A long-term view

Better than expected US jobs data and strong German factory orders helped to rally markets Friday. Also, ECB chief Mario Draghi’s Thursday announcement is seen as supporting broad-based asset purchases (QE) early in 2015. A long-term view of major markets may help to place current activity in perspective.

The S&P 500 continues a strong advance, with rising 13-week Twiggs Money Flow indicating medium-term buying pressure. Long-term and medium targets coincide at 2250* and we should expect further resistance at this level.

S&P 500 Index

* Target calculation: 1500 + ( 1500 – 750 ) = 2250; 2050 + ( 2050 – 1850 ) = 2250

CBOE Volatility Index (VIX) continues to indicate low risk typical of a bull market.

S&P 500 VIX

Germany’s DAX broke resistance at its earlier high of 10000, suggesting a further advance. Recovery of 13-week Twiggs Momentum above zero indicates continuation of the up-trend. The long-term target is 12500*, though I cannot see this being reached until tensions in Eastern Europe are resolved.

DAX

* Target calculation: 7500 + ( 7500 – 2500 ) = 12500

The Footsie is testing long-term resistance at 6900/7000. Respect of the zero line by 13-Week Twiggs Money Flow indicates long-term buying pressure. Breakout above 7000 would signal a fresh primary advance, with a long-term target of 10500*.

FTSE 100

* Target calculation: 7000 + ( 7000 – 3500 ) = 10500

China’s Shanghai Composite Index broke resistance at 2500 and is likely to test the 2009 high at 3500. Rising 13-week Twiggs Money Flow indicates strong (medium-term) buying pressure.

Shanghai Composite Index

Japan’s Nikkei 225 Index is testing resistance at its 2007 high of 18000. 13-Week Twiggs Money Flow respecting the zero line indicates long-term buying pressure. Breakout would signal another primary advance. A long-term target of 28000* seems unachievable unless one factors in rising inflation and continued devaluation of the yen.

Nikkei 225 Index

* Target calculation: 18000 + ( 18000 – 8000 ) = 28000

Weak ASX 200 performance is highlighted by the distance below its 2007 high of 6850. Falling commodity prices have retarded the recovery and are likely to continue for some time ahead.

The 2005-2008 Australian commodities boom was squandered, damaging local industry and hampering the current recovery. Norway successfully weathered a similar commodities boom in the 1990s, protecting local industry while establishing a sovereign wealth fund that is the envy of its peers. Their fiscal discipline set a precedent which should be followed by any resource-rich country looking to navigate a sustainable path through a commodities boom and avoid the dreaded “Dutch Disease”.

Respect of support at 5000 would indicate the primary up-trend is intact — but declining 13-week Twiggs Money Flow indicates selling pressure. Reversal of TMF below zero or breach of support at 5000/5150 would warn of a down-trend.

ASX 200

* Target calculation: 5000 + ( 5000 – 4000 ) = 6000

The daily chart shows a slightly improved perspective. 21-Day Twiggs Money Flow oscillating around zero signals indecision. Recovery above 5400 would suggest the correction is over. But reversal below 5200 is as likely and would warn of a test of primary support at 5120/5150.

ASX 200 daily

A tale of two economies

Stock markets in Western Europe and Asia are rallying on the strength of falling oil prices, joining the US in a bull trend. But primary producers, largely dependent on commodity exports, are likely to suffer as a result of falling prices. Australia is no exception.

The S&P 500 continues a primary advance. A conservative target would be 2200*. Rising 13-week Twiggs Money Flow indicates medium-term buying support. Reversal below 2000 is unlikely, but would warn of another correction.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1800 ) = 2200

CBOE Volatility Index (VIX) indicates low risk typical of a bull market.

S&P 500 VIX

Germany’s DAX is testing resistance at its earlier high of 10000. Recovery of 13-week Twiggs Money Flow above the declining trendline suggests medium-term buying pressure. Breakout above resistance would offer a conservative target of 11000*. Reversal below 9000 is unlikely, but would warn of a primary down-trend.

DAX

* Target calculation: 10000 + ( 10000 – 9000 ) = 11000

The Footsie is also testing long-term resistance on the monthly chart — at 6900/7000. The sharp rise on 13-Week Twiggs Money Flow indicates strong medium-term buying pressure, but resistance at the December 1999 high is likely to be solid. Reversal below 6500 remains unlikely.

