Dow warns of a correction

The commentator’s curse. Three days after I posted that Dow Jones Industrial Average was consolidating in a bullish narrow band below resistance at 21000, the Dow breached support at 20800. Downward breakout warns of a correction with support at 20000. Declining 21-day Twiggs Money Flow indicates medium-term selling pressure. Follow-through below 20600 would strengthen the (medium-term) bear signal but the primary trend remains up.

Dow Jones Industrial Average

The false break above 21000 was a hint that all was not well with the trend. Unfortunately we often only see what we expect and miss the subtle clues.

The Dow is in Stage III of a bull market. This is confirmed by a primary up-trend on the Transportation Average, although the current month shows a correction.

Dow Jones Transportation Average

Small Caps indexes like the Russell 2000 also display a strong up-trend, reinforcing the Stage III conclusion.

Russell 2000 Small Caps

Likewise, the Nasdaq 100.

Nasdaq 100

I have not drawn conventional trendlines, on the above charts, through the lowest points in the up-trend. Instead I have dragged a linear regression line down to “touch” the mid-point lows. I find this offers a better fit in many cases where there is an initial (bounce) spurt at the start of the trend.

Dow breaches support

The commentator’s curse. Three days after I posted that Dow Jones Industrial Average was consolidating in a bullish narrow band below resistance at 21000, the Dow breached support at 20800. Downward breakout warns of a correction. Expect support at 20000. The false break above 21000 was a hint that all was not well with the trend. Unfortunately we often only see what we expect to see and miss the subtle clues.

Dow Jones Industrial Average

The Dow is in Stage III of a bull market, with long-term Twiggs Money Flow signaling strong buying pressure. Chances of a (primary trend) reversal seem low.

[Correction: Breach of support was at 20800, not 21800.]

Dow bullish

Dow Jones Industrial Average is consolidating in a narrow band below resistance at 21000, a bullish sign. Strong buying pressure is also signaled by rising Twiggs Money Flow troughs above zero. Breakout would offer a short-term target of 22000.

Dow Jones Industrial Average

Dow: How long will stage III last?

Dow Jones Industrial Average is testing resistance at 21000. Another narrow consolidation, as in December-January, would confirm strong buying pressure already signaled by rising Twiggs Money Flow troughs above zero.

Dow Jones Industrial Average

We are witnessing stage III of a bull market. While this is the final leg, it could last several weeks or several years. My guess is that it will last until the Fed is forced to hike interest rates in 2018, to cool inflation.

Dow Jones Industrials

Dow Jones Industrial Average closed the week above 21000 for the first time. Twelve months ago the index was at 17000, an increase of 23.5 percent. Shallow retracements since then signal buying pressure, highlighted by Twiggs Money Flow troughs above zero. The latest trough, higher than zero, reflects growing enthusiasm from investors.

Dow Jones Industrial Average

Prices are rising faster than earnings in expectation of future growth. Clearly the Dow is in Phase III of a Bull Market. As I pointed out in December, this could last for several years.

Forward P/E turns back up

Dow Jones Industrials

Dow Jones Industrial Average continues to climb, heading for a target of 21000. Rising troughs on Twiggs Money Flow signal strong buying pressure.

Dow Jones Industrial Average

The S&P 500 follows a similar path.

S&P 500

With the CBOE Volatility Index (VIX) close to historic lows around 10 percent.

VIX

However, at least one investment manager, Bob Doll, is growing more cautious:

“…we think the easy gains for equities are in the rearview mirror and we are growing less positive toward the stock market. We do not believe the current bull market has ended, but the pace and magnitude of the gains we have seen over the past year are unlikely to persist.”

Forward P/E Ratio

Bob Doll’s view is reinforced by recent developments with the S&P 500 Forward Price-Earnings Ratio. I remarked at the beginning of February that the Forward P/E had dropped below 20, signaling a time to invest.

Actual earnings results, however, have come in below earlier estimates — shown by the difference between the first of the purple (latest estimate) and orange bars (04Feb2017) on the chart below.

S&P 500 Forward Price-Earnings Ratio

In the mean time the S&P 500 index has continued to climb, driving the Forward P/E up towards 20.

This is not yet cause for alarm. We are only one month away from the end of the quarter, when Forward P/E is again expected to dip as the next quarter’s earnings (Q1 2018) are taken into account.

