Global correction

Global stock markets have mostly experienced selling pressure over the last two weeks but most of the activity is secondary in nature and, apart from longer-term issues in the UK and Canada, is unlikely to affect the primary up-trend.

Starting near the North Korean epicenter of the latest tensions, the Seoul Composite Index is largely unfazed. The monthly chart reflects a secondary correction with moderate selling pressure and no hint of panic selling.

Seoul Composite Index

China’s Shanghai Composite Index rallied after a modest correction.

Shanghai Composite Index

While bearish divergence on Hong Kong’s Hang Seng Index warns of selling pressure and a secondary correction to test 26000.

Hang Seng Index

India’s Sensex is undergoing a correction after breaking its rising trendline but found support at 31000.

BSE Sensex

Moving farther afield, Canada’s TSX 60 continues to consolidate in a narrow line below the former primary support level at 900. Declining Twiggs Money Flow warns of long-term selling pressure. Breach of support at 880 is likely and would confirm a primary down-trend.

TSX 60

Europe also experienced selling pressure, with the Footsie testing primary support at 7300. Breach of support would signal a primary down-trend.

FTSE 100

Germany’s Dax found support at 12000. Respect, with a Twiggs Money Flow trough above zero, would indicate another primary advance.

DJ Euro Stoxx 50

Tillerson: Not many good North Korea options | Reuters

From Reuters:

U.S. Secretary of State Rex Tillerson said on Friday there would not be many good options left on North Korea if the peaceful pressure campaign the United States has been pushing to curb Pyongyang’s nuclear and missile programs failed….

The United States, Japan and South Korea agreed on Friday to push for a quick U.N. Security Council resolution to apply new sanctions on North Korea. U.N. diplomats said the United States had given China a draft sanctions resolution.

But Washington faces an uphill struggle to convince Russia and China to give quick backing to new U.N. sanctions.

Experts say North Korea’s ICBM launch on Tuesday was a major step forward in its declared intent to create nuclear-tipped missiles capable of hitting the United States. Some U.S. experts say the missile appeared to have the range to hit Alaska, Hawaii and parts of the U.S. Pacific Northwest.

Washington has warned it is ready to use force if need be to stop North Korea’s weapons programs but the consequences of that could be catastrophic and it prefers global diplomatic action.

Source: Not many good North Korea options if pressure fails: Tillerson | Reuters

Is the Donald long gold?

Don’t know if he is long, but Donald Trump is doing his best to drive up demand for gold.

From the FT overnight:

Donald Trump has warned that the US will take unilateral action to eliminate the nuclear threat from North Korea unless China increases pressure on the regime in Pyongyang.

In an interview with the Financial Times, the US president said he would discuss the growing threat from Kim Jong Un’s nuclear programme with Xi Jinping when he hosts the Chinese president at his Florida resort this week, in their first meeting. “China has great influence over North Korea. And China will either decide to help us with North Korea, or they won’t,” Mr Trump said in the Oval Office.

“If they do, that will be very good for China, and if they don’t, it won’t be good for anyone.”

But he made clear that he would deal with North Korea with or without China’s help. Asked if he would consider a “grand bargain” — where China pressures Pyongyang in exchange for a guarantee that the US would later remove troops from the Korean peninsula — Mr Trump said:

“Well if China is not going to solve North Korea, we will. That is all I am telling you.”

Nothing like the threat of nuclear war to drive up the price of portable assets. Not that it would do much good if you are on the receiving end.

Spot Gold broke resistance at $1250 an ounce. Follow-through above $1260 is likely and would signal an advance to $1300.

Spot Gold

Theresa May had a calmer, less belligerent approach: “….encourage China to look at this issue of North Korea and play a more significant role in terms of North Korea … I think that’s where our attention should focus.”

The Chip on China’s Shoulder | WSJ

…..Fully 70% of Chinese television dramas have plots related to war with Japan, he tells us, and in 2012 alone 700 million imaginary Japanese were killed in Chinese movies. Mr. French’s findings on this count are ominous: “Up until the present day,” he writes, “East Asia has never proven large enough for two great powers to coexist peacefully.”

