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Bonds, energy and gold are compressing – pressure building up

The turnaround from up-to-down in Treasury bond prices was signalled by compressions in 10-year notes that broke down in late 2016. The drop followed the usual bear market course of sharp falls followed by long periods of gradual rallies. The end of the drop (for now) came in February this year when weekly-scale bottom extensions appeared, also in 10-year notes as shown in the first chart.

Some daily-scale compressions have since formed (see third chart) that are now apparently breaking upward, although the picture is not fully clear. If a rally gets going, as seems possible, it should take prices back up to the weekly-scale compressions in 30-year bonds,shown in the second chart, at which point weakness would probably resume:

Notes, bonds history of drop

There are longer-term signals that are still in force in energy markets too. Weekly-scale top extensions came just before the highs of the six-month rally from the lows of summer 2017 and the first drop was marked by a bottom extension. Now, after a rally and some churning, there is a new compression:

Crude wkly top, dly comp

We can never tell which way a compression will break because they mark a period of complete confusion among market participants, which is the opposite of consensus. In this case the weekly top extension in the first chart will inhibit rallies for a few more weeks. This does not mean that this new compression is  more likely to break downward but it does mean that if it breaks upward the price won't travel far. In other words, there is more downside potential from here.

Gold has been stuck in a range for five years, so we are not surprised to see compressions. Some history:

Gold history and dly comp

This isolated example of a daily-scale compression in gold would not be remarkable on its own but we mention it because of the other compression signals listed above. There is obviously some pressure building up in markets across multiple asset classes and the weather is about to change. Be extra vigilant here.

When taking positions based on compressions, please remember that any initial break probably marks the start of a new market movement but that there is usually a 'return to compression' that happens before the main move occurs. This is not inevitable but it is normal and means that markets that break too quickly to catch will usually offer a second chance to get into a position.

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