We have often found the Philadelphia semiconductor index to be important as it sometimes leads the Nasdaq index by a little and so can provide early warning of a general market move. Yesterday it compressed:
As ever, we cannot know which way a compression will break but we do know that trends start with compressions and end with extensions. We saw a daily-scale top extension in the Dow (March 15th edition) which marked the end of a rally but that signal is now near the end of its useful life. We also now have a series of longer-term top extensions in US indices, as reported in yesterday’s edition, April 2nd. This means that we think the current buoyant US market will stall but we can’t tell if there will be another rally first. This compression will tell us – if it breaks down then a larger-scale decline has probably begun. If it breaks up there will be ‘one more rally’ which might be brief.
Chartists will be glad to see that the price has traced out the shape of a ‘head and shoulders’ which is supposed to mark a ‘top’. Maybe so, but we have seen H&S that occurred only part-way through a rally many times and so do not depend on this famous chart formation for any comfort.