FTSE 100

China’s Shanghai Composite Index cleared resistance at 2440/2500, signaling a primary up-trend. 13-Week Twiggs Money Flow respect of its rising trendline confirms (medium-term) buying pressure. I remain wary of China. The recent rate-cut by the PBOC is cause for concern, not jubilation.

Shanghai Composite Index

* Target calculation: 2500 + ( 2500 – 2000 ) = 3000

Japan’s Nikkei 225 Index is headed for long-term resistance at 18000. 13-Week Twiggs Money Flow oscillating above the zero line indicates long-term buying pressure. Reversal below 16500 is unlikely.

Nikkei 225 Index

* Target calculation: 16000 + ( 16000 – 14000 ) = 18000

The ASX 200 is undergoing another correction. Respect of support at 5250/5300 would indicate the primary up-trend is intact — but 13-week Twiggs Money Flow reversal below zero warns of strong selling pressure. Breach of support is likely and would warn of a test of 5000.

ASX 200

* Target calculation: 5650 + ( 5650 – 5300 ) = 6000

Markets rebound except for ASX

  • US stocks continue their bull-trend
  • European stocks strengthen
  • China likewise
  • ASX Energy and Materials sectors under pressure

The S&P 500 broke through the upper border of its broadening wedge formation, signaling a fresh advance with a target of 2300*. Rising 13-week Twiggs Money Flow indicates medium-term buying support. Reversal below 2000 is unlikely, but would warn of another correction.

S&P 500 Index

* Target calculation: 2050 + ( 2050 – 1800 ) = 2300

CBOE Volatility Index (VIX) at 13 continues to reflect low risk typical of a bull market.

S&P 500 VIX

Germany’s DAX broke through resistance at 9400/9500, signaling another test of 10000. Rising 13-week Twiggs Money Flow refllects medium-term buying pressure. Reversal below 9400 is unlikely at present, but would warn of another test of primary support at 9000.

DAX

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

The Footsie is also headed for a test of its long-term high at 6900/6950. The sharp rise on 13-Week Twiggs Money Flow indicates strong medium-term buying pressure. Reversal below 6500 is unlikely.

FTSE 100

China’s Shanghai Composite Index respected support at its 2013 high of 2440, signaling a fresh advance. 13-Week Twiggs Money Flow respect of its rising trendline confirms (medium-term) buying pressure.

Shanghai Composite Index

* Target calculation: 2400 + ( 2400 – 2300 ) = 2500

The ASX 200 is weaker, undergoing another correction. Respect of support at 5250/5300 would indicate the primary up-trend is intact — as would a 13-week Twiggs Money Flow trough above zero. Penetration of primary support at 5120/5150, however, would signal a primary down-trend.

ASX 200

* Target calculation: 5650 + ( 5650 – 5300 ) = 6000

ASX 200 Materials (15.7%) and Energy (6.0%) sectors have commenced a down-trend. This is in sharp contrast to the Financial (46.2% including REITs) and Health Care (5.2%) sectors which continue in a healthy up-trend. It is possible for the first two sectors, with a combined weighting of 21.7%, to reverse the broad index, but is not likely unless the contagion spreads to the Industrial and Financial sectors. Increased risk-weightings for home mortgages and stronger capital ratios for major banks are likely recommendations of the Murray inquiry. These will improve the long-term strength and growth prospects for Financials, but a negative reaction in the short-term could tip the sector into a down-trend.

ASX 200 sectors

ASX under pressure

The S&P 500 continues to test resistance at 2050, the upper bound of the broadening wedge. Rising 13-week Twiggs Money Flow suggests buying pressure. Breakout would offer a target of 2250*. Reversal below 2000 is less likely, but would warn of another correction.

S&P 500

* Target calculation: 2050 + ( 2050 – 1850 ) = 2250

The CBOE Volatility Index (VIX) indicates low risk typical of a bull market.

S&P 500 VIX

Dow Jones Euro Stoxx 50 is testing resistance at 3140. Breakout would indicate an advance to 3300. 13-Week Twiggs Money Flow oscillating around zero suggests indecision. Respect of 3140 would test primary support at 3000.

