Why I Am Confident Equity Markets Will Sell-Off.

Big title, big post (a lot of charts).

While US indices are making new highs, pushing bullish sentiment to vertiginous highs, most global markets are stalling below important resistance levels. To wit:

Below is a GDP-weighted composite index of stock markets of countries listed above. Combined, their GDP is 90% that of China (in nominal USD) - so this is no small fish. The declines so far have been impulsive; rallies corrective. Of further note is the fact that the 55 day moving average now crossed the 200 day one from above (bearish).

This is a daily chart of the eurozone banking sector. Note that the (so far) three-legged (hence corrective) recovery off the February 2010 lows is stalling under the resistance line in blue - the previous multiple supports. This is in stark contrast to the US banking sector, which is making new recovery highs. Should the EU index fall away from the blue line, it will likely fall rapidly and far.

I now highlight a number of European industrial stocks.

This is a chart of Germany's third largest company - Bayer. A very clear impulse from the highs has so far been retraced in a three wave move. This stock is breaking lower through some short-term supports (the red line), and will likely fall further.

This is a chart of Germany's Thyssen-Krupp, where the outlook is very similar to Bayer. A clear impulse off the highs has so far been retraced by a three legged correction. The red line here highlights multiple resistances against which the stock is stalling. I believe this will fall soon.

We now move onto some of the largest names in the Emerging markets, titans of industry, all with over $50 billion market capitalization. All of them have impulsive declines, followed by very technical, corrective retracements, suggesting of further downside.

Banco Bradesco

Banco Itau

POSCO

Taiwan Semiconductor

Tops In Risk Are Very Likely Here.

European equity market indices are between 0.6% and 1.6% higher than closing levels of Friday 5 March. From here, I believe that risk will start to sell-off.

Here is an hourly chart of the DJ EURO STOXX 50 index. It appears that the correction higher that began over a month ago on 5 February is over.

This is a four-hourly chart of the Australian Dollar versus the Yen. With weakness in risk, I expect this cross to sell-off hard from current levels.

Correction Higher In Risk: Correction Over

Equities and other risky assets will likely sell-off hard fairly soon. I consider it highly unlikely that sustained upside progress can be made.

Below is a daily chart of the German DAX. This is my count and projections, unchanged from January 2010.

This is an hourly chart of mainland Chinese large caps traded in Hong Kong (the H-shares index). This index is weaker than the Hang Seng, and failed to take out the resistance highlighted by the red box. From Elliott Wave perspective, the rally from February lows has been corrective and is very likely over at current levels. This index is putting in a massive, massive top. All this for the companies that cater to the market that will save the world in 2010???

Flying PI(I)GS.

Contrary to their Northern brethren, Portugal, Italy, Spain, Greece and Ireland peaked in October 2009. What followed is now history, and it is widely claimed that Greek problems will be contained.

Below is a GDP-weighted composite index of stock markets of countries listed above. Combined, their GDP is 90% that of China (in nominal USD) - so this is no small fish. I present my favoured scenario in this daily chart. The declines so far have been impulsive; rallies corrective. Of further note is the fact that 55 and 85 day moving averages are falling, and the 55 day one is about to cross the 200 day one from above (bearish).

An alternative scenario for this funky group is presented below. While it is certainly possible that PI(I)GS will fly in what would be a massive "C" wave higher, I consider the outcome unlikely. This will change should we get closes above January 2010 levels, which would confirm the move since October 2009 as an ABC correction lower, pending further upside.

Correction Higher In Risk: Correction Is Likely Finished

How poor is the outlook for equities? Very, very poor. It is a disaster waiting to happen. Risk and related assets are likely to face substantial difficulties moving higher, and will most likely move lower swiftly.

Below is a daily chart of the German DAX with my projections from 15 January 2010. So far, everything has been unfolding according to plan. If this continues to be the case, for which there is ample evidence, I believe we will see this index about 20% lower in the next 5 or so weeks.

This is an hourly chart of the Hang Seng Index in Hong Kong. It is currently trading at levels first achieved in August 2009 - fully eight months ago. As you can see, the index is firmly parked in a range (highlighted by the black box) that acted as support and resistance during those last eight months. From Elliott Wave perspective, the rally from February lows has been corrective and is very likely over at current levels. This index is putting in a massive, massive top.
This is an hourly chart shares of mainland Chinese large caps traded in Hong Kong (the H-shares index). This index (also shown on a daily time frame on the last chart in today's post) is weaker than the Hang Seng, currently trading below the price range, highlighted by the black box, that acted as support or resistance since August 2009. From Elliott Wave perspective, the rally from February lows has been corrective and is very likely over at current levels. This index is also putting in a massive, massive top. All this for the companies that cater to the market that will save the world in 2010???

H-shares index in Hong Kong is about to put in a "death cross" of 55 day moving average moving below the 200 day moving average for the first time since March 2008.

Correction Higher In Risk: Correction Is Likely Finished

Corrections higher, that began on 5 February 2010, have likely run their course. Risk and related assets will likely come under pressure from today onwards.

Marginal new highs (above this week's highs) are possible for most global indices, however I consider the likelihood of sustained upside to be very small.

No charts today.

Correction Higher In Risk: Completing The Correction

The markets have moved in an orderly and expected fashion, where "thrusts higher" materialised from "lower bases". The strong to very strong rallies I expected last week are likely in their final stages. Their highs around the end of this and beginning of next week will set us up for mighty declines.

Below is an hourly chart of the German DAX. Since the highs in January, this index (along with most others) behaved in a very technical manner, and this morning reached the long-standing target (since 9 February) of 5800. If my outlook is correct, this rally should end in the next few days.