We have been writing since early January that stocks are in a trading range in most parts of the world. As prices near the top end of those ranges, we get signals that conform it is time to get out of long positions and adopt shorts. We last did this in the June 13th edition, followed quickly by the June 19th edition in which we advised taking or protecting some profits because a sharp drop had provided new signals – these are all ‘tactical’ trades and the recent history is summarised here:
There were other reasons to cover shorts that merely confirmed our advice, so we did not publish them – the first chart below shows that the Dow had dropped into support, which has held the decline. The picture elsewhere is muddled. The Dax compressed, broke up, failed and dropped back through the compression level only to compress again yesterday. These are typically dangerous conditions where losses are much easier than profits, so we publish fresh advice often.
The most interesting chart is the third one below. The greater weakness in Asian markets probably reflects the greater fear there of a trade war with the US – some recently published economic analysis shows that the damage would be skewed to harm China more. This has pushed Hong Kong down through a weekly-scale compression, which is exactly what we expect to see at the beginning of a bear market – not just another ‘leg down’ in a trading range, but a sustained fall. This single piece of evidence is not conclusive but we will write more soon as we see the story unfold. For now, keep selling rallies and try to hold on to some ‘core’ shorts.
The grain markets have suffered particularly badly from the war of words between the White House and Beijing. Soya is one of the main topics and the whole complex has dropped quite hard, pulling other grains with it. We published a bottom extension in Soya Meal in the June 11th edition that was a ‘sucker trap’ as it came just before the threat of Chinese tariffs on US soya became intense. This is why we often repeat health warnings about taking extension signals as an immediate reason to adopt positions. Now, there have been bottom extensions in all the Soya complex and in Corn too and a strong reversal bounce:
It looks highly likely that this was the end of the drop and that prices will hold and recover from here. Buy and buy dips – the world demand for grains is not diminished by tariffs levied on one supplier – China will simply buy the same amount of Soya from other competing sources and the US will sell elsewhere (if indeed these tariffs ever materialise). Ships will be diverted, but the world supply-demand equation will remain the same.
Wheat will probably follow the rest in these times of intense correlations but we do not have a ”buy’ signal there.
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com