….he points to the enormous demographic shift under way in China as the population ages and birthrates fall far short of replacement. China is on course to have more than 329 million people over the age of 65 by 2050, while the younger, working-age population is set to plummet. The inexorable aging of the population will, Mr. French predicts, restrain the country’s ability to project power in the future. It will halve the size of the military-age population while saddling workers and the government with enormous expenses to care for the elderly. He suggests that the incredible pace with which China is currently trying to assert control over the South China Sea is driven by President Xi Jinping’s awareness that the country has a window of at most 20 or 30 years before demographics catch up to it and such an expansion becomes impossible.

China’s attempt to dominate East Asia (if not Asia) brings it into direct conflict with Japan. Expect increased militarization of Japan as China attempts to expand its sphere of influence. The Korean peninsula and Vietnam are simply sideshows.

Source: The Chip on China’s Shoulder – WSJ

Don’t Believe the Hype: China’s North Korea Policy is All Smoke and Mirrors

Dr. Van Jackson is an Associate Professor at the Asia-Pacific Center for Security Studies, and author of the book Rival Reputations: Coercion and Credibility in US-North Korea Relations:

Social media is abuzz with news that China’s Ministry of Commerce announced it will suspend coal imports from North Korea as part of U.N. Security Council sanctions enforcement for the North’s most recent nuclear and ballistic missile tests in violation of prior Security Council resolutions. So China is finally standing arm-in-arm with the United States and international community to actually do something about North Korea. That’s great, right? Wrong.

China’s suspension of coal imports is smoke and mirrors; an act of geopolitical misdirection. The United States is being played, as it has in the numerous past instances when China supported sanctions resolutions against North Korea at the United Nations only to fail to implement them….

….China’s “emotions” toward North Korea don’t drive its policy. China has a long tradition of paying lip service toward cooperation with the United States and the international community while largely failing to apply any meaningful pressure on North Korea, and for good reason: It doesn’t want a nuclear-armed neighbor on its border to become a nuclear-armed enemy. We ignore China’s enduring strategic interests in North Korea at our peril.

Source: Don’t Believe the Hype: China’s North Korea Policy is All Smoke and Mirrors

Asia: Japan surges while China ebbs

Japan is surging ahead, with the Nikkei 225 index headed for a test of 20000* after its breakout above 17500 four weeks ago.

Nikkei 225 Index

* Target medium-term: 17500 + ( 17500 – 15000 ) = 20000

India’s Sensex found support at 26000, but narrow consolidation and declining Twiggs Money Flow both warn of selling pressure. Breach of 26000 would indicate another decline, with a target of 23000*.

Sensex Index

* Target medium-term: 26000 – ( 29000 – 26000 ) = 23000

Shanghai Composite Index is undergoing another correction. Respect of support at 3100 would indicate a healthy up-trend, while breach of 3000 would warn of a reversal. Declining Twiggs Money Flow indicates medium-term selling pressure.

Shanghai Composite Index

* Target medium-term: 3100 + ( 3100 – 2800 ) = 3400

Sharply falling Money Flow warns of strong selling pressure on Hong Kong’s Hang Seng Index. Breach of support at 22000 would signal a primary down-trend with an initial decline to 20000.

Hang Seng Index

Japan & China rally

Japan’s Nikkei 225 Index broke resistance at 17500 while rising Money Flow indicates buying pressure. Target for the rally is the November 2015 high of 20000*.

Nikkei 225 Index

* Target medium-term: 17500 + ( 17500 – 15000 ) = 20000

Shanghai Composite Index followed through after a brief consolidation at 3200, offering a target of 3400*. Expect retracement to test the new support level at 3100 but rising Money Flow suggests respect is likely.

Shanghai Composite Index

* Target medium-term: 3100 + ( 3100 – 2800 ) = 3400

Asia steadies

China’s Shanghai Composite Index steadied and is again testing resistance at 3100. Breakout would signal a primary up-trend. Rising troughs on Twiggs Money Flow indicate buying pressure.

Shanghai Composite Index

Japan’s Nikkei 225 Index rallied for another test of resistance at 17000. Breakout above 17000 would suggest a primary up-trend. Follow-through above 17600, completing a broad double-bottom, would confirm. Further consolidation, however, is more likely.

Nikkei 225 Index

India’s BSE Sensex broke out of its narrow rectangle at 28000, signaling another advance. Expect a test of the 2015 high at 30000. Bearish divergence on Twiggs Money Flow now appears misleading.

