There have been a few new signals to report – mostly compressions that show new moves are imminent and two follow-on top extensions in the Nasdaq and Rbob.
The compressions first:
Copper has made a weekly-scale compression signal and is pushing slightly up above it as I write. It is far too early in the week to tell if it will close above the compression to provide a 'buy' signal but it is worth noting that there is good resistance at current levels from older compressions at both weekly and daily scales, which might encourage bold traders try a short hereabouts:
Rbob has formed a range and has now compressed at a daily scale – this compression may be breaking down as I write – again it is too early in the session to tell yet but a closing break would turn us bearish. This comes at a time when heating oil is compressed at a weekly scale – or rather is still in the area of a recent compression. Pressure is building up here, so watch out for explosive moves, even though they may not travel far:
The commodity index that we follow has made a compression that is definitely breaking up today. This is a warning not to get too bearish of the whole commodity sector as bear market rallies in selected commodities remain likely. We cannot tell which ones are likely candidates as we do not have any ‘buy’ signals as yet. We watch.
A Nasdaq futures contract made a weekly-scale top extension last week. This comes after a long climb in prices that has recently produced several such extensions. These have served to flatten-off the rally in the Dow and S&P indices but the Nasdaq keeps marching upward. These signals are rarely wrong, so we continue to warn that US stocks are vulnerable to (at the very least) downward corrections and very possibly worse.
As a tactic, when faced with a top signal it is usually wise to sell short the least strong instrument. Shorts in the Nasdaq have been difficult to hold onto but shorts in the Dow and S&P have been much easier. Our favoured short candidates remain the indices of Spain, Italy and France (in that order) all of which have dropped recently. They will probably drop more soon.
Natural gas has been strong lately and we advised selling long positions late last week on the first top extension signal. Now there has been another and so we advise taking short positions here.
As with the equity advice given over the last few months it is worth pointing out that tops are not like bottoms, simply inverted. Bottoms can form quickly and may mark a single event – as in the case of Nat gas in early November. Tops, in contrast usually form as part of a process and the extensions that we are seeing in Nat Gas may just mark the beginning of that. Accordingly, we suggest establishing a ‘core short’ some of which should be covered on a dip, to re-sell on a subsequent rally and so on until the process is well advanced. At that point we advise resting with the core short, as augmented by these additional trades, so as to benefit from the upcoming decline. This has worked very well in Southern European equity markets and it is always prudent to approach a new ‘short campaign’ that is based on top extensions in this way. Shorts from compression signals can be traded much more aggressively.
The Yen has weakened again against the major currencies, making new lows for the move against most. We recommended buying the Yen against the US dollar (this pair hasn't made a new high for the move) and this advice still stands. If you didn't take the trade last week, please do so now: