East to West: Sweeping conflagration

The tinder was dry and all it took was a spark from the US to set off a sweeping conflagration across global stock markets.

South Korea’s Seoul Composite Index broke support at 2450. Technically, Dow Theory requires a lower high followed by a new low to signal a reversal. What we have is a new low, without a preceding lower high. Often described as large correction, there has been debate over the years as to whether this constitutes a valid reversal. I prefer to sit on the fence: follow-through below 2300 would confirm reversal to a primary down-trend, while recovery above 2450 would signal a false alarm.

Seoul Composite Index

Japan’s Nikkei 225 Index remains in a primary up-trend, though retreat below the rising trendline at 21000 would warn of a loss of momentum.

Nikkei 225 Index

China’s Shanghai Composite Index was also hit hard. Primary support at 3250 has been breached but again by a large correction. Follow-through below 3000 would confirm the reversal.

Shanghai Composite Index

India’s NSE Nifty Index remains bullish, with Trend Index troughs above zero signaling long-term buying pressure. Breach of primary support at 10000 is unlikely.

Nifty Index

Target 10500 + ( 10500 – 10000 ) = 11000

In Europe, the DJ Euro Stoxx 600 is testing primary support at 366. Bearish divergence on the Trend Index warns of long-term selling pressure.

DJ Euro Stoxx 600

The Footsie retreated below two primary support levels, at 7300 and 7200, confirming reversal to a primary don-trend. Bearish divergence on the Trend Index warns of long-term selling pressure.

FTSE 100

In the US, it is hard to identify primary support levels as there has not been a decent correction for some time. Breach of support at 6200 appears unlikely, with Trend Index troughs above zero signaling long-term buying pressure.

S&P 500

While Canada’s TSX 60 is testing its primary level at 880. Again this is a large correction, so we may need to look elsewhere for confirmation if support at 880 is breached.

TSX 60

The extent of the market reaction reflects high levels of fear from investors. Valuations are high, especially in the US, and the emphasis has quickly swung to protecting existing profits and away from further gains.

ASX 200 selling pressure, banks weaken

The ASX 300 Banks index fell sharply, testing primary support at 8100. Continuing Trend Index troughs below zero warn of long-term selling pressure. Breach of primary support would signal a decline to the 2016 low at 7200.

ASX 300 Banks

Miners also retreated, testing medium-term support at 3500, though primary support at 3300 is expected to hold.

ASX 300 Metals & Mining

The ASX 200 tested medium-term support at 5800. Bearish divergence on Twiggs Money Flow warns of long-term selling pressure. Test of primary support at 5650 is likely.

ASX 200

Dollar rallies, Gold retreats

On Friday President Donald Trump signed a $400 billion budget deal that sharply boosts spending and swells the federal deficit, ending a brief federal government shutdown. [CBS News]

The Dollar Index rallied as stock market volatility increased around the globe. Another test of resistance at 91 is likely. Respect would signal a decline to 87*.

Dollar Index

* Target calculation: 91 – (95 – 91) =87

Gold retreated as the Dollar rallied, confirming an earlier divergence on the Trend Index. Breach of primary support at $1250 remains unlikely.

Spot Gold

* Target calculation: 1350 + (1350 – 1250) = 1450

Long tails on the All Ordinaries Gold Index indicate buying support, fueled by a weakening Aussie Dollar. Recovery above 5000 would signal another advance.

All Ords Gold Index

Further (USD) Dollar weakness is likely to boost gold prices.

Next major target for the Dow and S&P 500

The next major target for the Dow Jones Industrial Average is 28000*.

Dow Jones Industrial Average

Target 14000 x 2 = 28000

And 3000* for the S&P 500.