Dow Jones Euro Stoxx 50

The Shanghai Composite Index retraced to test support at 2440, while declining 13-week Twiggs Money Flow indicates medium-term selling pressure. Reversal below the rising trendline at 2400 would warn of a correction, while respect would suggest trend strength.

Shanghai Composite

Hong Kong’s Hang Seng Index is weaker. Reversal below 23000 would warn of a test of primary support at 21200/21500. Twiggs Money Flow (13-week) reversal below zero would also be a strong bear signal.

HSI

The ASX 200 is undergoing another correction. Respect of support at 5250/5300 would indicate reasonable trend strength, but declining 21-day Twiggs Money Flow suggests medium-term selling pressure. With both Energy and Metals & Mining sectors under pressure, a test of primary support at 5120/5150 is likely.

ASX 200

The Aussie Dollar is also falling, having reversed below primary support at $0.8650 to signal a decline to $0.80*.

Aussie Dollar

* Target calculation: 0.87 – ( 0.94 – 0.87 ) = 0.80

A quiet week in the markets

  • US stocks continue their bull-trend
  • European stocks strengthen
  • China likewise
  • ASX retraces to test support

The S&P 500 is testing the upper border of a broadening wedge formation. Retracement that respects support at 2000 would enhance the bull signal and offer a target of 2280*. Rising 13-week Twiggs Money Flow indicates buyers are in control. Reversal below 2000 and the rising trendline is unlikely, but would signal another correction.

S&P 500 Index

* Target calculation: 2040 + ( 2040 – 1820 ) = 2280

Dow Jones Industrial Average has already broken above a similar broadening wedge formation, offering a long-term target of 19000*.

Dow Jones Industrial Average

* Target calculation: 17500 + ( 17500 – 16000 ) = 19000

CBOE Volatility Index (VIX) continues to reflect low risk typical of a bull market.

S&P 500 VIX

Germany’s DAX is testing resistance at 9400/9500, but 13-week Twiggs Money Flow remains weak. Reversal of TMF below zero would warn of another correction. Reversal below 9000 would confirm a primary down-trend. Follow-through above 9500 is less likely, but would suggest another test of 10000.

DAX

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

The Footsie proved more robust, breaking resistance, at 6500/6560 to signal a test of 6900. 13-Week Twiggs Money Flow is rising strongly, signaling buyers are in control.

FTSE 100

China’s Shanghai Composite Index broke resistance at its 2013 high of 2440, signaling an advance. 13-Week Twiggs Money Flow reversal below its rising trendline, however, would warn of (medium-term) selling pressure.

Shanghai Composite Index

* Target calculation: 2400 + ( 2400 – 2300 ) = 2500

The ASX 200 retraced to test support at 5440/5450. Respect would signal another test of the August high at 5650/5660. Failure of support would indicate a test of 5250/5300 and a weaker up-trend. Reversal below 5250 remains unlikely, but would warn of another test of primary support. A 21-day Twiggs Money Flow trough above zero would signal long-term buying pressure.

ASX 200

* Target calculation: 5650 + ( 5650 – 5300 ) = 6000

S&P 500 bullish but Europe and China encounter resistance

Retracement of the S&P 500 respected its new support level at 2000, confirming a primary advance with a target of 2150*. Recovery of 13-week Twiggs Money Flow above the declining trendline indicates buyers are back in control. Reversal below 2000 and the rising trendline is unlikely, but would signal another correction.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1850 ) = 2150

CBOE Volatility Index (VIX) at 13 indicates low risk typical of a bull market.

S&P 500 VIX

Germany’s DAX found resistance at 9400 and retracement to test support at 9000 is likely. Failure of the former primary support level at 8900/9000 would confirm a primary down-trend. Reversal of 13-week Twiggs Money Flow below zero would also indicate that sellers dominate.

DAX

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

The Footsie also encountered resistance, at 6500/6560. Respect of this level would warn of a primary down-trend, but rising 13-week Twiggs Money Flow suggests medium-term buying pressure.

FTSE 100

China’s Shanghai Composite Index is testing its 2013 high of 2440. Declining 13-week Twiggs Money Flow warns of (medium-term) resistance.

Shanghai Composite Index

* Target calculation: 2400 + ( 2400 – 2300 ) = 2500

Hong Kong’s Hang Seng Index also found resistance, at 24000. Reversal below 23000 would confirm a primary down-trend. Reversal of 13-week Twiggs Money Flow below zero would strengthen the bear signal.

