The drop in Chinese stocks to 6-month lows has unstuck other equity markets too, so here we take a refresher look, Europe first. The dominant signals are the weekly-scale compressions from which prices fell earlier in the year. These provided resistance on the rallies from the March lows, and you will recall that is always our preferred place to take a short position – on the bounce after dropping from a compression. Here are some examples, starting with the iShares Europe ETF that we last used to illustrate this and then a couple of others, slightly different from the usual candidates:
Next, Asia and the Pacific rim. China made a weekly-scale bottom extensions on Putin’s War big drop in March, as other markets made daily bottoms. China didn’t bounce much and has now dropped further. We are not bearish here (except perhaps in the very short-term) as the conditions for another bottom extension still exist. In the meantime, we pointed out top extensions in Brazil and Mexico in the April 6th edition. That led to sharp drops (unusually for top extensions) and now prices in Mexico have fallen back to the level of an old compression, where we expect support. Brazil has made a bottom extension today. Buy. Charts:
Lastly, the US. We came off the fence here on April 13th, as prices had dipped into support (again from old compressions) so we suggested a ‘buy’ (1st chart below). A rally did happen but only for a few days and prices quickly fell back again, to new 6-week lows. In so doing, prices dipped further into support, so even if you gave up on the trade when prices dropped back to entry levels (a sensible thing to do) you might want to try buying again. Here is the current support, shown on a chart of Dow futures (2nd chart below). At a larger scale, prices in the key MidCap indices are still range-bound, still compressing (3rd chart):
Next, bonds. We pointed out a monthly-scale extension in 5 year Note futures on April 1st. This argued that the big drop in prices /rise in yields would end and that a reversal was possible. Monthly-scale signals are only good as long-term trend change warnings, so this is not a reliable trading signal. Now however, we have also seen weekly-scale top extensions in the 10 year US treasury yield, so we would act with more dispatch. Buy Bonds:
Lastly, Soybean oil. Like all grain markets, this has been rising because of the huge ‘stranded harvest’ problem in Ukraine, a huge Corn and Wheat producer. It doesn’t produce Soybeans much however and so the rally in the soy complex has been equal parts of:
Sympathy rally, Substitution pricing (as Ukraine is a big Sunflower oil producer) and Worries about a shift in planting intention away from Soya in the US. Non of this is directly attributable to any immediate shortage of Soybeans or Bean oil. Sell short, but don’t risk much:
All signals generated by software produced by our friends at Parallax Financial Research www.pfr.com
