- New Science in old markets -

Markets highly compressed. Cable is dropping, € too – sell it.

There is little to report from around the world except to note that an exceptionally large number of equity indices and commodities are compressed right now, arguing for:

  1. new trends starting soon
  2. an increase in volatility, possibly as part of those new trends

Hong Kong may be showing the way here with an explosive upward move over the last two trading sessions, after a prior shallow uptrend. We are on high alert and will report. For now we have light long positions in crude and S&P futures, a recent short in US bonds, an ageing half-long position in gold and the remainder of a short £/long Swiss Franc position, which is also getting a bit old.

There is one interesting signal to report - the £/$ futures contract compressed yesterday and appears to be breaking that compression downward so far today. This is similar to the activity in the $/€ FX pair, except that there has been no compression:

£-$ & $-€

This argues that the pause in the £'s drop against the $ that started with a bottom extension may be ending and that more £ weakness will now start. Despite the lack of compression signal in the second chart shown here (the €/$ pair) this may be the one to sell short. European QE has only just started and is ambitious in scope. We have seen how such central bank activity weakens the currency concerned and this is highly likely to continue in the case of the €. Now that the bottom extensions in both these charts have expired, these markets seem ready for more weakness. There is no QE in the UK and opinion polls for the upcoming national election are very tight, so we would avoid fresh exposure in the £ (for fear of either party suddenly gaining a lead). Accordingly, keep the remaining short £/Swiss franc position and sell the € against the $.