SENSEX

Asia pulls back

China’s Shanghai Composite Index retreated below resistance at 3100. Prospects of a primary up-trend have dimmed and further consolidation between 2800 and 3100 is likely.

Shanghai Composite Index

Japan’s Nikkei 225 Index is pretty directionless, retreating from resistance at 17000. Breach of 16000 would warn of another test of primary support at 15000. But a broad base between 15000 and 17000 is likely.

Nikkei 225 Index

India’s BSE Sensex is the most promising, consolidating in a bullish narrow range around 28000. Upward breakout would signal a further advance towards the 2015 high of 30000. Bearish divergence on Twiggs Money Flow warns of long-term selling pressure, however, and downward breakout would warn of a correction to 25000 or 26000.

SENSEX

Hope isn’t a strategy

Cautious optimism has evaporated after poor recent polls favoring a BREXIT. I hope that sanity prevails but, as the saying goes: “Hope isn’t a strategy”.

Better to have a Plan A and a Plan B to cope with the two alternatives. But if enough investors decide their money is safer in the bank, then expectations of a fall are likely to become a self-fulfilling prophecy.

The S&P 500 does not appear unduly alarmed but a sharp fall on 13-week Money Flow warns of selling pressure. Reversal below 2000 would warn of another test of primary support (1820 to 1870).

S&P 500 Index

Dow Jones Industrial Average shows a similar picture. Breach of medium-term support at 17400 to 17500 would warn of another test of primary support at 15500 to 16000.

Dow Jones Industrial Average

A CBOE Volatility Index (VIX) spiked to 20, indicating increased market risk. Long-term measures remain unaffected.

S&P 500 VIX

Europe

Germany’s DAX retreated below medium-term support, warning of another test of primary support. 13-Week Money Flow below zero suggests a primary down-trend.

DAX

The Footsie broke support at 6000 warning of a test of 5500. Reversal of Money Flow below zero would suggest a primary down-trend.

FTSE 100

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

Asia

The Shanghai Composite Index continues to range between 2700 and 3100.

Shanghai Composite Index

Japan’s Nikkei 225 Index broke support at 16000 and its lower trend channel, warning of another decline.

Nikkei 225 Index

* Target calculation: 15000 – ( 18000 – 15000 ) = 12000

India’s Sensex remains bullish, with a short retracement below 27000. Bearish divergence on 13-week Money Flow would end if the descending trendline is penetrated.

SENSEX

Australia

The ASX 200 broke medium-term support at 5200, warning of another test of primary support at 4750. Expect support at the former level of 4900 to 5000 but it is questionable whether this will hold. Combination of a seasonal sell-off and BREXIT fears are going to test buyers’ commitment.

ASX 200

The Banks Index fell sharply and breach of support at 7200 would offer a target of 6400*.

ASX 300 Banks

* Target calculation: 7200 – ( 8000 – 7200 ) = 6400

Health Care is experiencing a strong sell-off, led by CSL. This is a good long-term stock but exposure to the UK/Europe has spooked the market.

ASX 200 Health Care

Asia: Shanghai weakens

The Shanghai Composite Index broke medium-term support at 2900, warning of another test of primary support at 2700. Reversal of Money Flow below zero would warn of a decline to 2400*.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index is edging higher but trend strength is weak. Breakout above resistance at 17000 was followed by a retreat to 16000. Support is weak and breach of 16000 would signal another test of primary support at 15000.

Nikkei 225 Index

* Target calculation: 17000 – ( 20000 – 17500 ) = 15000

India’s Sensex is more bullish, testing its upper trend channel at 26000. Short retracement is a bullish sign and breakout above 26000 would signal that the down-trend is ending. Recovery of 13-week Twiggs Momentum above zero would strengthen the signal.

SENSEX

* Target calculation: 23000 – ( 25000 – 23000 ) = 21000

The titillating and terrifying collapse of the dollar. Again. | Michael Pettis

Michael Pettis explains why the US dollar as reserve currency is a burden rather than a privilege for the US:

Historically, neither Europe nor Japan, and certainly not China, have been willing to permit foreigners to purchase significant amounts of government bonds for reserve purposes. When the PBoC tried to accumulate yen three years ago, for example, rather than welcome the friendly Chinese gesture granting the Bank of Japan some of the exorbitant privilege enjoyed by the Fed, the Japanese government demanded that the PBoC stop buying. The reason is because PBoC buying would force up the value of the yen by just enough to reduce Japan’s current account surplus by an amount exactly equal to PBoC purchases. This, after all, is the way the balance of payments works: it must balance.

