- New Science in old markets -

A few new signals – in small cap US equities and Nat Gas

Equity markets are stuck in tight sideways trading ranges in Europe. There is a slightly rising version of the same tight range in the US and a slightly declining range in the far East. These are the kind of conditions that soon lead to compression signals and then to new trends and we have started to see the first of these, in the US and the UK.

The Russell 2000 is the 'small-cap' subsection of the all-share Russell 3000. It only represents about 10% of the larger index but a lot of attention is paid to small-cap stocks from time-to-time as they under- or out-perform shares in the larger and more famous companies described as 'large-cap'. Small cap stocks have done worse in the recent few months, dropping more in August and bouncing less than large cap since then:

Russell 1k and 2k weekly

That may have started to change as we now have a single daily-scale compression in the Russell 2000 that broke up yesterday but no equivalent signal from any of the indices of larger US stocks. This comes as the UK FTSE is making new compressions almost every day that are yet to break and it is worth pointing out that the Swiss market already made a compression signal before moving up to its present level:

Russell 2K FTSE, SMI

This reminds us that it remains dangerous to sell equities short just because there have been top extensions - sometimes there is just a period of sideways movement after top extension signals that may trace out a 'top' but may also lead to some further strength instead. For now, the combination of daily-scale top extensions in the OEX and various Nasdaq measures:

OEX and QQQ

...and the weekly compressions in many US indices that still provide overhead resistance:

Dow and SP400 wkly

...should be enough to inhibit any great strength, so we would stay short for now but we are watching carefully in case there is a surprise brewing here.

We reported bottom extensions at a daily scale in Natural Gas last week and recommended a long position. By the end of the week we also saw weekly and monthly scale signals, so this long position may turn out to be a 'hold' for a much longer period. Stop-loss discipline must nonetheless be maintained on the initial 'long':

Nat Gas, d,w,m

More soon