Hang Seng Index

The ASX 200, influenced by both the US and China, is testing resistance at 5550. Rising 13-week Twiggs Money Flow (above zero) indicates medium-term buying pressure. Expect a test of 5650/5660. Reversal below 5380/5400 is less likely, but would warn that sellers have resumed control. I have lowered the target to 6000* because of constant back-filling in recent months.

ASX 200

* Target calculation: 5650 + ( 5650 – 5300 ) = 6000

S&P 500 and Nasdaq retracement

The S&P 500 is likely to retrace to test the new support level at 2000. Respect would confirm a fresh advance with a target of 2150*. Rising 13-week Twiggs Money Flow indicates buying pressure. Reversal below 2000 is unlikely, but would warn of a bull trap (correction).

S&P 500

* Target calculation: 2000 + ( 2000 – 1850 ) = 2150

CBOE Volatility Index (VIX) at 14 continues to indicate low risk typical of a bull market.

VIX Index

The Nasdaq 100 is in a similar situation, having broken resistance at 4100. Retracement that respects support at 4000 would confirm a fresh advance, offering a target of 4500*. Recovery of 13-week Twiggs Money Flow above 35% would flag buying pressure.

Nasdaq 100

* Target calculation: 4100 + ( 4100 – 3700 ) = 4500

Dow and S&P 500 make new highs

  • US stocks have reaffirmed their bull market
  • European stocks are recovering
  • China and Japan signal up-trends
  • ASX is rising

The new reporting season is under way and fund managers are now looking for opportunities rather than selling off under-performers.

Dow Jones Industrial Average made a new high, above 17300, signaling a primary advance. Reversal below 17000 and the rising trendline is most unlikely, but would warn of another correction. Target for the advance is 18000*.

Dow Jones Industrial Average

* Target calculation: 17000 + ( 17000 – 16000 ) = 18000

The S&P 500 similarly made a new high, signaling a fresh advance. Rising 13-week Twiggs Money Flow (above zero) indicates medium-term buying pressure. Target for the advance is 2150*. Reversal below 2000 and the rising trendline is unlikely, but would signal another correction.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1850 ) = 2150

CBOE Volatility Index (VIX) at 14 indicates low risk typical of a bull market.

S&P 500 VIX

Dow Jones Euro Stoxx 50 continues to advance above its former primary support level at 3000. Long tails on the weekly candlesticks and recovery of 13-week Twiggs Money Flow above zero indicate buying pressure. Expect another test of 3300. Reversal below 3000 is less likely, but would signal a primary down-trend.

Dow Jones Euro Stoxx 50

* Target calculation: 3000 – ( 3300 – 3000 ) = 2700

China’s Shanghai Composite Index rallied above its recent high at 2400, confirming a primary up-trend. Target for the new advance is 2500*. and the rising trendline, warning of a correction. Rising 13-week Twiggs Money Flow trough (above zero) indicates medium-term buying pressure; completion of a trough high above zero would signal trend strength.

Shanghai Composite Index

* Target calculation: 2400 + ( 2400 – 2300 ) = 2500

Japan’s Nikkei 225 Index broke resistance at 16300, signaling an advance with a long-term target of 18000*. Reversal below 16000 is unlikely, but would warn of another correction.

Nikkei 225 Index

* Target calculation: 16000 + ( 16000 – 14000 ) = 18000

The ASX 200 is headed for a test of resistance at 5660. Brief retracement at 5440 and rising 21-day Twiggs Money Flow (above zero) both indicate medium-term buying pressure. Reversal below 5440 is unlikely, but would indicate a test of 5250. I have lowered the target to 6000* because of constant back-filling in recent months.

ASX 200

* Target calculation: 5650 + ( 5650 – 5300 ) = 6000

October correction nearing end

  • DAX and FTSE in a down-trend
  • China and Hong Kong retreat
  • US stocks remain in a bull market
  • ASX ends correction

The new reporting season is under way and fund managers are now looking for opportunities rather than selling off under-performers.

The S&P 500 broke resistance at 1900 and 1925. Penetration of the descending trendline suggests that the October correction is over. Recovery of 21-Day Twiggs Money Flow above zero indicates medium-term buying pressure. Expect a test of resistance at 2000 followed by consolidation or retracement to confirm support at 1925. Narrow consolidation below 2000 would be a bullish sign.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1850 ) = 2150

CBOE Volatility Index (VIX) at 16 again indicates low risk typical of a bull market.

