China: Inflation on the rise

China’s Shanghai Composite Index is approaching resistance at 3300 after respecting its new support level at 3100. Twiggs Money Flow troughs above zero indicate long-term buying pressure. Breakout would provide further confirmation of the primary up-trend.

Shanghai Composite Index

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

The rising market is primarily a result of central bank stimulus so investors need to consider the result if this is withdrawn. Rising producer prices warn that underlying inflation is growing. If this continues the PBOC will be forced to retreat.

China: Producer Prices Annual Change

Hong Kong’s Hang Seng Index is also testing resistance, at 24000. A Twiggs Money Flow trough that respects zero would signal long-term buying pressure but that looks uncertain at present.
Hang Seng Index

China hits turbulence

Shanghai Composite Index is retracing from its recent high at 3300. A test of support at 3100 is likely. Rising Twiggs Money Flow indicates long-term buying pressure but this may be distorted by state intervention in the stock market earlier this year.

Shanghai Composite Index

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

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

Hang Seng Index

The best summary I have seen of China’s dilemma is from David Llewellyn-Smith at Macrobusiness:

…China’s choices are limited here by the “impossible trinity”, that a country [pegged to the Dollar] can only choose two out of the following three:

  • control of a fixed and stable exchange rate
  • independent monetary policy
  • free and open international capital flows

China has been trying to run this gauntlet by sustaining an overly high growth rate via loose monetary policy and recently liberalised capital markets plus exchange rate. But it can’t have stability in all three and so is in full reverse on the last two to prevent a currency rout and/or monetary tightening.

Rising interest rates in the US are likely to bedevil China’s monetary policy. A falling Yuan would encourage capital flight. Capital flight would damage the Yuan, encouraging further outflows. Support of the Yuan would deplete foreign reserves and cause monetary tightening. Loose monetary policy would encourage speculative bubbles which could damage the banking system. A falling Yuan and loose monetary policy would fuel inflation. Inflation would further weaken the Yuan and encourage capital flight. Restriction of capital outflows would end capital inflows.

I am sure that there are some very smart people working on the problem. But they are probably the same smart people who created the problem in the first place.

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

Shanghai rally runs out of steam

Shanghai Composite Index ran into resistance at 3200 after its recent breakout. Expect retracement to test the new support level at 3100. Respect would confirm the target of 3400* for the advance.

Shanghai Composite Index

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

China

Hong Kong’s Hang Seng Index is testing support at 23000. Breach would warn of a correction to test the long-term rising trendline. Declining Twiggs Money Flow indicates medium-term selling pressure. Breakout above 24000 is unlikely but would signal a fresh advance.

Hang Seng Index

The Shanghai Composite Index is again testing resistance at 3100. Breakout is likely and would signal a fresh advance, offering a target of 3400.

Shanghai Composite Index

China breakout is likely

Hong Kong’s Hang Seng Index is consolidating between 23000 and 24000. Decline of Twiggs Money Flow has slowed and a trough above zero would indicate long-term buying pressure. Breakout above 24000 would signal a fresh advance. Breach of support at 23000 is less likely but would warn of a correction to test the long-term rising trendline.

Hang Seng Index

The Shanghai Composite Index made a flat saucer-shaped correction before again testing resistance at 3100. Breakout is now likely and would signal a fresh advance.

Shanghai Composite Index

China: Hang Seng retreats

Steep decline on Twiggs Money Flow warns of strong selling pressure on Hong Kong’s Hang Seng Index. Breach of support at 23000 would warn of a correction to test the long-term rising trendline.

Hang Seng Index

The Shanghai Composite Index continues to consolidate between 2800 and 3100.

Shanghai Composite Index

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

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

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

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


More….

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

Batten down the hatches

Batten down the hatches, the storm is here.

Nymex WTI Light Crude futures (March 2016) are testing support at $30 per barrel. There is no indication that this is the bottom and breach of $30 would be likely to test $20 per barrel.

Nymex WTI Light Crude March 2016 Futures

* Target calculation: 30 – ( 40 – 30 ) = 20

Long-term interest rates are falling, with 10-year Treasury yields headed for another test of primary support at 1.5 percent. Breach of 1.7 percent would confirm. The flight from stocks is driving up Treasuries (and yields lower).

10-year Treasury Yields

Flight to safety is (normally) synonymous with a strong Dollar, so the weakening Dollar Index is a surprise.

Dollar Index

China must be selling off Dollar reserves to support the Yuan and restore confidence.

USDCNY

Too late, I’m afraid. That horse has bolted. Loss of confidence in the Yuan is driving demand for gold, with the spot metal rallying to $1200 per ounce. Resistance at the former support level makes retracement likely, but a trough that respects $1100 or narrow consolidation below $1200 would suggest reversal (to an up-trend). Breach of $1200 would offer a target of $1300*.

Spot Gold

* Target calculation: 1200 + ( 1200 – 1100 ) = 1300

After forming a lower peak at 18000, Dow Jones Industrial Average is testing primary support at 16000. 13-Week Twiggs Momentum peak at zero warns of a primary down-trend. Breach of support would offer a target of 14000*.

Dow Jones Industrial Average

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

The S&P 500 displays a similar pattern, testing primary support at 1850, with a 13-week Twiggs Momentum peak at zero. Breach of support would offer a target of 1500*.

S&P 500 Index

* Target calculation: 1850 – ( 2150 – 1850 ) = 1550

A monthly chart shows VIX rising for another test of 30. Oscillation between 20 and 30 flags elevated market risk.

CBOE Volatility Index

Australia’s ASX 200 retreated below primary support at 5000, signaling a primary down-trend. A 13-week Twiggs peak below zero already warns of a decline. Close below 4900 would confirm, offering a short-term target of 4600* and a long-term target of 4000*.

ASX 200 Index

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

Investors who plan to hold stocks through a possible down-turn should stop watching daily prices and listening to news reports. It will only weaken your resolve. I am comfortable with holding stocks with strong dividend streams, but wary of holding growth stocks as they normally suffer the biggest losses.

For traders this is a time of dangerous opportunity. Either shorting sectors likely to be worst hit or waiting for opportunities to buy gold stocks.

Northern Star (NST)

Only when the tide goes out do you discover who’s been swimming naked.

~ Warren Buffett

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

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 ofers 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