- New Science in old markets -

Top extensions in equity markets

We have been seeing top extensions in a Taiwan equity index that we follow for the last three days which have now been joined by a US mid-cap signal. Mid-cap stocks have done particularly well in the US equity market rally and so it is no surprise that this index should be the first to extend. It may be the only one too, as we have often seen important market extremes marked by very few such signals:

Mid cap & Taiwan top exts

Today is also a turn day (see the March turn schedule). Although today's turn is not very big, the combination of turn and extensions is usually powerful so we are switching to bear mode here. A note on top extensions:

When a rally ends, a period of choppy action is often likely before any real weakness begins. This is the time when 'tops' form as the market churns back and forth without any obvious direction. We get top extension signals at the very beginning of this process and so usually advise building a short position with care - there may still be new highs to come, even if they will not be sustained.

There are occasions when 'spike' highs occur, which is why we still advise establishing some or even all of the short position as soon as the signal appears, but be prepared for a waiting period that could be some days or even weeks before the market drops.

In this case a faster drop is likely because of the over head resistance from old compressions that we have described here recently - see the February 26th edition.

There has also been a pair of top extensions in the mining and minerals ETF:

Mining top exts

It seems unlikely that the pain being felt by oil and mining companies is over - the long-term downward pressures on prices from increased supply are still in place and the protestations of chief executives that they will 'weather the storm' because this weakness is all due to a temporary shrinkage of demand seem self-serving and hollow. If you share this view, there is probably no better time to short-sell the sector than now.