S&P 500 VIX

The Nasdaq 100 recovered above resistance at 4000, indicating a fresh advance. Penetration of the descending trendline signals that the correction is over. Completion of a 13-week Twiggs Money Flow trough high above zero would indicate long-term buying pressure. Reversal below 4000 is unlikely, but would warn of another test of support.

Nasdaq 100

* Target calculation: 4100 + ( 4100 – 3800 ) = 4400

Dow Jones Euro Stoxx 50 recovered above its former primary support level at 3000, suggesting a bear trap. The primary trend remains downward, but recovery of 13-week Twiggs Money Flow above zero would suggest another test of 3300.

Dow Jones Euro Stoxx 50

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

China’s Shanghai Composite Index retreated below support at 2340/2350 and the rising trendline, warning of a correction. A 13-week Twiggs Money Flow trough above zero would confirm the primary up-trend, while reversal below zero would warn of a bear market.

Shanghai Composite Index

The ASX 200 recovered above resistance at 5250 and 5350 and the descending trendline, indicating that the correction is over. Breach of resistance at 5450 would signal another test of 5650. Bullish divergence and rising 21-day Twiggs Money Flow (above zero) indicate medium-term buying pressure. Reversal below 5350 is unlikely, but would indicate another test of 5120.

ASX 200

Another bear trap?

Bellwether transport stock Fedex found support at $154, the long tail and rising 13-week Twiggs Money Flow indicating buying pressure. Expect a test of $165. Reversal below $150 is unlikely, but would warn of a test of primary support at $130. Continuation of the primary up-trend signals improvement for the broad economy.

Fedex

* Target calculation: 165 + ( 165 – 150 ) = 180

The S&P 500 is testing its new resistance level at 1900/1910. Last week’s long tail indicates short-term buying pressure but declining 13-week Twiggs Money Flow continues to warn of long-term selling pressure. Recovery above 1910 would suggest that the correction is over, while penetration of the descending trendline would strengthen the signal.

S&P 500

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

Someone asked why I felt the correction was over, when there are so many bearish signs on the charts. My answer in brief was:

  • Strong support on the Dow and S&P 500;
  • Breach of descending trendline on the ASX 200;
  • October sell-off nearing an end;
  • US reporting season has started and fund managers will revert to accumulation of stronger performing stocks.

I could have added that our market filters continue to indicate low to moderate risk.

I am also suspicious of breaks of support after the bear traps of 2010 and 2011.

S&P 500

Breaches are indicated by red arrows, recoveries by green.

S&P 500

Investors remain extremely skittish after the 2009 crash and likely to jump at shadows.

CBOE Volatility Index (VIX) has retreated below 20%, suggesting low risk typical of a bull market. Recovery above 20% is not likely, but a (significantly) higher trough would warn of rising risk.

VIX Index

The Nasdaq 100 rallied off support at 3700. Follow-through above 3900 would suggest another test of 4100. Recovery above 4000 and the descending trendline would strengthen the signal. Divergence on 13-week Twiggs Money Flow indicates mild selling pressure. Reversal below 3700 and the rising (secondary) trendline would warn of a test of primary support at 3400.

Nasdaq 100

* Target calculation: 3750 – ( 4100 – 3750 ) = 3400

October sell-off: Drawing to a close?

  • DAX and FTSE find support, but remain in a down-trend
  • China is bullish, but Japan bearish
  • US stocks find support and continue to indicate a bull market
  • ASX respects primary support

The S&P 500 found support at 1820 and is testing resistance at 1900. Breach of resistance would suggest that the correction is over. 21-Day Twiggs Money Flow below zero, however, continues to warn of medium-term selling pressure. Respect of resistance is more likely, indicating another test of support at 1800*.

S&P 500 Index

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

CBOE Volatility Index (VIX) retreated to 22, indicating moderate risk, but nowhere near the 30+ levels typical of a bear market.

S&P 500 VIX

Dow Jones Industrial Average recovered above resistance (the former support level) at 16300, the long tail indicating short-term buying pressure. Follow-through above the descending trendline would signal that the correction is over. Recovery above the recent highs at 25% on 13-week Twiggs Money Flow would suggest that buyers have regained control.

