More top extensions in equities

There has been a flurry of top extensions in equity markets around the world. We reported that some Nasdaq indices had produced top signals in the last edition and some other minor markets were already doing so at that time. These have now been joined by more important indices so it seem that up-move is due for a general pause or reversal. This was the first group:

Which was not enough to set alarm bells ringing – the Nasdaq is a ‘special case’ we think as it is on its own path upward. Korea could hardly be more special as the unfortunate South has to share a peninsula with the even more unfortunate North while we have found that signals from Sweden have little predictive effect on other markets. Now however we have signals from these more important indices; Eurostoxx, Dax and (for good measure) Switzerland:

This means that we think the rally is running out of steam. We always attach a health warning to top extensions, pointing out that the end of up-moves does not normally lead directly to the start of down-moves even if we correctly identify the final push up (instead of just another ‘leg’). There usually has to be some back and forth price movement before any serious down move can begin, so we are just calling for a pause or dip for now.

There have also been some signals in currencies. We pointed out a top extension in £/Yen in the second part of the May 2nd edition and now there has been another similar signal in the Euro/Yen:

The Euro has been strong since Emmanuel Macron won the first round of the French Presidential election (he is very pro-EU) and he is expected to win the final round this weekend, easily. This Euro strength is probably due to end if he does indeed win, simply because the event is now discounted but we have no signal to justify selling the Euro against the $, which would be the obvious trade.

We do have this Euro/Yen signal however and the Dollar/Yen is pushing up near some resistance from old compression – ringed in the chart. This offers the chance to take a short Euro/long Yen position, to express the view that the Euro has risen enough. It may even be worth buying the Yen against the $ as the same impetus seems to have propelled both of these moves.