East to West: S&P 500 strengthens

Japan’s Nikkei 225 Index continues to test its rising trendline and support at 21000, with resistance forming at 22000. A Trend Index peak below zero warns of medium-term selling pressure.

Nikkei 225 Index

India’s NSE Nifty Index has had a strong bull run, with Trend Index troughs above zero. But now the Index is heading for a test of primary support at 10000, warning of slowing momentum.

Nifty Index

South Korea’s Seoul Composite Index remains bearish after breaking support at 2450.

Seoul Composite Index

Likewise China’s Shanghai Composite Index found resistance at 3300.

Shanghai Composite Index

Hong Kong’s Hang Seng Index is the pick of the East, with a long run of Trend Index troughs above zero. Breakout above 32000 would signal a fresh advance.

Shanghai Composite Index

In Europe, DJ Euro Stoxx 600 is struggling with resistance at 380/385 while bearish divergence on the Trend Index warns of selling pressure.

DJ Euro Stoxx 600

The Footsie is similarly headed for another test of resistance at 7300 but bearish divergence on the Trend Index warns of selling pressure.

FTSE 100

In the US, the S&P 500 is testing medium-term resistance at 2800. The difference is that a Twiggs Money Flow trough at zero warns of buying pressure. Breakout above 2800 is likely, bringing the long-term target of 3000* within reach.

S&P 500

* Target calculation: log scale 750 x 2 = 1500; 1500 x 2 = 3000

Canada’s TSX 60 is recovering. Breakout above 940 would suggest another advance.

TSX 60

Patience is required to weather the volatility of the next few weeks without making short-term decisions.

ASX 200: Bank relief but miners bearish

The ASX 300 Metals & Mining index broke support at 3500, warning of a test of primary support at 3300. The long-term up-trend is losing momentum.

ASX 300 Metals & Mining

Banks continue in a long-term down-trend but recovery above the former primary support level at 8100 offers temporary relief. Respect of the declining trendline warns of another test of primary support at 8000. Breach would signal a primary decline.

ASX 300 Banks

The ASX 200 remains hesitant. Bearish divergence on the Trend Index continues to warn of long-term selling pressure. A primary down-turn on either banks or miners would strengthen the bear signal. Breach of support at 5800 would signal a primary down-trend.

ASX 200

Gold waits on the Dollar

The Dollar Index continues to consolidate below resistance at 90.50. Downward breakout is likely and would offer a target of 87*.

Dollar Index

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

Gold is ranging between $1300 and $1350 per ounce. A declining Dollar is bullish for gold. Breakout above $1375 would offer a target of $1450*.

Spot Gold

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

The All Ordinaries Gold Index is testing resistance at 5100. Upward breakout would signal a primary advance with a long-term target of 6000*.

All Ords Gold Index

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

ASX 200: Miners & banks spoil the party

Miners are undergoing a correction. Breach of the rising trendline and support at 3500 on the ASX 300 Metals & Mining index would warn that the up-trend is losing momentum.

ASX 300 Metals & Mining

Banks continue their bearish down-trend, respect of the declining trendline warns of another test of primary support at 8000. Breach would signal a primary decline.

ASX 300 Banks

The ASX 200 will follow if banks and miners, the two biggest sectors, fall. Bearish divergence on the Trend Index continues to warn of long-term selling pressure. Breach of support at 5800 would signal a primary down-trend.

ASX 200

Gold rallies as Dollar meets resistance

The Dollar rally ended, with the Dollar Index encountering stubborn resistance at 90.50. Expect a test of primary support at 88.50. Breach of support would signal a primary decline.

Dollar Index

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

Gold found support at $1310 and is likely to again test resistance at $1360. A declining Dollar would be bullish for gold. Breakout above $1360 would offer a target of $1450*.

Spot Gold

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

The All Ordinaries Gold Index has been undermined by the strong Aussie Dollar but found support at the rising trendline. Expect another test of resistance at 5100. Breakout would signal a primary advance.

All Ords Gold Index

Martin Wolf: Xi’s power grab means China is vulnerable to the whims of one man

Xi's Power Grab

From Martin Wolf at FT:

Sometimes an announcement succeeds in being both unsurprising and shocking. It had long been evident that China’s Xi Jinping would not — indeed, could not — step down from power. He has made too many enemies, particularly through his anti-corruption campaign, even if he wanted to go, which seems unlikely.

Yet the announcement that the two-term limit on the presidency is to go, is still shocking. What seemed likely is now a fact. Mr Xi has discarded the attempt by Deng Xiaoping to institutionalise checks on the power of China’s leaders — itself a reaction to the wild excesses of the era of Mao Zedong. What is re-emerging is strongman rule — a concentration of power in the hands of one man…..

Read the full article at FT.com

ASX 200 back from the brink

A positive week for the ASX 200 index as Australian banks came back from the brink, recovering above primary support at 8100. Expect a rally to test the declining LT trendline around 8350 but selling pressure continues, with the Trend index below zero, and another test of primary support, this time at 8000, is likely.

ASX 300 Banks

Miners continue their up-trend. Although this week’s bearish hanging man candle warns of a correction.

ASX 300 Metals & Mining

The ASX 200 will lift for as long as the bank rally lasts but ASX 300 Banks long-term trend is downward. Bearish divergence on the Trend Index continues to warn of long-term selling pressure.

