- New Science in old markets -

Notes extend – time for bear pause. Energy extends. European Equities update. Soya

There have been extensions in five-year and ten-year US Treasury notes in the last 48 hours. These have been in both yield and price series and here we show one of each. It is likely that the recent 'leg' down in price/up in yield is now finishing and there will be pause or retracement:

Bear markets are hard to trade - a bounce or pause is likely

Energy markets have also risen and we are seeing daily-scale top extensions - one in Heating Oil, shown in the second chart below and another in an Oil & Gas sector index (not shown). This comes at an interesting time. Brent crude made a weekly-scale compression recently and immediately pushed up from it - see first chart below. It looks likely that there will now be a drop in all these related energy markets which may bring Brent back to the level of that compression. This would be the normal 'return to compression' that we see frequently and it represents a chance to enter a trade:

Buy the next dip

The advantage of this 'stalk and wait' approach to compression signals is to use our knowledge of their behaviour as mathematical 'attractors' - see our userguide for details. Trends often start with compression signals

  • When a compression break occurs, the direction is then clear but the market has already started its trend
  • The strong tendency for prices to revisit the area where a compression has occurred means that we can wait a bit
  • The price may approach (or even re-enter) that area before resuming its new trend - we can watch closely as it does
  • If the area provides support, we can then enter the trade (in this case, buy) with much greater confidence
  • Stop-losses can then be placed quite close to the entry point - just the other side of the compressed area

To illustrate the point, here is some current analysis of three European equity instruments, all of which moved up from compressions in previous weeks. Each has also re-visited the area where those compressions occurred and found support (so far):

All these are buy candidates. The first two are new, the FTSE is several weeks old. Put close stops on the first two!

Lastly, we mentioned in the January 6 edition that we were starting to worry about Soya. This has been a political football for a long time and the latest development is the mandated use of some renewable diesel as truck fuel in the US. Most of this comes from/will come from Soybean oil. Soya Meal (the other product of crushing Soya beans) was already greatly in demand as pig feed for all those in newly-rich countries (mostly China) who could now afford to eat more meat. The result is that prices of Soya beans are now very high compared with a few years ago. Nothing moves in a straight line however and the other political element to Soybeans (will China buy from the US? Will the US sell to China?) is ever-present.

We have some top signals, mainly this weekly-scale version in Meal. We generally don't jump straight in to sell at top extensions, preferring to wait until some kind of 'top' forms, but we would sell rallies from here on:

Sell rallies

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