Low Vol, Divergences, A Dow Theory Signal And An Extension on the Dow -Hmmmm

From Richard Edwards of HED Capital Management


Dow Jones futures have made a daily-scale top extension (by Tuesday’s close).

Dow fut top ext

This comes immediately after the occurrence of ‘divergence’ between two Dow indices pointed out on Monday – a Dow Theory sell signal for equities. The Dow Jones Industrial Average itself has risen, ignoring lurching drops in the Nasdaq last week yet the Transport index has fallen away from a failed attempt at a new high while the real estate sector is churning around 10% below the highs (and continuing to compress):This leads us to the conclusion that US stocks are about to enter a period of turbulence, with an increasing risk of drops from hereabouts.

The usual health warnings apply to any top extension signal – these mark the actual or imminent end of up-moves, which does not necessarily mean that a down-move will begin immediately. It is more likely that a period of churning will result, probably then to be followed by some more weakness. The shelf-life of these signals is about three weeks, so we would advise trading from both sides of the market for that time, selling weaker US equity instruments on rallies and buying stronger ones on dips. The Dow has been the strongest lately, so we would not choose it as a good ‘shorting candidate’. The Nasdaq and the S&P are both better choices.

This comes after the weekly timeframe US$ signal which we wrote about on Monday:

The US$ has been weak all year and the decline in the last three weeks has been steep. We have now seen bottom extensions in the $index and top extensions in the Euro against the $, so the decline should pause or reverse hearabouts. The Swiss franc has also just weakened quite sharply and this too has now made an extension – shown in the last of these three charts as a top extension in the Euro/Swiss rate. All these are weekly scale signals which means that the market may not turn (or pause) immediately but when this move does end within a week or so, the signals will last for three or four months. It is worth looking for some currencies to sell against the $ for a $ rebound:

$-€, $ index Swiss-€ wkly exts

A confluence of signals across markets/asset classes (you can add an energy complex sell signal too) often occurs near turning points and/or increases in volatility. An energy interim top would be consistent with a US$ bottom.

All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com


HED Capital Management can be reached via www.hedcapital.com


related content:

Daniel Loeb Expects Market Dislocations in the Second Half of 2016 (Sep 2016)

Some Dangerous Signals Appear in Financial Markets (Dec 2015)