We have been warning for some while of continued compressions in various US and European, both at a daily and a weekly scale. Compressions show that a move is imminent and that direction of that move can only be known when it actually begins, as these are moments when the markets are on a knife-edge. In the last two days there have been even more compressions at a daily-scale in almost every US index. The first of these charts shows the sheer extent of the compressions that we have seen this month and the second is just one example of the recent new signals:
Pressure has been building up and a break will probably be big. The US main market session has only been open for an hour as I write but an upward break seems to be happening. It is too soon to ‘follow the break’ as we need to see the markets close above the compression levels for a new upward trend to be confirmed but we advise close concentration today.
None of this changes the advice given in the May 13th edition that weekly-scale compressions must also break for a trend to start, but the end of this week is less than two sessions away and a break of the daily-scale signals will usually come before a break of the weeklies. It could happen here.
The chances of a rally also seem to be greater now than in previous weeks because of uncoordinated remarks by the current head of the Bank of England and the former head of the Federal Reserve, both of whom have indicated that rates will probably stay low for a long time to come, despite market expectations that have been building for some relative tightening. This apparent intervention to foil the natural impulse of the markets is a continuation of the same policy that has had the effect of boosting asset values for the last 5 years. Why would it be any different for the next few?
There is an old saying that stimulating a weak economy with monetary policy is like pulling a brick with a piece of elastic. Nothing happens until the brick suddenly hits you in the eye. A further rally in equity prices from here would be the equivalent of that brick starting to move....