The violent movements in stock markets have resulted in a series of compressions in US indices:
and one in Japan:
This may surprise some readers, as the usual conditions for compression signals are quiet sideways trading in ranges. Such conditions do often lead to compressions but the real meaning is that participants of many different time frames are in complete disagreement with one another about what happens next. The preceding volatility (or lack of it, usually) is irrelevant.
This is why we describe compressions as revealing that the market is on a ‘knife edge’ and can go either way from here. These new signals reflect confusion in the marketplace and this is always the conclusion – the next price direction is a 50:50 bet.
Having said that, our preference has been for these markets to rally, since we reported a weekly-scale bottom extension in the March 19th edition and advised buying then. That signal should last for several months and it is possible to reconcile that bullish advice with this neutral stance – it is all about time frame. These new compressions are at a daily scale, meaning that any sustained ‘break’ in the price out of the compressed area will continue for a median of 17 days, regardless of which direction it takes. In practice, sustained price trends for that many days are unlikely in present conditions where important trends come and go every few days.
So our bullish opinion is for the medium term (up to four months) and this neutral view is for the short term. The practical import is this:
- If prices break higher from hereabouts simply stay long, as the compression will lead to another up-leg in the general uptrend that we have predicted.
- If prices break lower from here, expect some ‘follow-through’ weakness but not a major new drop. Perhaps we could see the March lows again or even slightly lower levels but that would offer another big buying opportunity.
- So – use these compressions to put a protective stop-loss on long positions, a little below the lows of those compressed days.
Finally, please bear in mind that we still expect a trading range to develop, not a new bull market. We cannot yet tell the boundaries of that range but we will be able to identify them as they occur, by watching for shorter-term extension signals as time goes by. We warned in the March 2nd edition that the range would be ‘wild and wide’ and there is no reason to change that view.
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com
