- New Science in old markets -

US $ extends against the Yen. Gold breaks and stocks recompress

On Friday, there was a top extension signal in the $/Yen. It is higher again today (so far) meaning that there will undoubtedly be a second signal by the close:

$-Yen top extension

This has the usual meaning that we ascribe to extensions - the current move is at or nearing an end and a reversal is possible. When this occurs in stocks, bonds or commodities we warn that a top extension does not automatically mean that a drop is imminent - there may need to be some churning first as a 'top' forms.

We treat bottom extensions differently as there is a much higher probability of a bounce in any market that has made such a signal and we will often advise buying as soon as the signal appears. This simply reflects the fact that market tops and bottoms are not just the mirror image of one another - a bottom can be a single (or short-lived) event whereas tops often form over a longer period of time in a kind of 'process'.

Because currencies trade as pairs, every extension signal is both a bottom and a top. This one is a top in the $-Yen but a bottom in the Yen-$, even though the Yen futures contract (which is expressed as Yen-$) has not made the same signal. Accordingly we are more inclined to 'take the signal' in these currency markets and so would now buy the Yen.

Gold was compressed as we reported in the last edition and that compression broke downward. This probably means that there will soon be more weakness to come but we are not advising that you follow it by selling short:

Gold comp breaks down

The reason that we don't want to sell Gold despite thinking it will fall is that a compression break is not always conclusive. There can be re-compressions (see next item) or false breaks that can be expensive if followed. Instead we prefer to wait and see if there is a return-to-compression, which there usually is. If so, we will recommend selling then. There is a faint chance that this already occurred in the one-day rally on Thursday (second-to-last bar in the chart above), so we may miss the move.

Some US equity indices have been compressing, as reported in the September 25th edition. Two of these have now recompressed - here is an update:

valug, IDX, Trans comps update

Unusually for a compressed market, we had a slight bias to a bear view here because there had also been a top extension in the Dow about ten days ago (see the 24th September edition). We still have that slight bearish bias, but these compressions have not yet broken either way. We wait, with a nervous short position.