The MDax index of German second-tier companies made a top extension yesterday and so did the Dow 88 index of the largest companies in China, both at a daily scale.
Taken with the FTSE top extensions reported yesterday, these two new signals show that there is some froth in the market which is likely to lead to increased volatility. There may also be a turn downward in prices in the next week or so but we know from long experience that top extensions usually mean the start of a process that can lead to a ‘top’ and do not generally coincide with the absolute high point of a rally.
Drops in price are not inevitable as top extensions also occur when it is time for a pause in an up-move, which is what we think here – possibly a range will form before prices make more gains. The medium term outlook for US equities remains good as all the major indices have pushed above weekly-scale compressions – see the August 11th edition for the latest on this. The picture in Europe is less clear but the main indices have also just closed above weekly-scale compressions so an up-move is probably under way. Dips should be bought in these circumstances but some patience may be needed.