ASX 200

Dollar drives long-term Gold prospects

The Dollar is likely to continue weakening over the next few years according to analysis from a number of major banks. A falling Dollar would be a bull signal for gold investors.

The Dollar Index rallied over the past few days but is likely to encounter stubborn resistance at 90.50. Respect is likely and would signal another test of support at 88.50. Breach of support would warn of another primary decline.

Dollar Index

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

Gold lacks direction, ranging between 1310 and 1360, but that would change dramatically if the Dollar breaches support at 88.50. Breakout above $1360 would signal another primary advance, with a target of $1450*. Follow-through above $1375 would strengthen the signal.

Spot Gold

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

The All Ordinaries Gold Index has been undermined by the strong Aussie Dollar. Further weakness of the greenback would help support commodity prices and the Aussie. But further gains on XGD remain likely and recovery above 5100 would signal another advance.

All Ords Gold Index

East to West: Caution

Markets settled after the sharp fall of the previous week but a hint of caution was evident, with buyers wary of being caught by an after-shock. It should take several weeks for sentiment to settle back into a semblance of normal routine.

Short candles were common, as on South Korea’s Seoul Composite Index, with buyers displaying a lack of enthusiasm.

Seoul Composite Index

The long tail on Japan’s Nikkei 225 Index reflects buyer support but the large overlap with the previous candle suggests hesitancy.

Nikkei 225 Index

China’s Shanghai Composite Index likewise displays a short candle below the new resistance level at 3250.

Shanghai Composite Index

After a strong bull run India’s NSE Nifty Index is surprisingly hesitant. A close below the rising trendline would signal a test of primary support at 10000.

Nifty Index

DJ Euro Stoxx 600 shows a stronger blue candle but is still testing resistance at 380.

DJ Euro Stoxx 600

The Footsie shows a similar pattern, with resistance at 7300.

FTSE 100

In the US, bellwether transport stock Fedex respected support at 230. Follow-through above 250 is likely and would signal resumption of the up-trend, a bullish sign for the economy.

S&P 500

Canada’s TSX 60 respected primary support at 880. Recovery above 920 is likely and would indicate a test of 940.

TSX 60

Patience is required to weather the uncertainty of the next few weeks without making knee-jerk decisions.

The intelligent investor is a realist who sells to optimists and buys from pessimists.

Benjamin Graham: The intelligent investor…..

Why Aussie banks are weakening

Australian banks are breaking primary support levels. There are two major reasons for this. One is the precarious level of household debt as a result of the housing bubble. The first graph below shows how housing prices have more than doubled compared to disposable incomes (after tax but before interest payments) over the past 30 years. And how household debt has risen, not as a result of, but as the underlying cause of, the housing bubble. Without rising debt there would be no bubble.

Australian House Prices and Household Debt to Disposable Income

Growth in Australian housing prices is now slowing, prompting fears of a correction.

Australian House Price Growth

The second reason is falling returns on equity. Banking regulators have increased pressure on major banks to improve lending standards and increase capital backing for their lending exposure. For decades banks were given free rein to increase lending without commensurate increases in capital, to the extent that the majors hold only $4 to $5 of common equity for every $100 of lending exposure. Low interest rates, increases in capital and slowing credit growth have all contributed to the decline in bank equity returns to the low teens.

Australian Banks Return on Equity

ASX 200: Banks break support

The ASX 300 Banks index broke primary support at 8100, signaling a fresh decline. Follow-through below 8000 would strengthen the signal. Another Trend Index trough at zero warns of long-term selling pressure. The next major support level is the 2016 low at 7200 but expect retracement to first test new resistance at 8100.

ASX 300 Banks

Miners rallied, softening the blow.

ASX 300 Metals & Mining

But decline in its biggest sector would weigh heavily on the ASX 200. Retracement is likely to test 6000 but respect would warn of a test of primary support at 5650. Bearish divergence on Twiggs Trend Index warns of long-term selling pressure.

ASX 200

Dollar falls, Gold rises

The Dollar weakened, with the Dollar Index testing support at 88.50. Respect of new resistance at 91 — the last primary support level — confirms the strong down-trend. Completion of another Trend Index peak below zero would further strengthen the signal.

Dollar Index

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

The extent of the Dollar’s fall is best illustrated against major trading partner China’s Yuan: a 9.5% fall in just over two years. And that is despite rising US interest rates and a $120 billion increase in China’s foreign reserves over the last year.

USDCNY

Gold is again testing resistance at $1350. Breakout would signal another primary advance, with a target of $1450*. Follow-through above $1375 would confirm.

Spot Gold

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

The All Ordinaries Gold Index has been undermined by the strong Aussie Dollar. But recovery above 5000 would signal another advance.

All Ords Gold Index

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.

Gold and Dollar hesitate

The Dollar Index found short-term support at 89, having respected new resistance at 91. Trend Index peaks below zero warn of strong selling pressure. Expect a further decline to 87*.

Dollar Index

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

Gold respected resistance at $1350 as the Dollar found short-term support. Bearish divergence on the Trend Index warns of secondary selling pressure, warning of a correction.

Spot Gold

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

A strong Aussie Dollar is holding back the All Ordinaries Gold Index. Respect of the rising trendline would signal another advance.

All Ords Gold Index

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