- New Science in old markets -

Bottom extensions in Europe equities, tops in Asia & bunds

There have been three bottom extensions in equity indices in Europe - each connected to the recent sharp sell-off due to renewed worries about banks:

france, port, aust bott ext

This argues that the sell-off is at or very near an end and that a rebound will probably now occur. We currently have no outstanding ‘short’ recommendations in Europe but any remaining positions should be covered hereabouts. We also advise taking long positions in Germany or perhaps in the Eurostoxx contract. These have not made bottom extensions but we always prefer to recommend Germany as a ‘long’ candidate whenever there is a reason to buy Europe for reasons often stated –the Eurozone crisis is on going and those forces pushing the Southern European countries to ruin are also pushing Germany upward. This won’t change while the Euro endures in its present form.

Elsewhere, there have been top extensions. Canada extended at the same time as some US indices and we show those signals here for the first time. Some developing world markets have also been strong lately and now both Indonesia and Mexico have made top extensions. There is no particularly obvious trade to adopt here but we point this out to show that there is considerable divergence across the world—we expect this to continue.

Can, Mex, Ind top ext

We have an outstanding recommendation to be short of US equity index futures as of a few days ago - the 7th July edition. These shorts are profitable but now there is some doubt as to the next direction because of these bottom extension signals in Europe. Either take the modest profit available or tighten protective stops to ‘break even’ level. Stay short Hong Kong for now.

Bunds also made a top extension yesterday:

Bund top ext and t notes

This means we now advise taking profits on long positions advised near the beginning of June—an unusually long holding period for us. We remain bullish overall but this trade has ‘run its course’. There is an outstanding long position in US ten-year notes too that may also be sold here, even though there is no signal in that instrument;