There was a top extension in the MDax index yesterday. Prices of many European indices have risen in the past two weeks in expectation of some new monetary stimulus that may be announced by the European central bank tomorrow. Some of the commentary on this subject has become quite breathless and so it is surprising that prices have not risen even further. Nonetheless, we have two outstanding ‘long’ recommendations in Europe – one in the main Dax index futures and another in the Eurostoxx and we would exit both now:
If there is to be some ‘European QE’ then prices of all assets in the Eurozone (and nearby) will doubtless rise further but we are concerned mainly with the market time frame of ‘a few weeks’ and this daily-scale top may presage a dip within that sort of time. We will probably recommend re-buying in due course but we will wait for now. This action also fits the old market adage: ‘buy the rumour, sell the news’ which is often proved wise and may also lead to a drop from hereabouts.
That leaves the question of whether to reverse into a short position. Some European indices have only just broken up from compressions (see the January 13th edition) which are still ‘in date’. This makes short-sales very dangerous here, in addition to the likelihood that a massive spree of bond (or other Euro asset) buying may be announced tomorrow. If you are a risk-seeker, try a small short position in one of the S European Equity indices, such as Italy, Spain or Portugal (if you can find a cost-effective way to do that one). France is also on this shorting list, for the usual reasons but the Northern Europeans are not, as any new money will probably find its way to Germany and its neighbours, no matter where it may be aimed. Spain may be the best bet as it has lagged the rally lately.
