The recent run-up in US stocks has taken prices up to the high-end of the range that has held since January. There was a top extension at a daily scale on Friday in the Dow, both in cash and futures. The signals are the same so here we show only the cash index, together with a weekly-scale version to give some context:
This new signal has the usual meaning of a top extension – the rise is ending but there may need to be some ‘churning’ at current levels before any decline can start. Don’t sell short immediately but do exit all equity market longs taken on our advice in the September 6th and September 10th editions.
There is another clue from the real estate sector that things may be about to change. We have been seeing compressions at a daily-scale from various indices and ETFs that we follow – here is the most recent, from Friday:
Market moves tend to start with compressions, so it is worth keeping a close watch on this sector for early clues that a decline is beginning. It is entirely possible that this compression will break upward, in which case we will report it but not ‘follow the break’ as there is too much downside risk here.
Elsewhere, the febrile atmosphere surrounding the Brexit negotiations produced a rally in the £ over the last few weeks. That has now produced a top extension, if only against the Yen;
There has already been a drop in the £ since this signal but it seems to mean that there will be more weakness to come. We don’t see an obvious trade here as the market will be buffeted by rumour and counter-rumour as various deadlines loom closer. The ‘line of least resistance’ is clearly for the £ to weaken again, but a sharp rally is possible at any moment on any signs of a breakthrough in the current ‘impasse’. If there is such a rally, sell it.
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com