What is more, because the current account surplus is by definition equal to the excess of Japanese savings over Japanese investment, the gap would have to narrow by an amount exactly equal to PBoC purchases. Here is where the exorbitant privilege collapses. If Japan needs foreign capital because it has many productive investments at home that it cannot finance for lack of access to savings, it would welcome Chinese purchases. PBoC purchases of yen bonds would indirectly cause productive Japanese investment to rise by exactly the amount of the PBoC purchase, and because the current account surplus is equal to the excess of savings over investment, the reduction in Japan’s current account surplus would occur in the form of higher productive investment at home. Both China and Japan would be better off in that case.But like other advanced economies Japan does not need foreign capital to fund productive domestic investment projects. These can easily be funded anyway. In that case PBoC purchases of yen bonds must cause Japanese savings to decline, so that its current account surplus can decline (if the gap between savings and investment must decline, and investment does not rise, then savings must decline). There are only two ways Japanese savings can decline: first, the Japanese debt burden can rise, which Tokyo clearly doesn’t want, and second, Japanese unemployment can rise, which Tokyo even more clearly doesn’t want.

There is no way, in short, that Japan can benefit from PBoC purchases of its yen bonds, which is why Japan has always opposed substantial purchases by foreign central banks. It is why European countries also strongly opposed the same thing before the euro was created, and it is why China restricts foreign inflows, except in the past year when it has been overwhelmed by capital outflows. The US and, to a lesser extent, the UK, are the only countries that permit unlimited purchases of their government bonds by foreign central banks, but the calculus is no different.

It turns out that foreign investment is only good for an economy if it brings needed technological or managerial innovation, or if the recipient country has productive investment needs that cannot otherwise be funded. If neither of these two conditions hold, foreign investment must always lead either to a higher debt burden or to higher unemployment. Put differently, foreign investment must result in some combination of only three things: higher productive investment, a higher debt burden, or higher unemployment, and if it does not cause a rise in productive investment, it must cause one of the other two.

The two conditions under which foreign investment is positive for the economy – i.e. it leads to higher productive investment – are conditions that characterize developing economies only, and not advanced countries like Japan and the US. These conditions also do not characterize developing countries that have forced up their domestic savings rates to levels that exceed domestic investment, like China.

Source: The titillating and terrifying collapse of the dollar. Again. | Michael Pettis’ CHINA FINANCIAL MARKETS

Plenty of bottom signals

Global

Dow Jones Global Index is headed for a test of resistance at 320 after penetrating its descending trendline. Respect of 320 is likely but a bottom is forming and a higher trough would suggest an inverted head-and-shoulders formation. 13-Week Twiggs Momentum recovery above zero is bullish but another low peak would indicate that bears still dominate.

Dow Jones Global Index

North America

The S&P 500 continues to test the band of resistance at 2100 to 2130. Money Flow remains bullish but I expect stubborn resistance at this level, further strengthened by poor quarterly results, so far, in the earnings season.

S&P 500 Index

A CBOE Volatility Index (VIX) at a low 14 indicates that (short-term) market risk is low. Long-term measures are also starting to ease but we maintain high cash levels in our portfolios.

S&P 500 VIX

Canada’s TSX 60 is headed for a test of resistance at 825. Penetration of the descending trendline suggests that a bottom is forming. Resistance is likely to hold but an ensuing higher trough would be a bullish sign. Rising 13-week Twiggs Momentum is encouraging but a low peak above zero would indicate that bears still dominate.

TSX 60 Index

Europe

Germany’s DAX broke resistance at 10000 and is headed for a test of the descending trendline. Rising Money Flow indicates medium-term buying pressure. Retreat below 10000 would warn of another decline.

DAX

* Target calculation: 9500 – ( 11000 – 9500 ) = 8000

The Footsie is headed for a test of 6500. Rising Money Flow suggests decent buying pressure. Respect of resistance is likely but a bottom is forming and an ensuing higher trough would suggest a primary up-trend.