Dow Jones Industrial Average

Germany’s DAX is retracing to test resistance at 9000. Respect would confirm a primary down-trend. 13-Week Twiggs Momentum below zero strengthens the bear signal. Target for the decline is 8000*. Recovery above 9000 remains unlikely, but would warn of a bear trap.

Dow Jones Euro Stoxx 50

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

The Footsie displays a similar long tail, indicating buying pressure. Recovery above 6500 is unlikely, but would warn of a bear trap. Respect of resistance would offer a target of 6000*.

FTSE 100 Index

* Target calculation: 6400 – ( 6800 – 6400 ) = 6000

China’s Shanghai Composite Index is testing support at 2340/2350. Breach would warn of a correction. But the primary up-trend remains and rising 13-week Twiggs Money Flow signals medium-term buying pressure.

Shanghai Composite Index

Japan’s Nikkei 225 Index plunged through support at 14800, warning of a test of primary support at 13900/14000. Reversal of 13-week Twiggs Money Flow below zero indicates (long-term) selling pressure.

Nikkei 225 Index

The ASX 200 recovered above resistance at 5250 and the descending trendline, suggesting that the correction is over. Bullish divergence and a rising 21-day Twiggs Money Flow (above zero) indicates medium-term buying pressure. Recovery above 5350 would confirm that buyers are back in control, while reversal below 5250 would indicate another test of 5000/5050.

ASX 200

* Target calculation: 5350 – ( 5650 – 5350 ) = 5050

ASX 200 VIX remains below 20, indicating low risk typical of a bull market.

ASX 200 VIX

US stocks: Broad selling pressure

The S&P 500 broke through support at 1900, offering a target of 1800*. Decline of 21-day Twiggs Money Flow below zero warns of medium-term selling pressure. Recovery above 1910 is unlikely at present, but would suggest a bear trap.

S&P 500

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

CBOE Volatility Index (VIX) broke above 20%, but still indicates moderate risk. A break above 30% would suggest elevated risk.

VIX Index

Dow Jones Industrial Average is testing support at 16300. Breach would indicate a test of the (primary) rising trendline. Bearish divergence on 13-week Twiggs Money Flow continues to warn of selling pressure. Recovery above 16500 is less likely, but would suggest another rally.

Dow Jones Industrial Average

The Nasdaq 100 broke support at 3850. Follow-through below 3750 would confirm a target of primary support at 3400*. Divergence on 13-week Twiggs Money Flow indicates selling pressure. Respect of support at 3750 is unlikely, but recovery above 3850 would suggest another rally.

Nasdaq 100

* Target calculation: 3750 – ( 4100 – 3750 ) = 3400

October sell-off continues

  • DAX and FTSE break support, signaling a down-trend
  • China is bullish, but rest of Asia is bearish
  • US stocks are correcting, but continue to indicate a bull market
  • ASX testing primary support

The quarter-end sell-off has been exacerbated by weakness in Europe.

Germany’s DAX broke primary support at 8900/9000, signaling a (primary) down-trend. Reversal of 13-week Twiggs Money Flow below zero strengthens the bear signal. Target for the decline is 8000*. Recovery above 9000 is unlikely, but would warn of a bear trap.

Dow Jones Euro Stoxx 50

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

The Footsie displays similar weakness, breaching primary support at 6400/6500. Target for the decline is 6000*. Recovery above 6500 is unlikely, but would warn of a bear trap.

FTSE 100 Index

* Target calculation: 6400 – ( 6800 – 6400 ) = 6000

China’s Shanghai Composite Index is holding above its new support at 2340/2350, but expect retracement to at least 2250 in response to US/European weakness.

Shanghai Composite Index

Japan’s Nikkei 225 Index broke medium-term support at 15500 and the rising trendline to warn of a correction. Reversal of 13-week Twiggs Money Flow below zero would strengthen the signal. Breach of 14800 would indicate a test of primary support at 14000.

Nikkei 225 Index

The S&P 500 is testing primary support at 1900. Declining 13-week Twiggs Money Flow warns of selling pressure. Reversal below zero would indicate a down-trend, offering a target of 1800*.

S&P 500 Index

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

CBOE Volatility Index (VIX) rose to above 20, indicating moderate risk, but nowhere near the levels typical of a bear market.

