The sharp weakness across the world in stocks and commodities has now produced dozens of daily-scale bottom extensions. In the US most major and minor indices have extended – these charts are up to date as of 4 hours before the NY close and so today’s signals have not yet been generated – there will be more such extensions as of the close:
The picture is similar in Europe, where the two charts on the right are of cash market indices that have closed for the day, so signals have been generated, while the two on the right are of futures that are still trading for a few more hours:
The picture is repeated in some commodity markets where all the main energy contracts have extended and so has cotton:
All this calls to mind the saying from complexity theory, which is the branch of mathematics that we use that: “An avalanche does not know how big it will be…” meaning that feedback loops can magnify an effect from quite a minor cause. The scale can be large and is hard to quantify at extremes.
Nonetheless, these signals are usually reliable, so we would now stop being bearish, stop protecting short-side profits, cover and start to buy long positions. One further chart shows another reason to do this.There were weekly-scale top extensions in some US equity indices that we reported in various editions in January (shown by the arrow below) but there were older compression signals dating back to December 2018 (ringed). These old compressions always provide some support when re-visited and the markets have just done exactly that. Buy.
This is likely to provoke a bounce, but the more recent signals are those top extensions shown by the arrow, which will last for another two months or so. This tension between a down turn from weekly top extensions and support provided by daily-scale bottom extensions and old weekly compressions probably means a range will form. we will do our best to call the turns, as usual.
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com