FTSE 100

* Target calculation: 6000 – ( 6500 – 6000 ) = 5500

Asia

The Shanghai Composite Index retreated below 3000. Breach of medium-term support at 2900 would warn of another test of primary support at 2700. Rising Money Flow suggests that breach of primary support is unlikely.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index broke resistance at 17000, a higher trough signaling a primary up-trend. Expect retracement to test the new support level at 17000. Rising Money Flow confirms buying pressure.

Nikkei 225 Index

* Target calculation: 17000 – ( 20000 – 17500 ) = 15000

India’s Sensex is testing its upper trend channel at 26000. Penetration of the descending trendline would suggest that a bottom is forming. Respect, indicated by reversal below 25000, would warn of another test of primary support.

SENSEX

* Target calculation: 23000 – ( 25000 – 23000 ) = 21000

Australia

A sharp fall in the Australian Dollar as result of record low inflation numbers may precipitate some selling by international buyers. Further weakness in iron ore would impact both the ASX and the Aussie Dollar.

The ASX 200 has also penetrated its descending trendline, suggesting that a bottom is forming. But bearish divergence on 13-week Money Flow warns of selling pressure. Retreat below 5000 would warn of another test of primary support at 4700.

ASX 200

* Target calculation: 4700 – ( 5200 – 4700 ) = 4200

China’s problems

China’s problems in a nutshell, From Niels C. Jensen’s Absolute Return newsletter:

China’s problems….. It is faced with a decapitated banking industry, which has been far too willing to lend to all kinds of investment projects – good and bad. At the same time, the Chinese growth model has been driven by investments and exports, whereas the growth in consumer spending has been relatively modest. A few numbers to support that statement: As recently as 10 years ago, exports and investments constituted 34% and 42% respectively of Chinese GDP, i.e. less than a ¼ of Chinese GDP came from the combination of consumer spending and government spending. By comparison, consumer spending accounts for over 70% of U.S. GDP.

By 2014, investments had grown to 46% of GDP, whilst exports had fallen to 23%. The further growth in investments has been funded by rapid credit expansion in China’s banking industry, which has grown from $3 trillion in 2006 to $34 trillion in 2015. That is a shocking amount of credit in a $10 trillion economy. Now, the Chinese leadership face a big challenge. They must restructure the banking industry whilst at the same time seek to change the growth model. I can think of quite a few things that can go wrong in that process…..

The outcome is likely to be similar to Japan in the 1990s: zombie banks.
From FT lexicon:

Beginning in 1990, Japan suffered a collapse in real estate and stock market prices that pushed major banks into insolvency. Rather than follow America’s tough recommendation – and close or recapitalise these banks – Japan kept banks marginally functional through explicit or implicit guarantees and piecemeal government bail-outs. The resulting “zombie banks” – neither alive nor dead – could not support economic growth.

A period of weak economic performance called Japan’s “lost decade” resulted. Scores of companies were cast into an “undead” state – in the sense of being too weak to flourish, but too complex and costly for their lenders to shut down. Hence they remained half-alive, poisoning the corporate world by silently spreading a sense of stagnation and fear.

Risk of a global down-turn remains high

Stock markets in Asia and Europe have clearly tipped into a primary down-trend but the US remains tentative. The weight of the market is on the sell side and the risk of a global down-turn remains high.

Dow Jones Global Index found support at 270 and is rallying to test resistance at the former primary support levels of 290/300. 13-Week Twiggs Momentum peaks below zero flag a strong primary down-trend. Respect of 300 is likely and reversal below 290 warn of another decline. Breach of 270 would confirm.

Dow Jones Global Index

* Target calculation: 290 – ( 320 – 290 ) = 260

Willem Buiter of Citigroup warns that further monetary easing faces “strongly diminishing returns”, while “hurdles for a major fiscal stimulus remain high”. To me, major infrastructure spending is the only way to avoid prolonged stagnation but resistance to further increases in public debt is high. The only answer is to focus on productive infrastructure assets that generate returns above the cost of servicing debt, improving the overall debt position rather than aggravating it.

North America

Dow Jones Industrial Average recovered above primary support at 16000 and is headed for a test of 17000. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Respect of 17000 is likely and would warn of continuation of the primary down-trend. Reversal below 16000 would confirm the signal, offering a target of 14000*.