S&P 500 Forward Price-Earnings Ratio

But there are two events that would be cause for concern:

  1. If the index continues to grow at a faster pace than earnings; and/or
  2. If forward earnings estimates continue to be revised downward, revealing over-optimistic expectations.

Either of the above could cause Forward P/E to rise above 20, reflecting over-priced stocks.

Be fearful when others are greedy and greedy only when others are fearful.

~ Warren Buffett

Dow and Nasdaq: It’s a bull market

The Nasdaq 100 is in blue sky territory, having broken clear of its Dotcom high at 4900. Rising troughs on Twiggs Money Flow signal long-term buying pressure. A correction to test the new support level remains likely but this is unlikely to upset the bull market.

Nasdaq 100

The Dow Jones Industrial Average is also in a bull market, headed for a test of 21000. Twiggs Money Flow troughs above zero again indicate strong buying pressure.

Dow Jones Industrial Average

The Dow Jones Transport Average is also in blue sky territory having respected its new support level at 9000. The up-trend provides bull market confirmation required by classic Dow Theory.

Dow Jones Transport Average

Dow: Expect further advances

The Dow Jones Industrial Average respected support at 20000, signaling another advance. Probably to 21000 but it could carry as far as the upper trend channel at 22000. Twiggs Money Flow troughs above zero indicate strong buying pressure.

ASX 200

* Target: 18000 + ( 18000 – 16000 ) = 20000

Dow breaks 20,000

The Dow Jones Industrial Average broke the important psychological barrier of 20,000 this week. The news was greeted with cheers from the media, many advisers and investors.

Dow Jones Industrial Average

Older readers may recall a similar event when the Dow broke 1000 on November 14, 1972. Here is an excerpt from the New York Times that day:

The Dow Jones industrial average closed above the 1,000 mark yesterday for the first time in history.

It finished at 1,003.16 for a gain of 6.09 points in what many Wall Streeters consider the equivalent of the initial breaking of the four-minute mile.

“This thing has an obvious psychological effect,” declared one brokerage-house partner. “It’s a hell of a news item. As for the permanence of it — well, I just don’t know.”

Last Friday, the Dow surpassed 1,000 during the course of a day’s trading, but it fell back below the landmark figure by the end of the session.

But yesterday the market was not to be denied. The Dow finally put it all together, the peace rally, the re-election of President Nixon, the surging economy, booming corporate profits and lessening fears about inflation and taxes and controls and other uncertainties of 1973.

…..International Business Machines, Wall Street’s best known glamour issue, moved up 11 1/4 points to 388, its best price of the day.

…..An office broker, watching the stock tape from his desk downtown, murmured in wonderment: “There’s a sort of renewed confidence in the whole economic outlook.”

The broker who questioned the permanence of the move must have had a crystal ball. Three months later, the Dow reversed below 1000, commencing a bear market that ended at 570.

Dow Jones Industrial Average

Four years later, in 1976, the Dow again rallied and broke 1000. Only to retreat in another bear market that carried as low as 750. A third advance carried the Average above 1000 in 1981, before another retreat, this time to 780.

Only in 1982, a full ten years after the first breakout, did the Dow finally break clear of 1000, advancing strongly over the next few years.

The next significant barrier for the Dow was 10,000. Breakout took place in 1999, during the Dotcom boom, with a minimum of fuss. At least one pundit at the time predicted the Dow would reach 100,000 by 2020.

Dow Jones Industrial Average

Contrary to initial indications, the 10,000 level also proved a formidable barrier, with breach of support in 2001 heralding the start of a bear market that fell as low as 7200.

Recovery in 2003 appeared robust, with two secondary corrections respecting the new support level at 10,000. But the global financial crisis in 2008 saw the Dow fall to 6500. It took more than ten years after the initial breakout before we could comfortably say that the Dow had broken clear of 10,000.

The next important barrier is the current 20,000. It may be naive to think we have seen the last of it.

If past records are anything to go by, we could be in for an interesting decade.

It’s a bull market

Dow Jones Industrial Average successfully tested the new support level at 18000 and has now broken resistance at 19000, confirming the target of 20000*. Rising Twiggs Money Flow indicates selling pressure has ended. Expect a brief retracement to test support at 19000 but respect is likely.

