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Equities – more on the squeeze

The steady flow of top extensions in equity instruments that we have been reporting has turned into a flood. There have been many more sector extensions at a daily scale and we expect more at a weekly scale when today's session brings an end to the week. The sectors that are now providing extensions are from a much broader group than the mainly bank and non-bank financial measures that extended recently and a popular small cap index is now one of them. These are just a sample:

small-c-metmin-chem-mat-top-exts

...and here are some more. Banks have also continued to extend (although not shown here) and so has an insurance instrument:

homeb-cons-disc-ins-ind-top-exts

Outside the US some colder, oil-producing countries' equity markets have extended, as have Italy and Germany:

russ-can-it-germ-top-exts

All of which is interesting but not as important as the potential for the first weekly-scale top extension in a major US index, which could happen today in the Dow. We have programmed the extension in this instrument to show if it would generate if the market were to close right here. Indeed it would:

dow-potential-wkly-top...BUT this does not mean that you should immediately expect a reversal into full bear mode. Top extensions happen at the end of up-moves and may just lead to a period of 'churning' during which a 'top' may form. We have suggested the possibility that a 'spike' top might be the result of this sharp squeeze upwards but these are rare and it is unwise to hold on to an immediate bear view just because such a spike is possible. We covered our shorts, intending to re-sell soon.

Instead we suggest that you keep a sceptical view of this latest rally and expect that at some time soon it will fail, followed by some decent weakness. If you want to sell some equities, try choosing those instruments that have not followed the rally - the Nasdaq remains our favourite US short candidate and we would add some of the weaker Europeans too, but not yet. Protect yourself at all times with stops as a squeeze can go further than common-sense dictates. There will probably be good two-way price movement in the meantime, so be prepared to be nimble. If buying, only buy dips and take sensible profits - don't hang on for long. If selling short, choose your instrument carefully and be prepared to trade against the position a bit until the market turns around and starts to drop. This might take a while and could get violent along the way.

More after the weekend

All signals generated by software supplied by our friends at Parallax Financial Research www.pfr.com