Dow Jones Industrial Average

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

The most bearish sign on the Dow chart is the lower peak, at 18000, in late 2015. Only recovery above this level would indicate that long-term selling pressure has eased.

The S&P 500 is similarly testing resistance at 1950. Breakout is quite possible but only a higher peak (above 2100) would indicate that selling pressure has eased. Declining 13-week Twiggs Momentum, below zero, continues to warn of a primary down-trend. Reversal below 1870 would confirm the primary down-trend, offering a target of 1700*.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

CBOE Volatility Index (VIX) is testing ‘support’ at 20. Respect is likely and would confirm that market risk remains elevated.

S&P 500 VIX

Canada’s TSX 60 respected the descending trendline after breaking resistance at 750. Reversal below 750 would warn of another test of 680/700. Rising 13-week Twiggs Momentum is so far indicative of a bear rally rather than reversal of the primary down-trend.

TSX 60 Index

* Target calculation: 700 – ( 750 – 700 ) = 650

Europe

Dow Jones Euro Stoxx 50 is rallying to test resistance at the former primary support level of 3000. The large 13-week Twiggs Momentum peak below zero confirms a strong primary down-trend. Respect of resistance is not that important, but another lower peak, followed by reversal below 3000, would signal a decline to 2400*.

DJ Euro Stoxx 50

* Target calculation: 2700 – ( 3000 – 2700 ) = 2400

Germany’s DAX recovered above resistance at 9300/9500. Expect a test of 10000 but buying pressure on 13-week Twiggs Money Flow appears secondary and reversal below 9300 would signal another decline, with a (long-term) target of 7500*.

DAX

* Target calculation: 9500 – ( 11500 – 9500 ) = 7500

The Footsie recovered above 6000, and the declining trendline, but the primary trend is down. Buying pressure on 13-week Twiggs Money Flow appears secondary and reversal below 6000 would signal another decline, with a target of 5500*. The long-term target remains 5000*.

FTSE 100

* Target calculation: 6000 – ( 6500 – 6000 ) = 5500

Asia

The Shanghai Composite Index rallied off support at 2700 but respected resistance at 3000. Reversal below support would offer a target of 2400*. The primary trend is clearly down and likely to remain so for some time.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index is in a clear primary down-trend. Expect a test of 17000/18000 but respect of 18000 would warn of another test of 15000. Decline of 13-week Twiggs Money Flow below zero would flag more selling pressure.

Nikkei 225 Index

* Target calculation: 17000 – ( 20000 – 17000 ) = 14000

India’s Sensex primary down-trend is accelerating, with failed swings to the upper trend channel. Breach of 23000 would offer a short-term target of 22000*. Reversal of 13-week Twiggs Money Flow below zero would warn of more selling pressure.

SENSEX

* Target calculation: 23000 – ( 24000 – 23000 ) = 22000

Australia

The ASX 200 rally from 4700 respected resistance at 5000. Reversal below 4900 warns of another decline. Breach of support at 4700 would confirm. Divergence on 13-week Twiggs Money Flow indicates medium-term (secondary) buying pressure and reversal below zero would flag another decline. The primary trend is down and breach of 4700 would offer a target of 4400*. The long-term target remains 4000*.

ASX 200

* Target calculation: 4700 – ( 5000 – 4700 ) = 4400; 5000 – ( 6000 – 5000 ) = 4000

Banks are taking a hammering, with the Banks index (XBAK) in a clear down-trend. Retracement to test resistance at 78 is weak and another strong decline likely. Declining 13-week Twiggs Money Flow, below zero, reflects long-term selling pressure.

ASX 200 Financials

Bears threaten US rally

Rallies on the Dow and S&P 500 reflect a more positive outlook for the US economy. But the FTSE 100 has followed China’s Shanghai Composite and India’s SENSEX into bear territory, while Germany’s DAX, Japan’s Nikkei 225 and Australia’s ASX 200 threaten key support levels. There is very little to cheer about at present.

Dow Jones Global Index is testing resistance at the former primary support level of 290. Respect is likely and breach of 270 would confirm another decline. 13-Week Twiggs Momentum peaks below zero flag a strong primary down-trend.

Dow Jones Global Index

* Target calculation: 290 – ( 320 – 290 ) = 260

Dow Jones Industrial Average recovered above primary support at 16000 but respect of 17000 is likely and would warn of another decline. Breach of 16000 offers a target of 14000*. 13-Week Twiggs Money Flow oscillating around zero indicates uncertainty.

