S&P 500 recovery

The S&P 500 recovered above 1850, suggesting an advance to 1950. Breakout above 1900 would confirm. Recovery of 21-day Twiggs Money Flow above its descending trendline indicates that selling pressure is easing. Reversal below 1840 is less likely, but would warn of a test of primary support at 1750.

S&P 500

* Target calculation: 1850 + ( 1850 – 1750 ) = 1950

CBOE Volatility Index (VIX) retreated to 14, indicating low risk typical of a bull market.

VIX Index

The Nasdaq 100 found strong support at 3400 on the weekly chart. Recovery above 3600 would suggest an advance. Breakout above 3700 would confirm, offering a target of 4000*. Recovery of 13-week Twiggs Money Flow above zero would be a bullish sign. Respect of resistance at 3600 would be bearish.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

The primary trend continues upward and none of our market filters indicate elevated risk.

Europe hesitant

The Euro is retracing to test support at $1.37 on the monthly chart. Bearish divergence on 13-week Twiggs Momentum continues to warn of medium-term weakness, and penetration of the rising trendline/support at $1.35 would warn of a bull trap. Follow-through above $1.40 is unlikely at present, but would signal an advance to $1.46*.

Euro

* Target calculation: 1.37 + ( 1.37 – 1.28 ) = 1.46

Dow Jones Euro Stoxx 50 found support at 3100. Recovery above 3180 would signal another advance, but bearish divergence on 13-week Twiggs Momentum suggests weakness. Failure of 3100 would warn of a correction to test 2900/3000.

Dow Jones Euro Stoxx 50

The DAX found support at 9200 and recovery above 9400 would suggest another test of 9800. Breakout above 9800 is unlikely, but would offer a target of 10600*. Bearish divergence on 13-week Twiggs Money Flow continues to indicate medium-term selling pressure, until the descending trendline is broken. Further consolidation between 9000 and 9800 is the most likely outcome. Breach of primary support at 9000 is unlikely, but would signal reversal to a primary down-trend.

DAX

DAX Volatility is rising, but continues to indicate low risk typical of a bull market.

DAX

The Footsie similarly found support at 6500. Recovery above 6750 would signal another attempt at 6850. 13-Week Twiggs Money Flow oscillating above zero continues to indicate healthy (long-term) buying pressure. Reversal below 6400 (and the rising trendline) is unlikely, but would signal a primary reversal. Breakout above 6850 is also unlikely at this stage, so again further consolidation is the most likely outcome.

FTSE 100

India, China strengthen while Japan falters

Japan’s Nikkei 225 is testing primary support at 14000, while a large bearish divergence on 13-week Twiggs Money Flow warns of long-term selling pressure. Follow-through below 14000 would confirm a primary down-trend. Recovery above 15000 and the descending trendline is unlikely, but would indicate an advance to 16000*.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 14000 ) = 16000

Bullish divergence (13-week Twiggs Money Flow) on the Shanghai Composite Index signals medium-term buying pressure. Breakout above 2180 would complete a double bottom reversal. Breach of primary support at 1980 is unlikely, but would offer a target of 1750*.

Shanghai Composite Index

* Long-term target calculation: 2000 – ( 2250 – 2000 ) = 1750

Indian exchanges were closed Monday. A long-term view of the Sensex displays a healthy up-trend, with 13-week Twiggs Money Flow trough above zero indicating buying pressure. Target for the latest advance is 23000*, but reversal below 22000 would warn of a correction to test the new support level at 21000.

Sensex

* Target calculation: 21500 + ( 21500 – 20000 ) = 23000

Aussie strong despite ASX

The ASX 200 broke its rising trendline and short-term support to signal a correction. Declining 21-day Twiggs Money Flow indicates short-term selling pressure (a trough that respects zero would be a bullish sign). Breach of 5290/5300 would warn of a test of primary support at 5050. Failure of primary support is unlikely, but would signal a down-trend. Recovery above 5460 is also unlikely at present, but would signal a fresh advance.

ASX 200

* Target calculation: 5450 + ( 5450 – 5300 ) = 5600

ASX 200 VIX is rising, but continues to indicate low risk typical of a bull market.

ASX 200

The Aussie Dollar remains strong, consolidating at $0.94 despite ASX weakness. Bullish divergence on 13-week Twiggs Momentum signals a primary up-trend, but we may see the RBA intervene to prevent this. The RBA may need to follow the RBNZ, with macro-prudential controls, to take the steam out of the housing market (setting a maximum LVR percentage, for example) if further rate cuts become necessary.

Aussie Dollar

* Target calculation: 0.93 + ( 0.93 – 0.91 ) = 0.95

What’s Your Stock Market Story? | Bloomberg View

Barry Ritholz examines the reasons for the current sell-off:

None of these casual explanations can withstand close examination. They are often things that have existed for months or years, and so can’t account for what happened yesterday……

Here is the simple reality most of us try desperately to ignore: Most of the time, we have no idea what is going on. Our understanding of objective reality is at best tenuous. At its worst, our beliefs reflect a completely erroneous viewpoint, one that is as comforting as it is misleading. Indeed, the comfort often comes from hiding the truth from ourselves.

Read more at What’s Your Stock Market Story? – Bloomberg View.

Markets warn of correction

Before we examine the US and Australian markets, please take a look at the two charts below and tell me whether the trend is up or down. If you have a five-year old or six-year old handy, try asking them.

S&P 500

And the second one:

ASX 200

The trend on both is clear. If we invert the charts, you will recognize the S&P 500:

S&P 500

The S&P 500 breach of support at 1840 warns of a secondary correction and a sharp fall on 13-week Twiggs Money suggests selling pressure similar to the correction in late 2012. But the primary trend is up.