Dow Jones Industrial Average

* Target medium-term: 18000 + ( 18000 – 16000 ) = 20000

Charles Dow, founder of Dow Theory more than a century ago, always waited for confirmation from the Rail Average. Nowadays, railways have diminished in importance and we use the broader Transport Average which currently signals a primary up-trend after a lengthy “line” or narrow consolidation over the last 3 months.

Dow Jones Transport Average

It is also advisable to look for confirmation from the broader S&P 500 and the tech-heavy Nasdaq 100 index.

The S&P 500 broke resistance at 2200, signaling a primary advance with a target of 2300*. Rising Twiggs Money Flow again indicates that selling pressure has ended.

S&P 500 Index

* Target medium-term: 2200 + ( 2200 – 2100 ) = 2300

The Nasdaq 100 recently set an all-time high after breaking resistance at its March 2000 high of 4700. Retracement twice respected the new support level and follow-through above 4900 would confirm another primary advance.

Nasdaq 100

Fedex surges

Bellwether transport stock Fedex surged to a new high this week, signaling an expected rise in economic activity in the US. A Twiggs Money Flow trough above zero also indicates strong buying pressure.

Fedex

Dow Jones Industrial Average is testing resistance at 19000. The doji star indicates indecision rather than a reversal. Declining Twiggs Money Flow indicates long-term selling pressure but completion of a trough above zero would negate this. A fall below 18500 would warn of a correction. Follow-through above 19000 is less likely but would indicate a fresh advance.

Dow Jones Industrial Average

* Target medium-term: 18000 + ( 18500 – 17000 ) = 19500

The S&P 500 is testing resistance at 2200. The evening star pattern again indicates indecision rather than reversal. Breakout would complete a bullish inverted scallop pattern, which commenced in early July, signaling an advance to 2300. Declining Twiggs Money Flow remains bearish, favoring another retracement.

S&P 500 Index

* Target medium-term: 2100 + ( 2200 – 2000 ) = 2300

Dow breaches 18000

Dow Jones Industrial Average broke support at 18000, warning of a test of primary support at 17000. Bearish divergence on Twiggs Money Flow indicates long-term selling pressure. Recovery above 18500 is now unlikely but would signal another primary advance.

Dow Jones Industrial Average

Dow selling pressure

The S&P 500 is retracing for a test of short-term support at 2150. Respect of the rising trendline would signal a test of 2200. Breakout above 2200 would complete an inverted scallop (or fish hook) with a target of 2400*. Declining Twiggs Money Flow, however, warns of selling pressure. Breach of 2050 would test medium-term support at 2100.

S&P 500 Index

* Target calculation: 2100 + ( 2100 – 1800 ) = 2400

The Dow Jones Industrial Average also displays a potential inverted scallop on the weekly chart. Follow-through above 18600 would confirm but bearish divergence on Twiggs Money Flow again warns of selling pressure. Tall shadows on the last two candles also suggest short-term selling pressure. Breach of support at 18000 would warn of a test of primary support at 17000.

Dow Jones Industrial Average

* Target medium-term: 18500 + ( 18500 – 18000 ) = 19000

Crude oil and buybacks

At present, stock prices are heavily influenced by the price of crude oil. Whichever direction crude takes, stocks are likely to follow. The current rally in Light Crude (June 2016 Futures) is testing resistance at $42/barrel. Respect would warn of another test of primary support at $32. Breach of $32 would offer a target of $22/barrel* but we are more likely to see further consolidation (between $32 and $42) first.

WTI Light Crude June 2016 Futures

* Target calculation: 32 – ( 42 – 32 ) = 22

Another major factor influencing prices is corporate buybacks. Lu Wang at Bloomberg points out that inflows/outflows from managed funds are dwarfed by repurchases:

Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.

Corporate buybacks v. Fund Outflows on S&P 500

Of more concern is that we are approaching the March quarter-end. Repurchases are expected to fall dramatically in April.

Global

Dow Jones Global Index continues to test resistance at 300 and the descending trendline. 13-Week Twiggs Momentum continues to flag a strong primary down-trend. Respect of resistance is likely and reversal below 290 would warn of another decline. Breach of 270 would confirm. Penetration of the descending trendline, however, would warn that the down-trend is losing momentum and a bottom is forming.

