While we were busy working on a grain report overnight, a couple of top extensions occurred in Nasdaq equity indices. US equity markets had started climbing a bit more steeply this week after crawling higher for the two prior weeks. This increase of tempo is the sort of behaviour that can produce an extension - it reveals that the feedback loops curling just below the surface are now tightening fast, so this ‘leg’ up will end hereabouts. This comes at a time when we are expecting a turn and we always prefer to see a coincidence of extension signals (which are generated in ‘real time’ as the market’s story unfolds) with turns (which we can see coming in advance) before we recommend action. The turn is due on Monday 20th, less than 1 trading day away, so we now advise looking for places to sell US equity indices short.
Please note that we are still getting longer-term (weekly-scale) compression signals in other US equity indices, so this ‘sell short’ recommendation must be seen in that context – the bigger picture is still that of range-bound markets that will soon break those ranges. The direction of that break remains uncertain in the medium and longer-term but it doesn’t now look as though it will be upward any time in the next 2 - 3 weeks. It is possible that the eventual break will be downward of course, in which case any short position taken hereabouts will have a 'flying start'.
Interestingly, there is also a daily-scale compression signal in a useful commodity index- the CCI, sometimes known as the ‘Old CRB’. This is less energy-weighted than other such indices and so provides a good summary of the current global situation. Some agricultural commodities have boomed of late, due both to bad growing conditions and changing consumption habits in nations where people are climbing out of poverty. The scene is set for a bubble, in which prices that are already high suddenly start to go even higher and this kind of compression can provide a useful clue as to timing. There may not be a bubble, but if there is it will start with just such a signal – probably at a weekly scale (i.e. not this one) – but each one is worth noting.
Our grain report is now delayed until the weekend, but it is likely to argue that it is a bit too soon for any such bubble to develop in those markets. These commodity index signals can give good early warning though - we will advise as the story unfolds.