Equity Markets Bottomed

As expected, European markets broke the November range to the downside for a roughly 10% decline. I believe this completes a medium-term correction lower. Markets have now likely established a base for a 20%+ rally into Christmas.

I expect a correction to the most recent bounce, likely to close the "Italy-IMF" gap up - followed by a sustained rally.

European Equity Markets Most Likely Peaked, Further Weakness Likely.

As expected (see last update), European equity markets peaked. I believe they will fall for the next few weeks.

My preferred scenario is outlined on the hourly chart of the Dutch AEX index, below. Following a brief rally, we are likely to accelerate to the downside.

A very strong alternative is much stronger rally from around current levels, of about 7-8%, shown here on the hourly chart of EuroSTOXX 50. In this case, substantial supports (just below current levels) will hold, and we will likely peak towards the beginning of next week.

Longer-term, I cannot see how October 2011 highs can be taken out without substantial weakness first. I consider the probability of further market weakness (greater than 10%) to be very high.