We wrote in the August 1 edition that US equity markets had re-compressed at a daily scale, showing the Value Line and S&P 400 Midcap as examples. We said then that 'an upward move is quite possible, which could ... lead to a higher trading range..'. We advised patience.
The break of those compressions was indeed upward but we were not inclined to follow it and now there has been a top extension in Dow futures which indicate that the rally is ending. Here is an update to the Value Line and S&P 400 charts, with the Dow top extension:
To add more scepticism, there have been top extensions in New Zealand and Sweden too - see below. Although these are quite minor markets, we often find that important clues come from such places, as the underlying dynamics that lead to these clues are easier to see in places where the world's attention is less focussed. We rarely advise selling short at the first sign of top extensions, as markets may need to make some kind of 'top' before beginning to drop BUT the general rally in equities over the last week and a half has also brought the Dax back up under old compressions (third chart below). We expect to find resistance in such circumstances and so it has proved here. Sell Europe, and wait for a chance to sell the US too.
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com