Dow Jones Industrial Average

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

The S&P 500 recovered above 1900, while rising 21-day Twiggs Money Flow indicates short-/medium-term buying pressure. Expect a test of 2000 but breakout is unlikely. Breach of support at 1900 would signal another decline, with a (medium-term) target of 1700*.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

CBOE Volatility Index (VIX) continues to range between 20 and 30 reflecting hesitancy — and the potential to react quickly to bad news.

S&P 500 VIX

Canada’s TSX 60 also retraced to test resistance at 750. Respect is likely and breach of 700 would offer a target of 650*. Declining 13-week Twiggs Momentum peaks below zero indicate a strong primary down-trend.

TSX 60 Index

* Target calculation: 700 – ( 750 – 700 ) = 650

Europe

Germany’s DAX is testing primary support at 9500. Peaks below zero on 13-week Twiggs Momentum warn of a primary down-trend. Follow-through below 9300 would confirm.

DAX

* Target calculation: 9500 – ( 11500 – 9500 ) = 7500

The Footsie retreated below 6000, signaling a primary down-trend. 13-Week Twiggs Momentum peaks below zero further strengthen the signal. Long-term target for a decline is 5000*.

FTSE 100

* Target calculation: 6000 – ( 7000 – 6000 ) = 5000

Asia

Support has given way on the Shanghai Composite Index, strengthening the primary down-trend signaled last August when 13-week Twiggs Momentum crossed below zero. Target for the decline is 2400*.

Shanghai Composite Index

* Target calculation: 3000 – ( 3600 – 3000 ) = 2400

Japan’s Nikkei 225 Index is testing primary support at 17000. Breach is likely and would confirm the primary down-trend signaled by 13-week Twiggs Momentum below zero.

Nikkei 225 Index

* Target calculation: 94 – ( 106 – 94 ) = 82

Two failed swings on India’s Sensex (failing to reach the upper trend channel) warn of increasing selling pressure. Declining 13-week Twiggs Momentum peaks below zero confirm this. Follow-through below 24000 would offer a target of 22500*.

SENSEX

* Target calculation: 25000 – ( 27500 – 25000 ) = 22500

Australia

The ASX 200 staged a short rally today but sentiment remains bearish and respect of the recent high at 5050 would warn of another decline. Bullish divergence on 21-day Twiggs Money Flow indicates medium-term buying pressure but the weight of global bear markets is likely to sap any enthusiasm. Reversal below 4850 would offer a medium-term target of 4650*, or 4000* in the long-term.

ASX 200

* Target calculation: 4850 – ( 5050 – 4850 ) = 4650; 5000 – ( 6000 – 5000 ) = 4000

The largest sector, Banks, is already in a primary down-trend, having been singled out for particular attention by the bears. Breach of support at 7500/7600 would warn of a decline to 6600*.

ASX 300 Banks

* Target calculation: 7600 – ( 8600 – 7600 ) = 6600

Markets are fundamentally volatile. No way around it. Your problem is not in the math. There is no math to get you out of having to experience uncertainty.

~ Ed Seykota

Iron ore headed for the smelter

Bloomberg News quotes Zhu Jimin, deputy head of the China Iron & Steel Association, representing major steel producers, at their quarterly briefing on Wednesday:

“Production cuts are slower than the contraction in demand, therefore oversupply is worsening.”

“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.”

Little wonder that bulk commodity prices are falling sharply.

RBA: Bulk Commodity Prices

Australian producers have been ramping up production to compensate for lower prices.

RBA: Bulk Commodity Exports

But with further production due to come on line, the market looks ready for a meltdown. This from David Llewellyn-Smith at Macrobusiness:

Yes, China is still shutting in supply and is on track for 270 million tonnes this year but it’s not going to drop enough in the future (at the very best down to 200mt) as Roy Hill, Sino, Anglo, Vale and India (and possibly Tonkolili as well) continue the great ramp up, adding another 200mt plus in the next two years even as Chinese steel production keeps falling at 2-3% per year, taking 40mt per annum out of demand….. the total seaborne iron ore market is about to peak and then shrink….

The ASX 300 Metals & Mining Index is testing its 2008 low. Breach appears likely and would offer a target of 1700*.