S&P 500

Target 1500 x 2 = 3000

Reasoning: The Dow top of 14000 in 2007 was double its 2002 low of 7000 and roughly double its 2009 low of 6500, allowing for some GFC overshoot. The S&P high was similarly close to 1500 in 2007, compared to its 2002 low of 768 and a 2009 low of 666. Double the 2007 high of 14000 would give a target of 28000 and double 1500 for the S&P 500 gives a target of 3000.

Wage rates spook the Dow

The Dow Jones Industrial Average fell 666 points on Friday as the market was spooked by an upsurge in wage rates.

Dow Jones Industrial Average

From the Wall St Journal:

Concerns about rising interest rates pounded financial markets Friday as investors started to take the threat of inflation more seriously, a sharp shift from the sentiment that has characterized most of the stock market’s nearly nine-year bull-market run.

Annual growth in average hourly earnings for the private sector jumped to 2.88%, close to the 3.0% expected to trigger a more hawkish stance from the Fed.

Hourly Wage Rates

The market is skittish about higher interest rates, with the VIX jumping to the highest level since November last year.

CBOE Volatility Index (VIX)

ASX rally faces strong resistance

The ASX 200 found strong support at 6000, rallying strongly to test resistance at the recent high of 6150.

ASX 200

The recovery was assisted by banks, with the ASX 300 Banks index rallying to test resistance at 8500. Shallow Trend Index troughs below zero reflect improved buyer sentiment (still bearish but only just).

ASX 300 Banks

Miners are correcting as iron ore continues to lose ground.

ASX 300 Metals & Mining

Sentiment has been buoyed in recent weeks by global bullishness towards equities. But Friday’s US reaction to rising wage rates warns that the market is growing increasingly anxious about high stock valuations. Expect strong resistance for the ASX 300 Banks Index at 8500 and the ASX 200 at 6150.

Black Monday, October 1987

What caused the Black Monday crash of 1987? Analysts are often unable to identify a single trigger or smoking gun that caused the crash.

Sniper points to a sharp run-up in short-term interest rates in the 3 months prior to the crash.

3 Month Treasury Bill Rates

Valuations were also at extreme readings, with PEmax (price-earnings based on the highest earnings to-date) near 20, close to its Black Friday high from the crash of 1929.

S&P 500 PEmax 1919 - 1989

Often overlooked is the fact that the S&P 500 was testing resistance at its previous highs between 700 and 750 from the 1960s and 70s (chart from macrotrends).

S&P 500 1960 - 1990

A combination of these three factors may have been sufficient to tip the market into a dramatic reversal.

Are we facing a similar threat today?

Short-term rates are rising but at 40 basis points over the last 4 months, compared to 170 bp in 1987, there is not much cause for concern.

13-week T-Bill rates

PEmax, however, is now at a precipitous 26.8, second only to the Dotcom bubble of 1999/2000.

S&P 500 PEmax 1980 - 2017

While the index is in blue sky territory, with no resistance in sight, there is an important psychological barrier ahead at 3000.

S&P 500

Conclusion: This does not look like a repetition of 1987. But investors who ignore the extreme valuation warning may be surprised at how fast the market can reverse (as in 1987) from such extremes.

ASX 200 selling pressure

The ASX 200 found support at 6000 but the bears are not over yet. Thursday’s Hanging Man candle is bearish despite the long tail. Expect another test of support in the week ahead.

ASX 200

The monthly chart gives a long-term perspective. Respect of 6000 would confirm a primary advance. But bearish divergence on Twiggs Money Flow continues to warn of selling pressure.

ASX 200

East to West: Time to take the punch bowl away

Crude oil is retracing and a Nymex Light test of $60/barrel would take some of the heat out of the commodities market. A rising rig count in the US may help to increase supply and ease oil prices.

Nymex Light Crude

Political tensions remain high, with the Turks bombing Kurd-controlled territory in Syria, Iran proxies in Yemen firing missiles at Saudi Arabia, North Korea showing no signs of caving to sanctions pressure over its nuclear weapons program, and Russia fomenting tensions in the Balkans between Serbia and Kosovo.

