We have advised trading US equity indices from the short side since the June 29th edition. This advice was based on longer-term top extension signals (at a monthly scale!) seen a little earlier in the year, which implied that prices would fail to sustain any new highs and that the chance of price drops was starting to increase. Here is an update of one of these signals, in a Dow ETF:
This is not the same advice as ‘sell short and hold’, which we have yet to give (see below). The advice was initially to short-trade Mid-Cap indices, to which we then added the Dow and then most recently, on September 7th, the Nasdaq. For now, we repeat the same advice – trade from the short side. Here are the most recent relevant signals and the reasons for our advice:
This churning behaviour still continues, and the recent sharp drop has produced some reasons to moderate our bearishness – we have found some support as the next two charts show. New readers might want to be reminded that compressions act as the kind of ‘attractor’ that is common in all complex systems. These occur at the start of trends, but the price usually re-visits the level of the compression some time later. The original move away from the compression may then resume:
So it is wise not to ‘press’ on the short side here. Looking ahead, there is still a possibility that greater weakness is imminent but we need to see a longer-term compression break downwards to signal the beginning. There is a candidate, and it is in the Mid-Cap. Old trends end at extensions but new trends tend to start with compressions, just like these.
If you have been trading from the short side of US indices since we started recommending it, you should have made good trading profits and may still be short from comfortable levels. If so, you could try staying short here to see if these MidCap compressions in the last chart do break downward – we will know at Friday’s close. If they do, you should stay short for several weeks. If the support here holds (that is the compressions don’t break downward) then you will lose a bit of your open profit. We favour a bounce but it may be small. It depends on your trading style.
All signals provide by software developed by our friends at Parallax Financial Research www.pfr.com