ASX 300 Metals & Mining Index

* Target calculation: 2200 – ( 2700 – 2200 ) = 1700

North America

The S&P 500 respected support at 2050 and is headed for a test of the previous high at 2130 on the back of strong earnings performance. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure but expect strong resistance at 2130. Reversal below 2050 is unlikely, but would warn of another test of primary support at 1870.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1870 ) = 2130

A declining CBOE Volatility Index (VIX) indicates market risk is easing.

S&P 500 VIX

NYSE short sales remain subdued.

NYSE Short Sales

Dow Jones Industrial Average is similarly headed for a test of 18300, with 13-week Twiggs Money Flow rising steeply.

Dow Jones Industrial Average

Canada’s TSX 60 continues to test stubborn resistance at 825. Weak 13-week Twiggs Momentum, below zero, indicates the market remains bearish. Breakout would signal an advance to 900, but reversal below the former primary support level at 800 is as likely and would warn of another decline.

TSX 60 Index

* Target calculation: 775 – ( 825 – 775 ) = 725

Europe

Germany’s DAX is testing resistance at 11000. Recovery of 13-week Twiggs Money Flow above zero indicates medium-term buying pressure. Breakout above the descending trendline would suggest another test of the previous high at 12400. Expect stubborn resistance, however, and reversal below 10000 would warn of another decline.

DAX

The Footsie is similarly testing resistance at 6500. Breakout above the descending trendline would suggest another test of the previous high at 7100. 13-Week Twiggs Money Flow troughs above zero indicate long-term buying pressure. Reversal below 6250 is unlikely, but would warn of another test of primary support at 6000.

FTSE 100

Asia

The Shanghai Composite Index continues to test resistance at 3500. Respect is likely and would indicate a re-test of government-backed support at 3000.

Dow Jones Shanghai Index

Hong Kong’s Hang Seng Index is retracing to test support at 22500. Respect would indicate a rally to 24000, but failure remains as likely and would test primary support at 21000. A 13-week Twiggs Money Flow trough above zero would indicate (long-term) buying pressure.

Hang Seng Index

Japan’s Nikkei 225 is testing resistance at 19000. Breakout would signal another test of 21000. Respect is less likely, but would warn of another test of primary support at 17000.

Nikkei 225 Index

* Target calculation: 19000 + ( 19000 – 17000 ) = 21000

India’s Sensex encountered resistance at 27500. Rising 13-week Twiggs Money Flow troughs above zero indicate long-term buyiong pressure. Expect another test of 26500 but respect is likely and would indicate continuation of the rally. Reversal below 26500 would warn of another (primary) decline.

SENSEX

* Target calculation: 25000 – ( 27500 – 25000 ) = 22500

Australia

The ASX 200 is retracing to test medium-term support between 5200 and 5300. Reversal of 21-day Twiggs Money Flow below its rising trendline indicates (medium-term) selling pressure; decline below zero would strengthen the signal. Breach of 5200 would warn of another test of primary support at 5000. Recovery above the descending trendline is unlikely at this stage, but would suggest another test of 6000.

ASX 200

* Target calculation: 5000 – ( 5400 – 5000 ) = 4600

Why Japan Should Rearm by Brahma Chellaney | Project Syndicate

….It is Japan’s security, not its economy, that merits the most concern today – and Japan knows it. After decades of contentedly relying on the US for protection, Japan is being shaken out of its complacency by fast-changing security and power dynamics in Asia, especially the rise of an increasingly muscular and revisionist China vying for regional hegemony.

….China has not hesitated to display its growing might. In the strategically vital South China Sea, the People’s Republic has built artificial islands and military outposts, and it has captured the disputed Scarborough Shoal from the Philippines. In the East China Sea, it has unilaterally declared an air-defense identification zone covering territories that it claims but does not control.

With US President Barack Obama hesitating to impose any costs on China for these aggressive moves…..the reality is that ensuring long-term peace in Asia demands a stronger defense posture for Japan.

….Would Japan need to become a truly independent military power, with formidable deterrent capabilities like those of the UK or France?

The short answer is yes. While Japan should not abandon its security treaty with the US, it can and should rearm, with an exclusive focus on defense…..

Read more at: Why Japan Should Rearm by Brahma Chellaney | Project Syndicate