- New Science in old markets -

Top extensions in US Nasdaq, bottoms in grains and two compressions

There were daily-scale top extensions in most of the Nasdaq instruments yesterday. This comes at a time when we do not have a turn due (until next week) so this is probably just part of the ‘rolling over’ that we expect as this rally stalls and a top forms:

The two charts on the right show red arrows that mark the last top extension in a US index (in the Russell 1000 from the 18th July edition) and this is a good opportunity to remind readers how extensions work. We expect to get top extension signals at the end of a run-up in price as they mark the end of trends. This does not mean that a drop begins immediately as it is more likely that the price will start to ‘churn’ as a ‘top’ begins to take shape. Tops take many forms, as a glance at any chart manual will show and perhaps the most recognisable is the ‘head and shoulders’ so beloved of technicians, in which the price goes to a new high before falling back down. We cannot know what form this current top will take but if it were a ‘head and shoulders’ we would expect a top extension at the left shoulder and probably another at the top of the head. When the right shoulder forms, we might expect a compression but not a third extension. That may be what is happening here and we will monitor and advise.

Elsewhere, the Taiwan index made a couple of compressions from which it has now fallen. This is broadly in line with other indices in the region with the important exceptions of China and Japan, so we can expect a bit more weakness. We have already written in the June 30th edition that we think China has begun a new bull market, so this observation should not be taken to mean that we have changed our minds – we haven’t:

Copper also compressed and has yet to break. We remain bearish about commodities in general and particularly those that are ‘industrial’ such as copper. This does not mean that prices will fall in a straight decline of course and rallies are always possible. Watch for the break and sell short if it is downward. If it breaks up instead, there may be a ‘trade’ to make on the long side but be quick – we expect any rally to fail.

Grains have made some bottom extensions. Here we show daily-scale signals in corn and soya beans and a weekly-scale bottom in soya oil. This market already made a daily-scale bottom extension last week, which led us to suggest buying soya meal if that contract broke up from compressions that were starting to form. It didn’t, but now there are opportunities to buy corn and soya beans instead;

More soon.