Dow Jones Global Index

* Target calculation: 270 – ( 300 – 270 ) = 240

North America

The S&P 500 broke resistance at 2000 and rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Respect of short-term support at 2100 would indicate a rally to 2100. But I remain wary of this rally.

S&P 500 Index

A look at the monthly chart explains why. Respect of 2100, or even a feint (false break) above the previous high of 2170 would keep the weight on the sell side (an outgoing tide). Declining 13-week Twiggs Momentum, below zero, warns of a primary down-trend.

S&P 500 Index

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

A CBOE Volatility Index (VIX) peak below 20 indicates that (short-term) market risk has eased. But our longer-term risk measures continue to warn of elevated risk.

S&P 500 VIX

Canada’s TSX 60 is testing resistance at 800. Expect stubborn resistance at the former primary support level. A correction to test support at 700 is likely. Recovery of 13-week Twiggs Momentum above zero would indicate that the primary down-trend has ended. Penetration of the descending trendline suggests that a bottom is forming. A higher trough on the next correction would be a bullish sign.

TSX 60 Index

Europe

Dow Jones Euro Stoxx 50 found resistance at 3100 but bullish divergence on 13-week Twiggs Money Flow suggests that a test of 3300 is likely. The primary trend remains down and a lower peak, followed by reversal below 3000, would warn of decline to 2500*.

DJ Euro Stoxx 50

* Target calculation: 3000 – ( 3500 – 3000 ) = 2500

Germany’s DAX is similarly testing resistance at 10000. Breakout would indicate an advance to 11000. Buying pressure on 13-week Twiggs Money Flow appears secondary. Reversal below 9300 would warn of another decline.

DAX

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

The Footsie found stronger than expected resistance at 6250. Reversal below 6000 would warn of another test of 5500. Breach of the descending trendline suggests that a bottom is forming. A higher trough would favor a reversal. While a trough above zero on 13-week Twiggs Money Flow would strengthen the signal.

FTSE 100

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

Asia

The Shanghai Composite Index is consolidating in a narrow range between 2700 and 2900, suggesting continuation of the primary down-trend.

Shanghai Composite Index

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

Japan’s Nikkei 225 Index encountered stubborn resistance at 17000. Respect would warn of another test of 15000, while breakout would be likely to encounter further resistance at 18000. 13-Week Twiggs Money Flow holding above zero is encouraging but I expect the primary down-trend is far from over.

Nikkei 225 Index

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

India’s Sensex is testing resistance at 25000. Rising 13-week Twiggs Money Flow reflects strong (medium-term) buying pressure. Narrow consolidation below resistance suggests breakout is likely, which would test the upper trend channel at 26000. Respect of the trend channel is likely and would warn of another test of 22500*.

SENSEX

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

Australia

The ASX 200 is testing resistance at 5150 and the descending trendline. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. This is a bear market and respect of resistance is likely to warn of another decline. Penetration of the descending trendline, however, would warn that a bottom is forming. Reversal below 5000 is likely and would warn of another test of 4700, while breach of 4700 would offer a target of 4400*.

ASX 200

* Target calculation: 4800 – ( 5200 – 4800 ) = 4400

The Banks Index is also testing its descending trendline. Respect is likely and would warn of another decline. Penetration would again suggest that a bottom is forming.

ASX 300 Banks

Flying on one engine

Market direction is dominated at present by wild swings in the price of crude oil and other commodities (iron ore in Australia).

WTI Light Crude June 2016 Futures

The rally (WTI Light Crude June 2016 futures) may run as high as $44/barrel before retracing to test support. Primary support sits at $30 and a higher trough, following breach of the descending trendline, would suggest that a bottom is forming. But that is far from definite as Patrick Chovanec at Silvercrest points out:

….so far this year stock market sentiment has taken many of its cues from the price of oil. On any given day, if you knew which way oil prices moved, you probably could tell which way the stock market moved. While we believe this linkage fails to recognize the critical distinctions we have so often highlighted, it can’t be ignored in anticipating future market movements, at least in the near-term. The recent firming of oil prices reflects some important developments. After more than a year, we are finally seeing the initial signs of capitulation on the supply side: U.S. oil output has topped out and the most vulnerable OPEC members are agitating for cutbacks. Nevertheless, accumulated crude oil inventories remain at record high levels, which makes us wary concluding that the oil market has reached a hard bottom. While we think the oil price, and the producer industry, will gradually recover, we also think “consensus” expectations of a dramatic +20% gain in S&P 500 operating earnings this year, driven by a large and sudden rebound in the energy and materials sectors, continue to be overly optimistic. With this in mind, we are likely to see more sentiment-driven volatility in U.S. stock prices ahead, even as the U.S. economy continues on its path of slow growth.