S&P 500 VIX

The ASX 200 broke support at 5250/5300, suggesting a test of long-term support at 5000. Declining 13-week Twiggs Money Flow below zero indicates strong selling pressure. Recovery above 5350 is unlikely, but would suggest that the correction is over.

ASX 200

* Target calculation: 5350 – ( 5700 – 5350 ) = 5000

Market lifts despite weak global economy

Minutes of the September FOMC meeting highlight growing unease with the strong US Dollar and a weak global economy. The market read this as “low interest rates” and commenced a buying spree. Last year the quarter-end sell-off ended on October 9th after a 4.2% fall. This year’s correction fell 4.7%, lasting 13 days (so far) compared to 15 days in 2013.

Roberto Dominguez at NY Daily News reports:

“The start of earnings season, with companies including Costco and Alcoa reporting quarterly profits that beat forecasts, also helped push the S&P 500 to its biggest rally in a year.”

While Cullen Roche writes that the US fiscal deficit is shrinking:

“…tax receipts have surged by 7.7% year over year and are up 48% over the last 5 years. And while some of this is due to tax increases the vast majority is due to a healing private sector.”

Bellwether transport stock Fedex continues its primary up-trend, signaling improved economic activity.

Fedex

No doubt boosted by a falling outlook for crude oil.

Nymex and Brent Crude

With positive news about, we should be careful not to forget the Fed’s concern with a weak global economy. While this may drive oil prices even lower, the impact on international sales of major exporters will be closely watched.

S&P 500 recovery above 2000 would indicate the correction is over, while follow-through above 2020 would signal another advance. A 21-day Twiggs Money Flow trough above zero would signal a healthy up-trend. Reversal below 1925 is unlikely, but would test primary support at 1900/1910.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) retreated to 15%, indicating low volatility typical of a bull market.

VIX Index

US job growth rebounds

  • US job growth rebounds, halting the correction
  • Gold and crude oil are falling
  • European stocks remain bearish
  • Asian stocks are bearish
  • US stocks continue to indicate a bull market

We are at the September quarter-end and stock weakness is likely to continue into October.

From the Wall Street Journal:

U.S. job growth rebounded in September and the jobless rate fell below 6% for the first time since mid-2008, suggesting the labor market is improving faster than previously thought. Nonfarm payrolls grew a seasonally adjusted 248,000 last month, the fastest pace since June, the Labor Department said Friday.

The S&P 500 broke downwards from its broadening wedge formation this week, warning of a correction to 1900. But Thursday’s long tail and Friday’s rally indicate buying support below 1950. Another test of 2000 is likely. Respect of resistance would warn of further weakness in October, while breakout would suggest a fresh advance; follow-through above 2020 would confirm.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) remains below 20, typical of a bull market.

S&P 500 VIX

Dow Jones Euro Stoxx 50 found support at 3100, but this is unlikely to hold. Expect another test of primary support at 3000. Breach would signal a down-trend. Fall of 13-week Twiggs Money Flow below zero would strengthen the bear signal.

Dow Jones Euro Stoxx 50

* Target calculation: 3000 – ( 3300 – 3000 ) = 2700

Dow Jones Asia Index is headed for a test of 2800 on the weekly chart despite continued bullishness on the Shanghai Composite, reflecting strength in the US Dollar. Penetration of the rising trendline would strengthen the bear signal. Reversal of 13-week Twiggs Momentum below zero also signals a primary down-trend.

Dow Jones Asia Index

The ASX 200 found support at 5250. Recovery above 5350 and the descending trendline would suggest that the correction is over. But respect of resistance remains as likely and breach of 5250 would warn of a test of 5000/5050. Recovery of 21-day Twiggs Money Flow above zero would indicate short-term buying pressure.

ASX 200

* Target calculation: 5650 + ( 5650 – 5350 ) = 5950

S&P 500 breaks support

The S&P 500 broke through the lower border of the broadening wedge and the secondary trendline at 1965, indicating a correction. Expect support at 1900. Decline of 21-day Twiggs Money Flow below zero would strengthen the signal, while recovery above 25% (September high) would suggest that buyers are back in control.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) is close to 17%, but the low level continues to suggest a bull market.

VIX Index

Rising interest rates: Good or bad for stocks?

