Author: ColinTwiggs

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Forex: Dollar and Sterling strengthen

The Euro is rallying for another test of resistance at $1.37 after finding support at $1.3350 against the greenback. Troughs above zero on 13-week Twiggs Momentum suggest a healthy up-trend. Breakout above $1.37 would signal an advance to $1.40*. Respect of resistance, indicated by reversal below the secondary rising trendline, would, however, warn of a correction to the primary trendline at $1.31.

Euro/USD

* Target calculation: 1.37 + ( 1.37 – 1.34 ) = 1.40

Sterling breakout above resistance at €1.20 signals a primary up-trend. Recovery of 13-week Twiggs Momentum above zero strengthens the signal. Target for the advance is €1.23*. Reversal below €1.19 is unlikely, but would warn of another test of €1.1650.

Sterling/Euro

* Target calculation: 1.20 + ( 1.20 – 1.17 ) = 1.23

The Greenback is likely to retrace to test the new support level at ¥101 Japanese Yen. Respect would confirm an advance with a target of ¥108*. The trough above zero on 13-week Twiggs Momentum strengthens the signal. Reversal below ¥101 is unlikely, penetration of the rising trendline warning of trend weakness.

USD/JPY

* Target calculation: 1.01 + ( 1.01 – 0.94 ) = 1.08

Canada’s Loonie broke primary support at $0.94, signaling another decline with a target of $0.915*. A peak below zero on 13-week Twiggs Momentum strengthens the signal. Recovery above $0.945 is unlikely, but would warn of a bear trap.

Canadian Loonie

* Target calculation: 0.945 – ( 0.975 – 0.945 ) = 0.915

The Aussie Dollar is heading for a test of primary support at $0.89. The peak below zero on 13-week Twiggs Momentum signals continuation of the down-trend. Breakout below $0.89 would offer a long-term target of $0.81*, while respect of support would suggest a rally to $0.93. The RBA needs a weaker Aussie Dollar, without lowering interest rates, and will do all it can to assist the decline.

Aussie Dollar

* Target calculation: 0.89 – ( 0.97 – 0.89 ) = 0.81

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Gold support at $1200

Gold

The long tail on this week’s candle reflects buying support for spot gold at $1200/ounce. Recovery above $1250 would suggest another rally to $1350. But the 63-day Twiggs Momentum peak below zero warns of a down-trend. And breach of primary support at $1200 would confirm.

Spot Gold

* Target calculation: 1250 – ( 1350 – 1250 ) = 1150

Often a leading indicator of spot prices, the Gold Bugs Index, representing un-hedged gold stocks, continues in a primary down-trend after breaking support at 210. Completion of a 13-week Twiggs Momentum peak below zero would strengthen the signal.

Gold Bugs Index

Dollar Index

The yield on ten-year Treasury Notes broke through medium-term resistance 2.75, suggesting a primary advance to 3.50 percent*. Breakout above 3.00 percent would confirm. Reversal below the rising trendline is unlikely, but would warn of trend weakness and another test of 2.50. Higher yields are likely to strengthen the dollar.

10-Year Treasury Yields

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

The Dollar Index shows evidence of strong support at 80.50, consolidating in a narrow band between 80.50 and 81.00 over the last 2 weeks. Upward breakout would suggest a primary advance; confirmed if resistance at 81.50 is broken. Breach of support at 80.50 remains as likely and would warn of another test of primary support at 79.

Dollar Index

* Target calculation: 81.5 + ( 81.5 – 79 ) = 84

Higher interest rates and a stronger dollar would increase downward pressure on gold.

Crude Oil

Nymex crude penetrated its downward trendline but this first bear rally may not be the last. Expect resistance between $98 and $100/barrel. Respect remains likely and would indicate another test of support at $92. Brent crude reflects global supply constraints and is likely to find strong support at $100/barrel.

Brent Crude and Nymex Crude

Commodity Prices

A rising Shanghai Composite Index is supporting commodity prices. Recovery of the Dow Jones-UBS Commodity Index above 126 would indicate a bear trap. Breakout above 130 would suggest reversal to a primary up-trend; and cross-over of 13-week Twiggs Momentum above zero would strengthen the signal. Respect of resistance at 126 and a primary decline now appear unlikely.

