Many extensions, including Gold. Strange divergence in China

Gold futures made a bottom extension yesterday. Silver already did so as reported in the May 2nd edition but we don’t usually rely on signals from that most volatile of markets. This new Gold extension seems to confirm that the current weakness in precious metals will end hereabouts and that a rally will happen, so buy some Gold:

A rally in gold would probably coincide with drops in the main world stock indices and also (probably) an end to the recent slight weakness in bonds. This ‘risk-on, risk-off’ correlation has continued for so long that it is now part of the normal market scenery but it is worth pointing out that at times of change, these correlations need not persist – they may only continue out of habit. We don’t have any signals that say we should be buying bonds, in fact we even have a bearish signal in UK Gilts – a compression that broke down recently – see the first chart below. There is also an unresolved weekly-scale compression in Bunds that could break either way:

This means we are sidelined in bonds, waiting for some greater certainty.

We have warned several times recently of the risk of a drop in various stock markets, pointing out top extensions in the US and Europe. These have been at both daily and weekly scales and there have been a few more of them that we have not reported until now. Here is a summary, firstly of the weekly signals:

There have also been fresh daily-scale top extensions in the US and Europe. There are many of these Europeans, so we show only the Dax and Italian index as examples. Others include France, Spain, Holland, Finland, Sweden, Portugal and Greece:

There has also been a daily-scale top extension in Japan and one in the $/Yen:

The Yen has previously extended against European currencies but this is the first such signal in $/Yen. Buy the Yen if you did not already do so

Oddly, the Chinese stock market, which made a weekly-scale top extension in December (and then fell) has now made a bottom extension. It is still dropping as of yesterday’s trading session but this weakness should end soon:

Despite these warnings of top extensions in most of the world’s market (except China) we are wary of getting too bearish here. The markets may be in the grip of that strange fever that occurs in the final stages of a long-running bull market (in the US at least). Europe is in a different situation where the current enthusiasm for stocks comes after quite a long period of pessimism so we may just see a set-back before more strength. Whatever the outcome, top extensions are usually followed by a period in which prices ‘churn’ instead of simply dropping.

We will advise.