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New top extension in the US equity market

Nasdaq futures made a top extension yesterday:

Nasdaq top ext

This is the latest in a series of top extensions in various US equity indices that started about two weeks ago, meaning that the current up-move is still over-stretched. As we have already pointed out this week there is a conflict here between weekly scale compressions that broke up to start the latest upmove and these shorter-term top extension signals that indicate the likelihood of a pause or dip. In these circumstances the longer-term signals usually prevail and so we advise using any dip to acquire long positions. There is no  way of telling whether such a dip will be large, only that we are in a period when dips are likely. The maximum drop that we would expect could take markets back down to the level of those weekly compressions again (ringed below) which start at 4.5% down from current Nasdaq levels and 2.5% down from the current Dow level. We would be surprised to see such large dips at this stage of a new upmove so don't wait too long to buy.

Nasd & Dow wkly comps

This argument also applies to European markets, where weekly scale compressions formed and broke upward much more recently and so the 'dip risk' is less. We would prefer to buy strength in Europe however (or a dip after some strength perhaps) in order to be sure that prices are not merely testing the top end of the 18-month trading range. The brave would buy early but keep some ammunition in reserve.