China: Stay clear

“Never trade against the central bank” is a golden rule of trading. Rule #2 should be: “When the central bank behaves erratically, stay clear.” The PBOC announced a crackdown on wealth management products in May but alarm at the rapid contraction elicited a quick retraction.

The Shanghai Composite Index broke support at 3050/3100 signaling a primary decline. But the PBOCs sudden reversal spurred a recovery, with the index now likely to test resistance at 3300. Rising Twiggs Money Flow indicates buying pressure. Reversal below 3050 is unlikely but would confirm a primary down-trend.

Shanghai Composite Index

Shanghai intervention

The Shanghai Composite Index recovered above primary support at 3100, after the state moved quickly to ease contractionary pressures from the recent crackdown on wealth management products. Rising Twiggs Money Flow signals buying pressure but the situation is artificial. Normally breach of primary support would elicit strong selling.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

Beijing eases pressure

China’s PBOC eased up on its crackdown on wealth management products (WMPs) and related bank lending. The resulting fall-off in new credit and a spike in interbank lending rates threatened to precipitate a sharp contraction.

Copper rallied off long-term support at 5400. The reaction is secondary and breach of 5400 remains likely, signaling a primary down-trend.

Copper A Grade

Iron ore is consolidating in a narrow bearish pattern above support at 60. Breach seems likely and would signal another decline, with a target of 50*.

Iron Ore

* Target: 60 – ( 70 – 60 ) = 50

Shanghai’s Composite Index rallied to test its new resistance level at 3100, after breach signaled a primary down-trend. Respect would confirm the decline, with a medium-term target of 2800*, but government intervention may bolster support. Recovery above 3100 would mean all bets are off for the present.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

Shanghai breaches support

Copper is testing long-term support at 5400, suggesting weak demand from China. Breach would signal a primary down-trend.

Copper A Grade

The Yuan has enjoyed a respite, consolidating in a narrow line for several weeks. But this is likely to prove temporary, with further advances of the Dollar against the Yuan eroding PBOC foreign exchange reserves.

USDCNY

Shanghai’s Composite Index broke support at 3100, signaling a primary down-trend, but the long tail indicates buying support. Recovery above 3100 would suggest a false signal (or government intervention) while respect of resistance would confirm the down-trend.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

Shanghai warning

Shanghai’s Composite Index is again testing support at 3100. Twiggs Money Flow reversal below zero warns of selling pressure. Breach of 3100 would signal a primary down-trend.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

China tests support while India strengthens

Shanghai’s Composite Index is testing support at 3100. Twiggs Money Flow recovered above zero but buying pressure remains weak. Breach of 3100 would warn of a primary down-trend.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

Hong Kong is faring better, with the Hang Seng index recovering above 24000 to signal a fresh advance.

Hang Seng Index

India’s Sensex is testing major resistance at 30000. Rising Twiggs Money Flow indicates medium-term buying pressure. Breakout is likely and would offer a target of 32000*.

Sensex Index

* Target medium-term: 29000 + ( 29000 – 26000 ) = 32000

China dips while India strengthens

Shanghai’s Composite Index is experiencing selling pressure, with Twiggs Money Flow crossing below zero for the first time since 2014. Reversal below 3100 would warn of a primary down-trend.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

India’s Sensex is consolidating in a bullish narrow band below major resistance at 30000. Rising Twiggs Money Flow indicates medium-term buying pressure. Breakout is likely and would offer a target of 32000*.

Sensex Index

* Target medium-term: 29000 + ( 29000 – 26000 ) = 32000

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