- New Science in old markets -

Energy and Stocks

Energy prices pushed higher, taking them above the weekly-scale compressions reported in the last edition. This would be just a curiosity to note until we see the prices at the end of the week but this sudden spurt has produced daily-scale top extensions in several energy contracts:

Crude wkly comps break, top exts

This probably means that there is more strength to come (the weekly compression break should keep prices moving higher for up to four months) but that there will now be a pause or dip. If long, protect profits by some means - put a trailing stop, write some short-dated near-the-money calls or simply sell. Be prepared to re-buy soon though on any decent dip that lasts a few days.

Regular readers will know that when markets push away from compressions they typically revisit the same price area soon after the initial push, only for the 'main move' to resume after that. This is the strange 'attractor' phenomenon common to all complex systems, to be found in the scientific literature on the subject and as described in our user guides. The crude oil compressed price area in that weekly compression in the first chart above extends from 43.33 down to 37.52. We would not expect prices to fall back all the way into the compressed area at this early stage, so expect support to start in the higher part of it.

The Natural Gas market has also moved up, after a bottom extension a few days ago, as we told premium subscribers by phone late last week. This is another 'full house' as there have been monthly, weekly and now daily bottom extensions. The weekly signal has expired, but we do occasionally see examples of a signal that catches an all-time low or high. We don't rely on this (obviously as signals most often catch interim extremes) but we are aware of it. This might be one such case, but the most immediately important thing is that there is a current daily-scale 'buy' signal. We may recommend holding on longer than the usual few weeks as events unfold and perhaps we will see a longer-term reason to do so:

Nat Gas bottom exts2

Lastly, stocks.

The main generic US indices that we follow have range-traded since the top extensions first reported in the November 9th edition. Those daily-scale top signals are still more-or-less in date BUT it is important to remember that there were weekly-scale top signals in September that are almost the same age - about 12 periods. Here's an update:

Dow dly, Nasd &SP wkly tops

The most likely outcome is that these various top extensions will continue to have effect for some more time - perhaps a month in the case of the weekly signals - so the danger is small of an immediate resumption of the uptrend. New highs are possible but it is likely that a further failure would result. Keep trading from the short side, i.e. sell rallies and cover all or part on dips.

Elsewhere, there have been more top extension signals in some of those equity markets that have been strong, mostly around the Pacific rim:

Kor, Can, Ind top exts

This group of signals has the usual meaning of any fresh top extension - the current rise will end hereabouts and a dip or pause will ensue, often some 'churning'. This may be part of a 'topping' process that can lead to some sustained weakness although we usually get some further signal before that can happen, probably a compression.

We repeat this general remark about top extensions from time-to-time, so that we do not give the wrong impression that a drop is the inevitable consequence when such a signal occurs. It's the end of the 'up' not necessarily the start of the 'down'.

There are some signals to report in grains too, which we will describe tomorrow.

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