- New Science in old markets -

Dow compresses – new move imminent. bonds break down

Several Dow instruments made daily-scale compressions yesterday. Here is the Dow ‘tracker’ ETF called DIA and one of the futures contracts:

We have been suggesting that US stocks are making a ‘top’ hereabouts and wrote in the August 12th edition that this process should be complete sometime this week, to coincide with the turns that are due now. Compressions occur just before new moves start and so this is timely. This compression also provides a convenient way of testing our proposition, as it should break down and so mark the start of a new downtrend. If prices instead break upward, cover shorts and expect a further rally. This is one of the useful features of compression signals – they make it possible to place tighter stop-loss protection on existing positions, so in this case we advise placing protective buy-stops on any short positions adopted in US markets above the levels of yesterday’s highs in Dow futures on a closing basis. A simple intra-day penetration of the highs would not mean abandoning our bear position and it is also possible that a further compression signal will develop before the move begins. We will monitor and advise.

Bunds and US bonds have dropped sharply out of the bottom of the compressions reported in the August 12th edition after briefly trading up on Monday - the bund compression is not shown on this chart as it is at a weekly scale (see August 12th edition):

Such ‘false breaks’ from compressions on an intra-day basis have been happening a lot lately in different markets and is a good reason to place protective stops based on compression breaks only near the market close, not during most of the trading session.

Now that these important government bond markets seem to have embarked on fresh downtrends, the implications go far beyond the price of bonds. Rising yields are going to be unwelcome in other asset markets and will contribute to the risk that any down-draught that develops in stock markets from here could become serious.

If you missed selling bonds and bunds short on the break down, there may be some 'return move' that brings prices back towards the area of compressions that will offer a second chance. If you see such a bounce, sell it.