Strength In Asset Markets Likely Over Soon

The forecast made in the beginning of July, of a multi-week, 7-8% bounce in risk and related assets, has come to pass.

I believe that this strength is likely to be over soon, with a potential for sustained weakness beyond June/July lows.

Below is a daily chart of the FTSE100 index (London). For various reasons, I believe this chart to offer one of the cleanest "counts", where the most plausible outcome is sustained weakness from current levels.

Very Oversold, But Still Room To Go

On a number of metrics, the current "risk trade" is extremely oversold. Taking G20 equity indices, I believe that a multi-week, roughly 7-8% bounce is quite close. However, both internal structure of the market so far, and slightly longer-term indicators suggest that further short-term weakness is highly likely.

The number of stocks, included in the SP500 index, that are trading above their 50 day moving average is fast approaching levels not seen since the March 2009 bottom and the panic of October 2008. Previously, stocks have always bounced from similarly oversold levels.

There is still a fair bit of room before the market is terminally oversold though, as shown by the number of SP500 stocks that are trading above their 200 day moving averages, in the chart below.

Here on the daily SP500 chart, both the RSI and Stochastics are extremely oversold. The index is alos sliding along the lower Bollinger band. I expect a move lower short-term, followed by a multi-week bounce, as shown by red lines.

More downside?

So far, the larger “irregular” count I have been following is working out well.

Again, so far, we had a very neat impulse lower in the EZ banking sector. Surprisingly, Spanish and French banks have been noticeably stronger than, say, German or Skandi banks.

That notwithstanding, they have also, on hourly charts, traded beautiful little corrections (abc in lower case on the chart).

This is quite a count… if it is correct, the market will collapse in the next 3-4 sessions.

I expect a bottom to hit around mid-next week.

This is an hourly chart of the Spanish bank Santander: