- New Science in old markets -

Stocks extend as turn day approaches – what it means for bonds too

There is an equity turn due tomorrow, as reported in earlier editions. This is not the usual cluster of separate turns taken from the 100+ indices that we follow in various countries but a single turn from the Dow Jones Industrial Average (‘the Dow’). This index contains over a century of price history and we analyse it in a slightly different way from the normal scrutiny that we apply to the rest. The result is typically only a few turns each year but they are often the more important, larger highs and lows. This particular example spans today and tomorrow, but tomorrow is slightly more likely to be the actual date of the turn.

This comes at a time when the prices of US equities (as measured by the Dow) have been rising for some weeks and so this turn is almost certain to mark a high point. Dow futures have already made a slight new high today, which effectively removes any possibility that prices could ‘swerve’ down and make a low point instead, as we saw on the turn cluster due on the 8th January.  There are no turns from other indices due in these two days that might give extra weight to this signal but that probably doesn’t matter – these Dow signals do sometimes occur alone.

There have also quite a lot of top extensions occurring in the past few days – in a few general equity indices in the UK and Canada and in some US sector indices too, only two of which are shown here.

These are the latest top extensions in a series that started in Asia and Europe just after the turn of the year:

Some of which have also occurred at a weekly scale:

These last two show that the Dow transport index has already broken some important weekly-scale compressions to begin an uptrend which has proceeded for 6 weeks without a significant setback. It is probable that this turn will mark the beginning of some counter-trend reaction. The last chart shows that the Nasdaq futures contract has still not broken its own recent weekly-scale compression, which may mean that it will range-trade for a bit longer.

All this means that a dip is now likely. Longer-term traders (or long-only investors) will want to 'wait this out' and buy after some time has passed - we will advise when we have a reason to say 'buy'. Shorter-term traders may wish to try a trade on the short-side. The trigger for this will be any new high in the Dow today or tomorrow - take that as your cue to establish shorts.

Bonds are mostly still behaving in the opposite way to stocks. A dip in equities will probably mean another bond rally and this could be large. The ten-year US treasury note is compressed (this is a chart of the yield - in inverse of price):

...and this compression has yet to break. If it does so in the next few days in the direction of lower yields (meaning higher prices) then we will advise fresh long positions in bonds. The crucial yield level at the bottom of this compression is 1.694% - a good downward break of which would trigger a 'buy bonds' recommendation from us.

RE