Likewise the ASX 200. The index retreated from 5500 and follow-through below 5380 would warn of a secondary correction. But 13-week Twiggs Money Flow oscillating above zero indicates buying pressure and the primary trend remains upward.

ASX 200

Momentum stocks are experiencing a sell-off, but our strategy is to hold existing positions. Attempting to time entries and exits in secondary corrections erodes performance. None of our market filters indicate elevated risk and we are confident that this is a bull market.

Are we in a bull market?

A simple reflection of the weekly trend on major markets using Ichimoku Cloud. Candles above the cloud indicate an up-trend, below the cloud indicates a down-trend, while in the cloud reflects uncertainty. From West to East:
S&P 500
S&P 500
Footsie
FTSE 100
DAX
DAX
ASX 200
ASX 200
Nikkei 225 is testing primary support at 14000 and looks a bit weaker
Nikkei 225
While China is holding above primary support at 1950/2000 but shows no clear trend
Shanghai Composite

Overall, there is a strong case for a bull market.

Who is buying Australian stocks?

Despite a broad sell-off across global markets, the ASX 200 has stood firm, rallying into the close for the last two days. Low volumes indicate an absence of sellers, but expect strong resistance at 5450/5460. Breach of the rising trendline would warn of another test of support at 5300 and possibly a stronger correction. Breakout above 5450/5460 remains as likely and would signal an advance to 5600*. Primary support at 5050 does not at this stage appear threatened and the index remains in an up-trend.

ASX 200

* Target calculation: 5450 + ( 5450 – 5300 ) = 5600

A rising Aussie Dollar may be contributing to ASX resilience. Performance over the last quarter looks a lot stronger if measured in US Dollars or Japanese Yen. Breakout of the Aussie Dollar above $0.93 suggests a rally to $0.95*.

Aussie Dollar

* Target calculation: 0.93 + ( 0.93 – 0.91 ) = 0.95

The weekly chart presents a more complete picture. Breach of the descending trendline and recovery of 13-week Twiggs Momentum above zero (after a strong bullish divergence) both suggest that a bottom is forming, but we are a long way from commencing an up-trend.

Aussie Dollar

Asian stocks fall but ASX 200 resilient

The Asia-Pacific region reacted to Friday’s sell-off in US markets, with the Nikkei and Hang Seng currently down 1.5% and 1.2% respectively. The Shanghai exchange is closed for a public holiday, while India’s DJ15 is down 0.67%. The ASX 200, however, rallied towards the close, losing only 0.17%.

The monthly chart of Japan’s Nikkei 225 continues to display a large bearish divergence on 13-week Twiggs Money Flow, warning of long-term selling pressure. Reversal below 14000 would signal a primary down-trend. Recovery above 15000 is as likely, however, and would indicate another advance.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 14000 ) = 16000

A monthly chart shows the Shanghai Composite Index on the flight path for a soft landing. Successive falls over the past 5 years have all exceeded the previous trough by roughly 200 points and this seems unlikely to change for the foreseeable future. The problem with a managed descent is that it is likely to endure for a lot longer than a short sharp crash. Breach of primary support at 1950 would therefore offer a target of 1800.

Shanghai Composite Index

Hong Kong’s Hang Seng Index on the other hand displays a large bullish ascending triangle. A 13-week Twiggs Money Flow trough at zero indicates buying pressure Breakout above 24000 would signal a primary advance. Reversal below the rising trendline is unlikely, but would warn of reversal to a primary down-trend.

Hang Seng Index

* Long-term target calculation: 24000 + ( 24000 – 17000 ) = 31000

India’s Sensex encountered resistance at 22500 and is likely to retrace to test 22000. Respect would signal an advance to 23000*. Bearish divergence on 13-week Twiggs Money Flow, however, warns of short/medium-term selling pressure. Reversal below 21500 is unlikely, but would indicate another correction.

Sensex

* Target calculation: 21500 + ( 21500 – 20000 ) = 23000

The ASX 200 proved surprisingly resilient, rallying toward the close. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure, but expect strong resistance at 5450/5460. Breakout above 5450/5460 would signal an advance to 5600*. Respect of resistance or a false break, however, would warn of another test of support at 5300 and possibly a stronger correction. Primary support at 5050 does not at this stage appear threatened and the index remains in an up-trend.

ASX 200

* Target calculation: 5450 + ( 5450 – 5300 ) = 5600

ASX 200 VIX below 12 continues to indicate low risk typical of a bull market.

ASX 200

Europe rebounds

Dow Jones Euro Stoxx 50 broke through resistance at 3180, signaling an advance to 3350*. Completion of a 13-week Twiggs Momentum trough above zero would confirm strong buying pressure. Reversal below 3150 is unlikely, but would warn of a bull trap.

Dow Jones Euro Stoxx 50

* Target calculation: 3150 + ( 3150 – 2950 ) = 3350

DAX breakout above 9800 would signal an advance to 10600* — though there is bound to be some resistance at 10000. Recovery of 13-week Twiggs Money Flow above the descending trendline would suggest that medium-term selling pressure is easing. Reversal below 9400 is unlikely, but would indicate another test of primary support at 9000.

DAX

DAX Volatility at 15 indicates low risk typical of a bull market.

DAX

The Footsie is testing medium-term resistance at 6700. 13-Week Twiggs Money Flow oscillating above zero indicates healthy (long-term) buying pressure. Reversal below the rising trendline is unlikely, but would test primary support at 6400. Breakout above 6850 is not yet likely, but would offer a target of 7200*.

FTSE 100

* Target calculation: 6800 + ( 6800 – 6400 ) = 7200