The various US stock market indices held the bottom end of their year-long range on Friday and have now rallied. This sharp drop after testing the top end of the recent narrower sub-range is typical of the market crowd's behaviour in such circumstances and there have been quite wild mood swings. The sentiment (same thing) grew bullish at the beginning of this month as prices approached the high that was made on the 3rd December and turned quite bearish as price fell into Friday's low point. Expect more of the same and we will try to provide guidance as these erratic and volatile conditions continue.
Our last advice in the December 6th edition was to cover shorts as the drop gathered speed. We did not issue a specific 'buy' recommendation to go long in either Europe or the US but if you thought it sensible to buy some as the bottom of the range approached then please be careful now. The US trading range is well-defined and the upper end of the current 'mini-range' is round 2800 in the S&P. There is no reason why the bottom end of the range cannot be re-visited soon (before an attempt at going higher) so protect any profits that you may have - by tightening stops, for example. The reason why we think that some short-term weakness is possible comes from Europe, where several indices are approaching resistance:
Each of these three indices fell from recent compressions (the most recent blue bars)and they are now rallying back underneath the levels where those signals occurred. Regular readers will know that this is where we expect resistance to occur and so some renewed weakness is possible soon. This may not have much effect outside Europe, but we mention it because it is so clear. European stocks have been in a broad shallow downtrend for a long time and so we should pay attention to any overhead resistance like this - it has marked the end of many prior rallies.
The exception to that European downtrend has been in Switzerland, where stocks have been pretty firm, not even dropping much in the February and October global sell-offs. That is another reason to pay attention whenever we find resistance there.
On another note - the FTSE is cheap by most measures, and the £ is at multi-year lows. This is undoubtedly due to worries about Brexit, but these worries have been groundless so far. The UK has yet to actually leave the EU of course but there were dire warnings that the UK economy would 'fall off a cliff edge' at the mere prospect of departure, almost two years ago. In fact the UK has grown faster than the Eurozone for the last eight months despite a slow pace of investment and employment is at record high levels - similar to that in the US. If you are interested in 'value investing', there are some bargains to be had - the FTSE trades on a dividend yield of almost 4.5%...
For this reason, we will not press too hard on the short side of any FTSE trades for the foreseeable future and if we find a long trade to do, we will try to hold on to it for longer than usual while this odd situation plays out.
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com