No, we haven’t become mystic hippies who trust in astrology but there is a slightly bearish case developing in US stocks that might provoke a drop. As we wrote last week, there have been new daily-scale compressions in US equities and in many other places too. We had been sticking to a bullish view based on longer-term analysis often repeated here but pointed out last week that this could change if these new compressions failed to break upward. They didn’t, at least not yet and in fact broke down and then bounced back to the break.
Experienced readers will know that this behaviour is typical of a compression break – the first move is often temporary as the price tends to return to the compression before the new trend takes hold. These ‘return moves’ are part of the Chaotic nature of markets and these ‘attractors’ are often seen in other non-linear dynamic systems too. See the user guide for more. The S&P provides a good example – prices compressed twice the week before last and broke downward on last Tuesday the 11th. The low of that move was reached 2 days later followed by a bounce on Friday that put prices back to the compressed levels before falling away again:
This looks like an easily understood situation – prices will fall from here and the drop could be sharp. There have been some other fresh compressions in European equity indices however throughout this unfolding story and also in Japan. These have been at both daily and weekly scales but these weeklies show the story best:
This doesn’t mean that these markets will keep range-trading but it does mean that a widening range is likely and this could be in either direction. We have taken tactical short positions in Japan, the UK and the US and may add Europe in the next day or so. These weekly signals shown above mean that this may be premature but the daily-scale analysis of the S&P shown at the beginning has persuaded us to act now.
Some superstitious traders believe that a full moon can worsen a stock market drop by the way. None of our work supports this view but then again, you never know….
