- New Science in old markets -

Top extensions in US equities, China too

The 'big three' US indices have all made top extensions in the last 24 hours.

Nas, Dow, S&P top exts

These are not the first top extensions - we pointed out such signals in the Nasdaq 100 and Dax futures in the January 27th edition that led to a dip - but these new examples are widespread. There is also a top extension in China, where a recent bottom extension reported in the January 17th edition, stopped the drop and led to the current rally, which should now end at or near this top signal:

China top ext

This all means that the current rally in stocks around the world is vulnerable to a correction or reversal. The longer-term outlook remains cloudy too, because of weekly-scale top extensions in various US indices in December, as reported on December 20th, which are still 'in date'. Here is an update:

Dow & S&P wkly tops

Prices have continued to rise since then  - after a six-week 'flat spot' - but this is often what happens after top extensions at any time-scale. They signify the end of an up-move that can then lead to a 'top' forming that may involve temporarily higher prices, as we often warn when we see these signals. Now that daily-scale top extensions have occurred in the US, as shown at the beginning of this edition, these new highs will probably prove temporary. We have sold short some US and European equity index futures.

This fits the picture in bonds too. We also pointed out in that December 20th edition that there had been weekly-scale tops in bond yields. These are still 'in date', meaning that lower yields/higher prices are likely, as often happens when stocks falter. Here is an update:

30 yr yield wkly tops

In the even longer-term there is still the possibility of an equity market bubble inflating  - we have been saying 'buy the Nasdaq on dips, sell the S&P and Dow on rallies' for some time, as we think that the Nasdaq is the most likely candidate for a bubble. It seems unlikely that the whole stock market could inflate, but the Nasdaq (actually, certain sectors within the Nasdaq) has a history of doing so. This means that we are keeping a close eye on risk and will not try to keep short positions for more than a brief period, for now. We will continue to monitor this and report on it from time-to-time.

All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com