ColinTwiggs, Author at the patient investor

January 24, 2014

Shanghai surprise

The Shanghai Composite Index found support at 2000 and is retracing to test resistance at 2100. Respect would indicate a strong primary-down trend, confirmed if support at 1950 is broken. Some may find the move surprising after weak manufacturing PMI data on Thursday, but the real estate sector surged on the back of falling money-market rates following a liquidity injection by the PBOC. A 13-week Twiggs Money Flow peak below zero would also warn of long-term selling pressure.

Shanghai Composite

* Target calculation: 2100 – ( 2250 – 2100 ) = 1950

January 24, 2014

DAX selling pressure

Germany’s DAX shows medium-term selling pressure, with bearish divergence on 13-week Twiggs Money Flow. Breach of support at 9400 — and the latest rising trendline — would warn of a correction to 9000. Respect of 9400 is unlikely, but would signal a primary advance to 10200*.

DAX

* Target calculation: 9800 + ( 9800 – 9400 ) = 10200

January 24, 2014

Footsie warns of correction

The FTSE 100 retreated below short-term support at 6700 after a false break above 6800, signaling a correction to test primary support at 6400. Bearish divergence on 13-week Twiggs Money Flow warns of long-term selling pressure. Recovery above 6800 is unlikely, but would signal a fresh advance.

FTSE 100

* Target calculation: 6800 + ( 6800 – 6400 ) = 7200

January 24, 2014

The correction we had to have

US markets were overdue for a correction and continuation of the advance for much longer would have resulted in instability, from an imbalance between buyers and sellers.

At Research & Investment we do not attempt to time entries and exits on secondary corrections. Our research shows that this is expensive and erodes performance. What we do pay a lot of attention to, on the other hand, are macro-economic and volatility indicators of market risk, exiting to cash when risks become elevated.

With a long-term view of the market, secondary fluctuations are relatively insignificant, but they do present opportunities to increase investment in the market.

The S&P 500 broke support at 1810, signaling a correction. Bearish divergence on 21-day Twiggs Money Flow strengthens the signal. Expect support at the Setember 2013 high of 1730.

S&P 500

A monthly chart places the latest breakdown in perspective. Respect of support at 1700 — and the secondary trendline — would confirm a healthy primary up-trend. A 13-week Twiggs Money Flow trough above zero would again strengthen the signal.

S&P 500

* Target calculation: 1800 + ( 1800 – 1700 ) = 1900

The VIX is rising steeply, but continues to indicate low risk and a bull market.

S&P 500 VIX

January 23, 2014

China: Roiling the Waters

Roiling the Waters: Why the United States needs to stop playing peacemaker and start making China feel uncomfortable.

BY Elbridge Colby, Ely Ratner

History has demonstrated the perils of focusing too much on stability at the expense of deterrence. The Cuban missile crisis, the modern world’s closest brush with the apocalypse, was precipitated by Soviet Premier Nikita Khrushchev’s perception that the United States, especially President John F. Kennedy, was overly concerned about stability and cooling tensions between the superpowers. Khrushchev’s sense that America could be pushed was formed by Kennedy’s cautious reactions to assertive Soviet moves toward Berlin, as well as Khrushchev’s measure of Kennedy at the 1961 Vienna superpower summit as “weak” and accommodating……..

OF COURSE, CHINA IS NOT THE SOVIET UNION. And 2014 is not 1962. The point is simply that a country with the power of the USSR or China, unsatisfied with features of the existing order, motivated to do something to change it, and skeptical of the resolve of the United States, could well pursue a policy of coercion and brinkmanship, even under the shadow of nuclear weapons. As historian Francis Gavin has argued, the whole history of the Cold War shows that countries like China — and, at times, the United States — can bluff, coerce, and threaten their way to geopolitical gain.

The worst way to deal with such a power is to leave it with the impression that these approaches work. Just as the United States would have been far better off if Kennedy, at the Vienna summit, had squelched Khrushchev’s doubts about his resolve to defend Berlin, it will be far better if the leadership in Beijing has the clear sense that the United States will meet each challenge to its and its allies’ interests resolutely.

