As reported, there were top extensions in several US equity indices last week, at a daily scale. There have since been new compression signals in the US mid-cap index at a daily scale and in various sector indices too.
This seems to indicate that the fashionable stocks and sectors that have kept the uptrend going are now overstretched (as indicated by the extensions) and that the bulk of unfashionable stocks in the market are poised for a new trend (as indicated by the compressions). At the moment, we expect this new trend to be downward but it is just possible that we will instead see a large ‘rotation’ in which the current market leaders take a back seat while those neglected stocks take over and begin to rise. We will know which direction it is to be when the compressions that are forming in the mid cap indices finally choose a direction in which to break (bottom right chart, below):
Here are some of the most significant compression signals in US sector indices over the last few days. Remember that price moves tend to start with compressions and that we don’t know which direction they will take until they break:
In Europe, where the major markets have been trading sideways, there have also been some compression signals, indicating that a new move is pending there too:
The situation is clearer in Asia. Regular readers will know that we have been long-term bulls of China since the upward break of a monthly-scale compression in May 2020. We have looked for places to add to long positions, and this is one such, for the reasons given in the 1st chart below. We also like Malaysia, because of the good chance of a ‘V’ bottom at a bottom extension, and so by inference, the whole region now starts to look better.
All signals provided by software developed by our friends at Parallax Financial Research www.pfr.com