Global

Dow Jones Global Index is testing resistance at 300. Respect is likely and reversal below 290 would warn of another decline. 13-Week Twiggs Momentum continues to flag a strong primary down-trend. Breach of 270 would confirm. Penetration of the descending trendline is unlikely but would warn that the down-trend is losing momentum and a bottom is forming.

Dow Jones Global Index

* Target calculation: 270 – ( 300 – 270 ) = 240

North America

“When you fly in a twin-engined aircraft and one engine cuts out, take comfort that the other engine will carry you to the scene of the crash.”

Whenever I see the market index gradually rolling over in a broad topping pattern I am reminded of this saying by my Irish friend Ollie Flynn (who did a lot of flying in light aircraft to remote locations). When there is no sudden shock, like Lehman Brothers’ collapse or LTCM, the market can remain undecided for a considerable time before rolling over into a hard down-trend.

The monthly chart of the S&P 500 is flying on one engine. Currently testing resistance at 2000, a peak at this level would strengthen the warning of a bear market. But even a peak at 2100 would keep the weight on the sell side. Follow-through below 1850 would confirm another decline. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure but the overall trend is down.

S&P 500 Index

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

CBOE Volatility Index (VIX) below 20, suggests that (short-term) market risk is easing. Respect of this level (on the next spike) would strengthen the signal.

S&P 500 VIX

Canada’s TSX 60 penetrated the descending trendline after breaking resistance at 750, suggesting that a bottom is forming. Expect stubborn resistance at 800. Rising 13-week Twiggs Momentum is so far indicative of a secondary rally rather than reversal of the primary down-trend. Depth of the next trough will provide a better indication as to the likelihood of a reversal.

TSX 60 Index

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

Europe

Dow Jones Euro Stoxx 50 found resistance at 3050 but bullish divergence on 13-week Twiggs Money Flow suggests that a test of 3300 is likely. The primary trend remains down and a lower peak, followed by reversal below 3000, would warn of a decline to 2500*.

DJ Euro Stoxx 50

* Target calculation: 3000 – ( 3500 – 3000 ) = 2500

Germany’s DAX displays a similar pattern, testing resistance at 10000. Breakout would indicate an advance to 11000. Buying pressure on 13-week Twiggs Money Flow appears secondary and reversal below 9300 would warn of another decline.

DAX

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

The Footsie found resistance at 6250, but this may be short-term and we can only expect committed resistance at 6500. Reversal below 6000 is unlikely at present, but would warn of another test of 5500. Breach of the descending trendline suggests that a bottom is forming. A higher trough would favor a reversal. While a trough above zero on 13-week Twiggs Money Flow would strengthen the signal.

FTSE 100

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

Asia

The Shanghai Composite Index continues to test support at 2700, with no indication of the recent excitement in iron ore markets. The primary trend is down and likely to remain so.

Shanghai Composite Index

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

Japan’s Nikkei 225 Index found resistance at 17000. Respect would warn of another test of 15000, while breakout would be likely to encounter stubborn resistance at 18000. 13-Week Twiggs Money Flow holding above zero is encouraging but I expect the primary down-trend is far from over.

Nikkei 225 Index

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

India’s Sensex is testing resistance at 25000. Rising 13-week Twiggs Money Flow reflects strong (medium-term) buying pressure. Breakout is likely and would test the upper trend channel at 26000. Respect of the trend channel remains likely and would warn of another test of 22500*.

SENSEX

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

Australia

The ASX 200 is testing resistance at 5150, with rising 13-week Twiggs Money Flow indicating (medium-term) buying pressure. This is a bear market and respect of the descending trendline is likely, warning of another decline. Reversal below 5000 would warn of another test of 4700, while breach of 4700 would offer a target of 4400*.

