Worry about the further spread of Covid-19, formerly known as the Corona Virus pushed stocks down yesterday and Gold up to a new high for the move. This was enough to produce a top extension and we would now start to sell Gold – see first chart. As ever when a top extension occurs, we advise waiting to assume a fully bearish posture as some churning often occurs after these signals and before any weakness can develop. By all means sell small rallies in Gold but be prepared to have to wait for any significant reward. ‘Spike’ tops do occur at the end of bull moves, but they are rare.
The second chart above shows the $ index, which made three successive extensions before its corner threw in the towel (this is written by a boxing fan, who admires Tyson Fury). The $ will have great difficulty going up for the next three weeks or so and it could easily reverse back down. We advised short sales in the February 11th edition and still hold that view. The reason we don’t attach the same warnings to top extensions in currencies as other markets is that each instrument trades as a pair and so a top in one is a bottom in another and we almost always take bottom extensions to be an immediate trading signal. The $ index is of course not half of a currency pair but the same principle applies – there are similar signals in the $/Euro.
Stocks themselves have dropped sharply everywhere. We warned in several newsletters in January (the 14th, the 17th and the 28th) that weekly-scale top extensions had occurred in US equity indices and that talk of ‘another leg up’ in the bull market was not to be trusted. We also pointed out in the that new highs were possible but that any rally that took prices up to new ground would soon fail. Here is an update, showing the relevant signals and advice:
As ever with top extensions, the choices are:
- Sideways ranging prices where the range is bounded by the extremes set just after the extension (i.e. prices could go lower from here and yet still stay in an overall range within a few % of the highs)
- Prices drop into a bear market after a short period in which a ‘top’ forms – it is worth repeating that ‘Spike’ tops are rare but not unknown.
In any event it is good to hang on to any shorts for now – more signals will soon come to provide more clues.
All signals courtesy of software supplied by our friends at Parallax Financial Research