Stock markets shrugged off the usual conga-line of autocrats behaving badly, instead focusing on signs of a reviving global economy. South Korea’s Seoul Composite Index is headed for a test of resistance at its November high of 2560. Respect of the rising trendline is bullish but the latest Trend Index rally is weak and a bearish divergence may be forming.

Seoul Composite Index

Japan’s Nikkei 225 Index remains bullish. A Trend Index trough high above zero indicates strong buying pressure.

Nikkei 225 Index

China’s Shanghai Composite Index broke resistance at its November high of 3450 to signal another primary advance.

Shanghai Composite Index

India’s NSE Nifty Index is advancing toward its target of 11000*. Trend Index troughs above zero signal long-term buying pressure.

Nifty Index

Target 10500 + ( 10500 – 10000 ) = 11000

In Europe, the DJ Euro Stoxx 600 broke resistance at 396. Trend Index recovery above the declining trendline indicates buyers are back in control.

DJ Euro Stoxx 600

The Footsie met short-term resistance at 7800 and is likely to retrace to test its new support level at 7600. Trend Index recovery above the declining trendline again indicates buyers have taken control.

FTSE 100

Moving to the US, the Dow chart says it all. Investors continue to shrug off concerns about high valuations as the up-trend accelerates. The few corrections over the last 12 months have been both mild and of short duration. A rising Trend Index, with troughs high above zero, indicates strong buying pressure. It is important to remain objective, focus on the long-term, and not to get caught up in the euphoria. Heady gains like this inevitably lead to a sharp blow-off. The question is: when?

Dow Jones Industrial Average

Right now it seems the rocket has plenty of fuel, with tax cuts expected to stimulate both buybacks and new capital investment, while a falling US Dollar should boost US manufacturer’s competitiveness both at home and abroad. A sharp reversal could be many months away.

It’s time that the Fed took the punch bowl away, to calm things down before the party really gets out of hand.

ASX retreats

The ASX 300 Metals & Mining index is undergoing a correction which is likely to test medium-term support at 3500.

ASX 300 Metals & Mining

Banks continue to weaken, with the ASX 300 Banks index testing medium-term support at 8300. Breach is likely and would signal a test of primary support at 8100. Trend Index peaks below zero continue to warn of selling pressure.

ASX 300 Banks

With both miners and banks in retreat, the ASX 200 is correcting for a second test of medium-term support at 5900. Respect would confirm the primary up-trend. But bearish divergence on the Trend Index warns of selling pressure and a test of 5800 is likely.

ASX 200

Target for the ASX 200 is the 2007 high of 6800 but a lot will depend on the relative strength of banks and miners.

East to West: Global stocks rally

In Asia, South Korea’s Seoul Composite Index found support at 2450 but be careful of a bearish divergence forming on Twiggs Trend Index. Reversal below zero would warn of a test of primary support at 2300.

Seoul Composite Index

Japan’s Nikkei 225 Index remains bullish. Trend Index troughs high above zero indicate strong buying pressure.

Nikkei 225 Index

China’s Shanghai Composite Index found support at 3250. Breakout above 3450 would signal a primary advance.

Shanghai Composite Index

India’s NSE Nifty Index broke resistance at 10500, signaling a fresh advance. Trend Index troughs above zero signal buying pressure. The immediate target is 11000*.

Nifty Index

Target 10500 + ( 10500 – 10000 ) = 11000

In Europe, the Footsie is advancing strongly after breaking through resistance at its June high of 7600. Trend Index is still declining but recovery above the declining trendline indicates buyers are taking control.

FTSE 100

Europe, represented by the DJ Euro Stoxx 600, remains weak. A declining Trend Index warns of selling pressure despite breakout above resistance at 396.

DJ Euro Stoxx 600

Moving to the US, the S&P 500 chart says it all. Investors continue to shrug off concerns about high valuations. The rising Trend Index, high above zero, indicates strong buying pressure. We need a correction fairly soon to prevent an accelerating up-trend leading to a blow-off.

