Asset markets peaking

More evidence that asset markets are peaking comes from Copper, which I believe is finishing a great irregular wave, pending a sell-off.

Equities at or near the high; same with X/JPY

I continue to believe that global Equity markets are topping. Also, I believe that both USD and JPY are preparing to rally. Below is my view of EUR/USD & GBP/USD.

The EUR/USD is likely tracing out a "triangle" pattern. It is possible that minor "c" wave of the triangular "B" wave is still under construction, in which case EUR/USD will rally to around 1.41. This will then postpone the break of the larger "triangle" pattern, as minor waves "d" and "e" will yet have to be constructed. HOWEVER, looking at other USD crosses, notably GBP, AUD & NZD, I believe that USD is about to begin strengthening to beyond the highs of 2008. This MAY (and I believe it will) coincide with weakness in JPY crosses, and weakness in asset markets, such as equities.




Adding to my conviction of an imminent sell-off in equity markets is, among plenty of other indicators, the below indicator of percentage of stocks trading above their 50 day moving average. Over the past 2 years, these extreme levels have without exception coincided with significant market tops.

Equities at or near the high; same with X/JPY

The market is showing signs of weakness. Nasdaq and Russell are failing to show leadership, with poor breadth and price performance, relative to the SP500. Longer-term, the volume recruited into the March-April bounce has been very, very poor.

This chart illustrates that massive rallies that come immediately following massive declines are usually bear-market rallies (in red). The blue dots are the dates of significant market bottoms, which have tended to occur following moderate declines into the ultimate lows, followed by moderate initial bounces off those lows (base building).

This chart shows that significant rallies off bottoms - on volume that fell relative to the volume that accompanied the immediately preceeding sell-off - have tended to be bear market rallies (red dots), not starts of new bull-markets, which saw moderate gains accompanied by an increase in volume (blue dots).

Equities at or near the high; same with X/JPY

Long risk has been a great trade since early March. The Financial Services SPDR is up 90% from its low, Germany's DAX up 30%. This move is likely at an exhaustion point around current levels. With that, I also believe that the Japanese Yen crosses, such as AUD/JPY & NZD/JPY are also at their highs.

While it is too early to say how low the drop that is about to begin will go, some markets look more bearish than others. Notably, the Nasdaq appears to have completed its major fourth wave correction, pending a drop below its November lows. However, the EU indices and broader US indices appear to have either finished their major fourth wave corrections as "running corrections", or they may have just finished first legs of "C" waves of their irregular fourth wave corrections. Either way, I believe the move UP in risk and related assets is, for the next few weeks, over.

State of the Market

I continue to believe that Equities are in the process of putting in an intermediate-term bottom. DAX currently at 3637; NASDAQ at 1066. I see bounces of at least 15% from these levels, which would give us a very modest DAX 4150, around 50% retracement level of the drop from February 2009 highs. The Bund is also looking toppy here are 125.35, rallying up in a five wave move from 4 March 2009 123 low. Finally, the USD looks set to weaken substantially, and currently, among the majors, the CHF is leading (USD/CHF 1.16). I expect to see that cross below 1.04 very soon.

USD weakness imminent; Equity strength likely to continue

The Dollar has done very well recently, and against the EUR/USD at least that trend looks set to reverse very soon. New lows in the cross have been made against substantial divergences, and appear to be taking shape of an ending diagonal [the move from 1.47 high has taken shape of overlapping, corrective slide. There are many ways to count it, but most of them arrive at the same conclusion - USD strength likely to end very soon].

Global equity markets are moving higher this morning, bouncing from 12 year lows. The move into those lows appears complete (to me). I expect equity strength to last for a few weeks at least, followed by a fairly deep retrace, and then still higher into May 2009. Fitting well with that is coming government bond weakness, in Europe and the US.

A medium-term bottom in Equities?

The following is a chart of a basket of major EU stock market indices (FTSE100; CAC40; DAX30; IBEX; MIB/SP). It seems to me that the move lower that began at the beginning of February 2009 is approaching or may have hit its end. There are a number of reasons for my bullishness:

• The two impulsive moves lower in 2009 - one that began in January and one in February are equal in size, and internally subdivide into impulses. This suggests a bounce.
• 85% of all stocks in the US are trading at least 1 standard deviation below their 40 day moving average. There have only been 6 other periods when this was the case: 1) 19-29 Oct 1987; 2) 31 Aug 1998; 3) 21 Sept 2001; 4) 23 Jul 2002; 5) 2-17 Oct 2008 and 6) 20 Nov 2008). All of these have marked significant market bottoms.
• 65% of stocks are trading below 2 standard deviations below their 40 day moving averages, a condition only achieved on three other occasions: 1) 19-29 Oct 1987; 2) 21 Sept 2001 and 3) 6-10 Oct 2008.
• Finally, the US Dollar looks set to WEAKEN from these levels. The two currency pairs that I track and believe are set to fall are USD/CHF & USD/CZK. With the USD playing a "safe haven" role when risk appetite falls, imminent USD weakness suggests that risk appetite will return soon.