Crude and commodities still bearish

Nymex crude continues its downward trend. Respect of the descending trendline would warn of further weakness, while breach of support at $92 would indicate a decline to $84/barrel*. Recovery above $100 is unlikely, with 13-week Twiggs Momentum declining below zero. Brent crude continues its consolidation above $105, reflecting global supply constraints. Breach of $105 would warn of a down-trend.

Brent Crude and Nymex Crude

* Target calculation: 92 – ( 100 – 92 ) = 84

Commodities also continue their primary down-trend, encouraged by a falling Shanghai Composite Index. Bullish divergence on Dow Jones-UBS Commodity Index 13-week Twiggs Momentum, however, warns that a bottom is forming. Breach of the descending trendline would strengthen the signal — as would recovery of Momentum above zero. Breakout above 128 would signal a primary up-trend: a bullish sign for resources stocks.

Dow Jones UBS Commodities Index

January 22, 2014

Gold Bugs bullish

The Gold Bugs Index, representing un-hedged gold stocks, is often a leading indicator of spot prices. Bullish divergence on 13-week Twiggs Momentum suggests that a bottom is forming and is strengthened by breach of the descending trendline. Only recovery above 280 would signal reversal to a primary up-trend, but retracement that respects support at 190 would be a bullish indication.

Gold Bugs Index

Dollar Index

Rising interest rates and a stronger dollar, however, are likely to exert downward pressure on gold.

The yield on ten-year Treasury Notes respected resistance at 3.00 percent. Breach of support at 2.75 and the rising trendline would test primary support at 2.50, but failure of this level is unlikely. Breakout above 3.00 is more likely and would offer a target of 3.50 percent*.

10-Year Treasury Yields

* Target calculation: 3.00 + ( 3.00 – 2.50 ) = 3.50

The Dollar Index is again testing resistance at 81.50 after a bullish higher trough and breach of the descending trendline. Breakout would signal a primary advance to 83.00*, while recovery of 13-week Twiggs Momentum above zero would strengthen the signal. Respect of resistance is less likely, but reversal below 80 would warn of further weakness.

Dollar Index

* Target calculation: 81.5 + ( 81.5 – 80 ) = 83

Spot Gold

Spot gold respected long-term support at $1200/ounce and is testing resistance at $1260/ounce as well as the descending trendline. Respect would signal another test of $1200, while breakout above $1260 would suggest that a bottom is forming. Recovery of 13-week Twiggs Momentum above zero would strengthen the signal. Failure of $1200, however, would warn of a decline to 1000*.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

January 20, 2014April 18, 2024

ASX 200 hanging man

The ASX 200 is testing short-term resistance at 5300. Rising 21-day Twiggs Money Flow suggests buying pressure, but the latest hanging man candlestick is bearish. Follow-through above 5320 would indicate an advance to 5400*, while reversal below 5200 would test primary support at 5050.

ASX 200

* Target calculation: 5300 + ( 5300 – 5200 ) = 5400

The ASX 200 VIX below 20 continues to reflect low market risk.

ASX 200 VIX

January 19, 2014

Sensex resistance

India’s Sensex displays strong resistance at its 2007 and 2010 high of 21000, with several failed attempts at a breakout. Reversal below 20600 would warn of another test of primary support at 20000. The bullish ascending triangle, however, suggests an advance to 22000*. Declining 13-week Twiggs Money Flow indicates medium-term selling pressure typical of a consolidation.

Sensex

* Target calculation: 21000 + ( 21000 – 20000 ) = 22000

January 19, 2014

Shanghai selling pressure

A sharp fall below zero on 13-week Twiggs Money Flow warns of selling pressure on China’s Shanghai Composite Index. Breach of support at 1950 is likely and would offer a target of 1800*.

Shanghai Composite Index

* Target calculation: 1950 – ( 2100 – 1950 ) = 1800

Michael Pettis summarizes the four challenges facing China:

China is over-reliant on credit to generate growth;
Attempts to boost consumption will reverse the long-standing subsidy of new investment;
Attempts to resolve excess capacity also slow growth; and
Unrecognized bad debt on bank balance sheets mean that growth is overstated.