Dow Jones UBS Commodities Index

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ASX correction despite Asian bulls

Japan’s Nikkei 225 is likely to retrace to test its new support level at 15000. Respect would negate the bearish divergence on 13-week Twiggs Money Flow and confirm the long-term target of 17500*. Reversal below the rising trendline, however, would warn of a correction to 13000.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 12500 ) = 17500

China’s Shanghai Composite is consolidating between 2100 and 2250. Upward breakout would suggest a test of the descending trendline at 2450 on the monthly chart. Momentum remains weak and reversal below 2100 is as likely, which would test primary support at 1950.

Shanghai Composite Index

Hong Kong’s Hang Seng is testing this year’s high of 24000. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Breakout above 24000 is likely and would signal a primary advance to 24500, with a long-term target of 25500*. Reversal below 23500 is unlikely, but would warn of another test of 22500.

Hang Seng Index

* Target calculation: 23500 + ( 23500 – 21500 ) = 25500

India’s Sensex is headed for a test of 21200 after respecting support at 20200. Breakout above its 2007/2010 highs at 21000 would confirm the primary advance, offering a target of 24000*. Another 13-week Twiggs Money Flow trough above zero would strengthen the signal. Reversal below 20200 is unlikely, but would warn of a correction to primary support at 18000.

Sensex

* Target calculation: 21000 + ( 21000 – 18000 ) = 24000

The ASX 200 is undergoing a correction after breaching the rising trendline and support at 5290/5300. Bearish divergence on 13-week Twiggs Money Flow warns of selling pressure, but a trough above zero would indicate a healthy (primary) up-trend. There are plenty of support levels evident on the chart, but I would expect strongest support around 4900 and the 2009/2011 highs of 5000.

ASX 200

The ASX 200 VIX index, below 15, continues to indicate low market risk.

ASX 200

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DAX leads the way

The FTSE 100 continues to test support at 6600. Upward breakout from the recent flag formation would signal an advance to the December 1999 high of 6950/7000*. Falling 13-week Twiggs Money Flow suggests medium-term selling pressure, but a trough above zero would be a long-term bull signal. Breach of 6600 would warn of a correction to primary support and the rising trendline at 6400.

FTSE 100

* Target calculation: 6700 + ( 6700 – 6400 ) = 7000

Dow Jones Euro Stoxx 50 continues its test of resistance at 3100 on the monthly chart. Rising 13-week Twiggs Momentum suggests a primary up-trend. Breakout above 3100 would signal an advance to 3500*. Reversal below 3000 is unlikely, but would indicate a correction to the rising trendline.

Euro Stoxx 50

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

Germany’s DAX leads the way with a strong advance to 9500*. Steeply rising 13-week Twiggs Money Flow signals strong buying pressure. Respect of the target at 9500 would suggest a correction to the rising trendline and support at 8500.

DAX

* Target calculation: 8500 + ( 8500 – 7500 ) = 9500

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TSX tests resistance

Canada’s TSX 60 is testing resistance at 780 on the monthly chart. Breakout would signal an advance to 800* — and possibly the 2011 high of 820. Rising 13-week Twiggs Money Flow indicates buying pressure. Respect of resistance is unlikely, but would warn of a correction to 740.

TSX 60

* Target calculation: 740 + ( 740 – 680 ) = 800

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Bullish outlook despite retracement

Dow Jones Industrial Average retraced to test short-term support at 16000. Breach would suggest a correction to test the rising trendline at 15500. Mild bearish divergence on 13-week Twiggs Money Flow warns of medium-term selling pressure. Target for the advance is 16600* and respect of support at 15500 would suggest another advance.

Dow Jones Industrial Average

* Target calculation: 15700 + ( 15700 – 14800 ) = 16600

The S&P 500 is also testing short-term support, but at 1800*. Bearish divergence on 13-week Twiggs Money Flow warns of medium-term selling pressure. Breach of support would signal a correction to the rising trendline around 1730. Respect of the trendline would indicate a healthy up-trend.

S&P 500

* Target calculation: 1725 + ( 1725 – 1650 ) = 1800

CBOE Volatility Index (VIX) below 15 continues to indicate low market risk.

VIX Index

Bellwether transport stock Fedex displays a huge surge on the monthly chart, with rising Twiggs Money Flow indicating strong buying pressure. A bullish sign for the US economy.

Fedex

* Target calculation: 100 + ( 100 – 70 ) = 130

The Nasdaq 100 continues its accelerating up-trend. Rising Twiggs Money Flow, with higher troughs above the zero line, indicates strong buying pressure. Target for the advance is 3550*. