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China update – Hong Kong extends. Grains drop back

We wrote in the May 25th edition that there was some odd divergence in China and a top extension but we made no trade suggestion. There has now been a weekly-scale top extension in Hong Kong and another daily-scale top in the China 88 index that had already extended:

HK wkly top, Chn dly

Despite the continued divergence between two major China indices (see below) this seems to indicate that things are a little over-excited and so we expect a pause or pullback from hereabouts. This may be a chance to sell short, with the usual caveat about top extensions, which is that they often lead to the start of a top, not the start of a drop. The longer-term divergence:

Chin88 top ext, brd mkt too cont

Elsewhere, we pointed out in the June 7th edition that grains were pushing up from daily-scale compressions. We also said that we might wish to wait for a 'return movement' back to those compressed areas before buying and that has now happened, as the charts below show. Buy wheat and corn:

Wheat & Corn ret to comps

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