We are now at the September quarter-end, normally a volatile time for stocks. Expect selling pressure to increase over the next few weeks as investment managers sell off poor-performing stocks. Increased cash balances then enable them to take advantage of new opportunities as they present themselves. If the fundamental under-pinning of the market is sound, the market is likely to undergo a minor dip before resuming its advance. If not, and there are serious flaws, the sell-off could turn into a rout — as in 1987 and 2007.

At present the market appears sound, with none of our market indicators flagging elevated risk, and the bull market is likely to continue.

Bears cite the potential for an increase in US interest rates as a major threat to the US economy. The track record for the last 15 years suggests otherwise. The graph below compares percentage change in 10-year Treasury yields to the Wilshire 5000 Total Market Index (divided by 20 for purposes of comparison). The two tend to rise and fall in sync, with a 20% to 40% rise in the index accompanying a 1% increase in yields.

10-year Treasury yields v. Wilshire 5000 Total Market Index

The Fed tends to be conservative about raising interest rates (“doves” outnumber “hawks”) and is unlikely to raise rates until there is solid evidence of a recovery. So a rise in interest rates is more likely to be followed by a surge in stocks than a fall.

US stocks

The S&P 500 found significant support at 1965, the lower border of the broadening wedge. Monday’s long tail flags (short-term) buying pressure. Follow-through above 1990 would suggest a rally to test the upper border. Breach of 1965, however would indicate another correction. Decline of 21-day Twiggs Money Flow below zero would confirm, while recovery above its September high would suggest that buyers are back in control.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) is rising, but the low level continues to suggest a bull market.

VIX Index

Dow Jones Industrial Average found support at 16950 on the weekly chart. Long tails again flag buying pressure. Recovery above 17150 would suggest another advance, while follow-through above 17350 would confirm. Breach of support at 16950 is unlikely, but would warn of a correction. 13-Week Twiggs Money Flow reflects some hesitancy, but the long-term picture is bullish.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

S&P 500 broadening wedge

  • We are at the September quarter-end and can expect stock weakness to continue into October
  • The Dollar is rising
  • Gold and crude oil are falling
  • European stocks are bearish
  • Asian stocks are bearish despite China showing strength
  • US stocks reflect a bull market

Dow Jones Europe Index is testing primary support at 320. Breach would signal a down-trend. Follow-through below 315 would confirm. Penetration of the rising trendline and 13-week Twiggs Momentum peak below zero both strengthen the bear signal.

Dow Jones Europe Index

* Target calculation: 320 – ( 340 – 320 ) = 300

Dow Jones Asia Index broke primary support at 3200 despite bullishness on the Hang Seng and Shanghai Composite. Expect a test of support at 3000 (at the rising trendline). Reversal of 13-week Twiggs Momentum below zero would further strengthen the bear signal. Follow-through below 3000 would confirm a primary down-trend.

Dow Jones Asia Index

* Target calculation: 3100 + ( 3100 – 2800 ) = 3400

Shanghai Composite Index, however, continues to test resistance at 2350. Breakout would confirm a primary up-trend. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure.

Shanghai Composite Index

Bear in mind that Dow Asia and Dow Europe are priced in USD and reflect strength in the US Dollar as well as weakness in local markets — though the two are closely connected.

The S&P 500 is consolidating around the 2000 level in a broadening wedge formation. Do not be surprised if the index rallies early next week, to test medium-term resistance at 2020. Fund managers are normally willing to support the market at quarter-end and lock in quarterly performance bonuses. But this is likely to be followed by weakness in October as they sell off non-performing stocks and increase cash holdings until new opportunities present themselves. Breakout below the broadening wedge — and penetration of both support at 1950 and the (secondary) rising trendline — would warn of a correction. A large volume spike from triple-witching hour on September 19th, however, has exaggerated weakness on Twiggs Money Flow. Breakout above 2020 would signal a fresh advance.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) remains in the low range (below 20) typical of a bull market.

S&P 500 VIX

The ASX 200 is testing support at 5300/5350. Penetration of the rising trendline warns of a correction to 5000. Declining 13-week Twiggs Money Flow, below zero, after a long-term bearish divergence, also signals weakness. Breach of 5300 would confirm a test of 5000. Recovery above 5550 is unlikely, but would suggest another test of 5650.

ASX 200

* Target calculation: 5650 + ( 5650 – 5350 ) = 5950