ASX 200

* Target calculation: 4800 – ( 5200 – 4800 ) = 4400

It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine—that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.

~ Jesse Livermore

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

The most important rule is to play great defense, not great offense. Everyday I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out.

~ Paul Tudor Jones

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

One swallow does not a summer make

“One swallow does not a summer make, nor one fine day; similarly one day or brief time of happiness does not make a person entirely happy.”

~ Aristotle (384 BC – 322 BC)

Similarly, one brief rally does not make a bull market.

Dow Jones Global Index found support at 270 and is rallying to test resistance at the former primary support level of 290. 13-Week Twiggs Momentum peaks below zero flag a strong primary down-trend. Breach of 270 would confirm another decline. Recovery above 290, on the other hand, would indicate a more gradual down-trend rather than a reversal; respect of the descending trendline at 300 would confirm.

Dow Jones Global Index

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

Dow Jones Industrial Average recovered above primary support at 16000, long tails on weekly candles reflected committed buying. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Breakout above 16500 would signal a test of 17000. But respect of 17000 is likely and would warn of continuation of the primary down-trend. Breach of 16000 would confirm the signal, offering a target of 14000*.

Dow Jones Industrial Average

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

The S&P 500 is similarly headed for a test of 1950. Rising 13-week Twiggs Money Flow again reflects medium-term buying pressure. Reversal of the primary trend is unlikely and breach of support at 1850 would confirm a decline to 1700*.

S&P 500 Index

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

CBOE Volatility Index (VIX) is headed for another test of support at 20. Respect is likely and would confirm that risk remains elevated.

S&P 500 VIX

Canada’s TSX 60 broke resistance at 750. Rising 13-week Twiggs Momentum suggests that a bottom may be forming, but only another test of 700 would confirm this.

TSX 60 Index

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

Transport

Bellwether transport stock Fedex (FDX) found support at $120. Recovery above $140 would signal a test of $150 and the descending trendline. But the primary down-trend remains intact.

Fedex

Europe

Germany’s DAX is testing resistance at 9500. The rally may well follow-through to 10000 but buying pressure on 13-week Twiggs Momentum appears secondary and the primary down-trend is intact.

DAX

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

Deutsche Post AG (DPW.DE), Europe’s bellwether equivalent of Fedex, found support at € 20. A rally that respects resistance at € 23 would confirm a strong primary down-trend, while respect of € 25 and the descending trendline would indicate a more gradual decline. 13-Week Twiggs Money Flow declining below zero signals long-term selling pressure.

Deutsche Post AG

The Footsie recovered to 6000, but expect strong resistance at this level (and the declining trendline). 13-Week Twiggs Momentum oscillating below zero flags a primary down-trend. Long-term target for a decline remains 5000*.

FTSE 100

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

Asia

The Shanghai Composite Index found support at 2700. Expect a test of resistance at 3000, but 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 retracing to test the new resistance level after breaking primary support at 17000. Respect is likely and would confirm the primary down-trend. Decline of 13-week Twiggs Money Flow below zero strengthens the bear signal.

Nikkei 225 Index

* Target calculation: 17 – ( 20 – 17 ) = 14

India’s Sensex broke the bottom border of its trend channel, testing support at 23000. The primary down-trend is accelerating. Respect of resistance at 24000 is likely and would warn of a test of 22000. Respect of resistance at 25000, on the other hand, would suggest a more gradual descent.

SENSEX

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

Australia

The ASX 200 retraced to test resistance at 5000 and the descending trendline. Respect of the latter is likely and would confirm the primary down-trend. Bullish divergence on 13-week Twiggs Money Flow indicates medium-term (secondary) buying pressure. The weight of the market remains on the sell (bear) side. Respect would indicate a test of support at 4600, but the long-term target remains 4000*.

ASX 200

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

Banks are taking a hammering, with the Finance sector ($XFJ) in a clear down-trend. Retracement to test resistance at 5700 is secondary. A rally that respects the descending trendline would suggest a decline to 5100*. Declining 13-week Twiggs Money Flow reflects long-term selling pressure.

ASX 200 Financials

* Target calculation: 5400 – ( 5700 – 5400 ) = 5100


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I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have.

~ Paul Tudor Jones