S&P 500

Commodities are also advancing, led by stronger crude oil prices.

Nymex Light Crude

It’s about time that the Fed and other central banks took the punch bowl away, before the party really gets out of hand.

ASX 200 retreats

The ASX 200 retraced to test its new support level at 6050. Falling 21-day Twiggs Money Flow indicates medium-term selling pressure. Breach of 6050 would warn of a test of 5900.

ASX 200

The current advance is fueled by rising commodity prices, with the ASX 300 Metals & Mining index advancing strongly.

ASX 300 Metals & Mining

But the ASX 300 Banks index is pulling in the opposite direction, respecting resistance at 6500 while the Trend Index continues to warn of moderate selling pressure. Breach of 8300 is likely and would warn of a test of primary support at 8000/8100.

ASX 300 Banks

Target for the ASX 200 is the 2007 high of 6800 but a lot will depend on the relative strength of banks v. miners.

East to West: Footsie surprise

The Footsie is testing resistance at its June high of 7600. Trend Index is still declining but recovery above 0.2% would indicate buyers are taking control.

FTSE 100

Europe is weaker, with tall shadows on weekly Dow Jones Euro Stoxx 600 candles and a declining Trend Index warning of selling pressure.

DJ Euro Stoxx 50

In Asia, South Korea’s Seoul Composite Index broke support at 2450, confirming the bearish divergence on Twiggs Trend Index. Expect a correction to test primary support at 2300.

Seoul Composite Index

Japan’s Nikkei 225 Index remains bullish, consolidating in a narrow band below resistance at 23000. Trend Index troughs high above zero indicate strong buying pressure.

Nikkei 225 Index

China’s Shanghai Composite Index found short-term support at 3250. Bearish divergence on the Trend Index warns of selling pressure.

Shanghai Composite Index

India’s NSE Nifty Index is testing resistance at 10500 after a mild correction to 10,000. Twiggs Trend Index respecting zero signals strong buying pressure. Breakout above 10500 is likely and would indicate another primary advance with an immediate target of 11000*.

Nifty Index

Target 10500 + ( 10500 – 10000 ) = 11000

Moving to the US, the S&P 500 continues to shrug off concerns over high valuations and a flattening yield curve. The rising Trend Index, high above zero, indicates long-term buying pressure.

S&P 500

Bellwether transport stock Fedex has advanced to 250, signaling strong economic activity, a bullish sign for the entire economy.

Nasdaq 100

ASX breaks resistance

The ASX 200 broke through 6050 after respecting support at 5900 over the last few weeks. Expect retracement to test the new support level. Bearish divergence on Twiggs Money Flow remains a concern, warning of large numbers of sellers. Target for the primary advance is the 2007 high of 6800 but I remain wary because of selling pressure and banking sector weakness.

ASX 200

The ASX 300 Banks index found short-term support at 8300. Twiggs Trend Index continue to warn of moderate selling pressure. Breach of 8300 is likely and would warn of a test of primary support at 8000/8100.

ASX 300 Banks

Gold Bounces

Gold bounced off support at $1240/ounce, ending the week with a strong rally. Penetration of the descending trendline would indicate the down-trend has weakened, while breakout above $1300 would suggest another advance. Twiggs Trend Index close to zero still indicates hesitancy.

Spot Gold

The greenback is weakening which is bullish for gold. Dollar Index reversal below 93 (and the rising trendline) would indicate another test of primary support at 91. A major Trend Index peak below zero would warn of another primary decline with a target of 87*.

Dollar Index

* Target calculation: 91 – (95 – 91) =87

Australia’s All Ords Gold Index is headed for another test of long-term resistance at 5000. Breakout would signal a primary advance.

All Ordinaries Gold Index

A weakening Aussie Dollar would strengthen demand for gold stocks. Respect of resistance at 77.5 US cents by the current bear rally would warn of a decline to test primary support at 73.5.

