- New Science in old markets -

US and China longer-term prospects, Soy meal and Corn exten

There was another monthly-scale top extension in the Nasdaq 100 in February, as shown here:

US equities have been rising since November 2008 and this five-year+ rally is now looking dangerously over-extended. The dip that lasted only one day on the prospects of war between Ukraine and Russia has been taken as a sign of the market’s underlying strength by some, but this is not what these top extensions tell us. The history of such signals is good, as this chart shows, so the dangers are actually increasing as prices push higher. We continue to look for places to sell short and have an outstanding sell recommendation dating from the February 14th edition. This was based on daily-scale signals, so is near the end of its active life and we will review the situation in the next few days to see if we can extend the recommendation to hold on to shorts for longer. If we cannot, we will try again in the near future – the risks are all on the downside here.

The situation in Europe is similar but is different in the far-East, where we have advised holding on to long positions first recommended in the February 5th edition, as extended on February 10th. There is no reason to change that advice yet but the situation in China is different again:

This Chinese index has made several monthly-scale compressions, starting in September last year. There have been compressions at a weekly scale too, but no good break as yet. These compressions mean that a big move is brewing but we have no way to tell which way the break will be – only that pressure is building up. There has been some commentary comparing China now with Japan in the early years of its ‘lost decade’ which means that some bearish sentiment may be building up. This argues for an eventual break upward, but we have no other evidence to support this view. We wait and keep the powder dry.

The Russia/Ukraine argument has produced a ‘spike’ in some grain prices. This is not surprising as the Ukraine is a vast prairie, quite like the American version. When the Ukrainian reactor at Chernobyl, in the North of the country, melted-down in April 1986, wheat prices leapt ‘limit up’ two days in a row before falling back, so the prospect of a supply interruption in this fertile region makes the grain markets nervous.  Unlike corn and the various soya contracts, wheat had not been in much of an uptrend before this current squabble happened and the rally has been fairly modest. There has been no top extension in wheat but there have in both corn and soya meal – this meal signal joins the existing signals in soya beans and soy oil:

We already have outstanding short-sale recommendations in soy beans and soy oil, so traders probably shouldn’t add to risk by selling more contracts on the strength of these two new signals – these markets are quite correlated at the moment, so this would amount to ‘doubling up’ on the trade. They do provide further evidence that the rally is over-stretched however, so provide some comfort to those short below current market levels.

There will be some changes to our format in forthcoming editions, at the suggestion of several readers. If you too have ideas on what you would like to see here, please let us know.

RE