- New Science in old markets -

US equities compress, bonds too

A week after the top extension signal in the Dow, reported in the July 16th edition there have now been compression signals in two other US indices, the main midcap and a small-cap too:

Mid cap & small cap compress

This is not surprising as these two important sectors have been ranging sideways since the beginning of July, while the Dow and S&P both continued to climb. Compressions usually occur after just a period of ranging and it means pressure is building up for a new move. We have advised taking short positions since that Dow top extension  and this offers a chance to adapt new tactics. If these compressions break upward, cover - a break means a 'good' close above the levels shown here (yesterday's highs) not just a slight move upward. If, on the other hand there is a closing break downward, increase short positions.

New movements start with compressions and so this sequence of events is quite familiar:

  • an up-move ends with an extension
  • the market starts to range-trade
  • a compression forms and either:
    • the market breaks upward, so the uptrend continues for another 'leg'
    • or the market breaks downward and a more serious drop occurs

This comes at the same time as a couple of compressions in bonds, where pressure is obviously building up too:

Bonds compress

As ever, we can't know which way the market will break from these new compressions so we advise waiting to see. The choices are:

  • 'Go with the break', meaning follow whichever way the market starts to go provided there is a clear break (as described above)
  • Wait for the break and then jump in on a subsequent 'return movement'. Markets almost always re-visit the area of a compression before embarking on the trend that is coming. This odd behaviour is consistent with that of other complex systems which also tend to breed 'attractors'. There is more on this in the userguide.

The reason for waiting until a 'return movement' occurs is to avoid uncertainty about the direction of the move as any false break (yes, they do happen) will be over by the time such a movement offers the opportunity to enter a position. Another reason is that the break may to too quick to catch. The choice is yours - we do both!

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