Australian Dollar AUDUSD

East to West: Asia, Europe weaken but US powers on

Starting with Asia, South Korea’s Seoul Composite Index continues to test support at 2450. Bearish divergence on the Trend Index warns of selling pressure but this appears secondary in nature. Breach of the rising trendline would warn that the primary up-trend is losing momentum.

Seoul Composite Index

Japan’s Nikkei 225 Index is consolidating between 22000 and 23000. A Trend Index trough high above zero indicates strong buying pressure.

Nikkei 225 Index

China’s Shanghai Composite Index is undergoing a correction that should find support at 3200. Bearish divergence on the Trend Index, and a cross below zero for the first time since May 2016, warn of continued selling pressure.

Shanghai Composite Index

India’s NSE Nifty Index continues to test support at 10000 after a weak correction. Twiggs Trend Index respecting zero signals strong buying pressure. Recovery above 10500 is likely and would indicate another primary advance.

Nifty Index

Target 10500 + ( 10500 – 10000 ) = 11000

Europe is weaker despite strong manufacturing signals. Dow Jones Euro Stoxx 50 found support at 3520 but the Trend Index is declining, warning of selling pressure. Breach of 3520 is likely and would warn of a test of primary support at 3400.

DJ Euro Stoxx 50

The Footsie remains volatile, with the index headed for another test of stubborn resistance at 7600. But Trend Index is declining and continues to warn of selling pressure.
FTSE 100

Moving to the US, the S&P 500 continues to shrug off concerns regarding high valuations and a flattening yield curve. The rising Trend Index, high above zero, indicates long-term buying pressure.

S&P 500

The Nasdaq 100 also continues a strong bull market, with the big five tech stocks (Apple, Amazon, Alphabet, Microsoft and Facebook) all recording solid gains.

Nasdaq 100

ASX struggles with resistance

Bulls were baited with a third ASX 200 breakout above resistance at 6000, only to see the index retreat yet again. Declining Money Flow warns of commitment from sellers. Breach of support at 5920 would confirm a correction already signaled by Money Flow (21-day) crossing to below zero.

ASX 200

The ASX 300 Retailing Index is weak, anticipating a poor Christmas.

ASX 300 Retailing

But Food & Staples Retailing is strengthening.

ASX 300 Food & Staples Retailing

ASX 200 direction, however, is largely determined by Banks and Miners.

The bear-trend on iron ore is weak, with the bulk commodity continuing its test of resistance at 70. Respect would warn of another decline, while breakout above 80 would signal a primary up-trend.

Iron Ore

The ASX 300 Metals & Mining Index, however, shows signs of selling pressure, with Money Flow (21-day) declining to zero. Breach of support at 3300 would warn of a correction.

ASX 300 Metals & Mining

Banks continue to disappoint, with the ASX 300 Banks index headed for a test of short-term support at 8250. Twiggs Trend Index peaks below zero indicate continued selling pressure. Breach of 8250 is likely and would warn of a test of primary support between 8000 and 8100.

ASX 300 Banks

ASX still hesitant

The ASX 200 index is running up against resistance at 6000. Reversal below support at 5920 would signal a correction. As would Twiggs Money Flow (21-day) crossing to below zero.

ASX 200

Iron ore is testing resistance at 70. Respect would warn of another (primary) decline. Breakout above 80 would signal a primary up-trend but that is unlikely if China continues to crack down on bank lending.

Iron Ore

The ASX 300 Metals & Mining Index is testing support at 3300. Decline of the Trend Index below zero warns of medium-term selling pressure. Breach of 3300 would warn of a correction.

ASX 300 Metals & Mining

The ASX 300 Banks index found short-term support at 8300. Recovery above 8500 would be a bullish sign but respect is more likely and would warn of a test of primary support between 8000 and 8100.

ASX 300 Banks