European stocks have finally dropped but that doesn’t necessarily mean that US stocks must follow. We have pointed out some compression signals recently in various US equity indices that would indicate the start of weakness if and when they break downwards. The newest of those occurred on Tuesday the 10th April and apparently broke downward on Thursday (just) and then Friday (definitely) – the chart of the NYSE Composite below is typical of many other indices. We are wary of false breaks, especially in such a range-bound market and so we have watched with keen interest to see what would happen next.
Yesterday there was a sharp rally, while Europe was shut for Easter Monday. This rally took prices back to the lower end of the compressed area (ringed in the chart) which is where we expect to find resistance. So far, prices have indeed stalled there and are falling back today with three hours of the session still to go. This looks like a pretty convincing failure and encourages us in our bear view (and in our short position). Here is the picture:
Now that the ‘line of least resistance’ seems to be downward, the burden is on the bulls. In order for us to shift from bearish to neutral, prices would have to move back up into the compressed area and close there. We could not become bullish unless prices closed above the compressed area. In S&P futures terms, the price area of the compression is 2347-2363 which is quite a small range. Watch it carefully.
