Nosebleed

On a number of metrics, the "risk ON" trade entered "nosebleed" territory (a lot of inverted commas here). Sentiment indicators reached levels of bullishness last seen at three important points: April 2010, October 2007 and July 2007. Price action from the 30 November low is finishing a structure that needs to correct at least 2.5-3%.

This is a daily chart of the German DAX. Presented on the chart is the most bearish scenario, which I weight at around 50% probability.

This is a daily chart of the US two-year note future, which suggests that rates are likely to fall in the next few weeks (prices higher).

This is a daily chart of the German two-year schatz future, which also suggests that rates will fall in the short-term.

Wave Three Down?

If this morning's weakness in European equities continues (and equities do not rally to yesterday's highs), we could see dramatic acceleration to the downside.

This is an hourly chart of the French CAC40, labels are not changed from yesterday.

Air-pocket?

By my calculations, risk will either sell-off very hard very soon, or will continue to rally until the end of the week.

This is an hourly chart of the French CAC40. The index fell in an impulsive fashion last week. The move up, so far, could be interpreted as a classic, fast and furious counter-trend zig-zag, pending a move lower, which would be the third wave.

Boom, Boom, Pow...?

Asset markets have likely peaked for 10-15% corrections.

This is an hourly chart of the US Energy sector, which at 11.68% of SP500 is the third largest sector in that index. The pattern here suggest that we fall to at least the level of triangular consolidation, marked by blue lines.

This is a daily chart of the Australian index I used on 19 October 2010 to forecast an exhaustive rally. The chart has not been updated but for the actual traded data. It appears the index topped and subsequently declined exactly as expected. This further suggests that the decline will continue.

This daily chart of the Australian dollar against the Japanese Yen suggests that we are topping around current levels. There is an outside chance (about 30%) that we rally to around JPY83 before rolling over.

One of the reasons why I am not expecting declines of greater than 10-15% for major indices is because a lot of Asian indices do not appear "complete" on the upside. They do appear to be ready to enter a prolonged (about 4-6 weeks) period of correction/consolidation. Below is a daily chart of shares in Hong Kong.

Finally, further evidence for a shorter-term top around current levels comes from Japan, here on an hourly chart (Topix). The rally in November is a fairly clear finished impulse, which is most likely a "c" wave. This suggests that supports around 800 will be broken.

Get Ready to Rock!

I believe equity index volatility (VIX, on a daily chart below) is about to move substantially higher. This will likely coincide with serious weakness in asset markets across the world.

Pushing on a String

Markets did indeed peak on Monday, as expected. The quality of the subsequent decline is not impulsive. It is possible that Monday's highs will remain unchallenged, and risk will sell-off from current levels. It is equally possible that we rally once more, to challenge the recovery highs.

Looking at gold (here on an hourly chart), I expect USD to sell-off soon to set-up a base for a sustained rally (gold, non-USD FX, equities to rally). Turning points will once again likely coincide with market events, such as the Fed next week.

Tops in Equity Markets

Equity markets have likely peaked this morning. The cycle that began in the first days of October is likely over.

This is an hourly chart of the German DAX. At a minimum, I expect a correction to 6350, or about 5%.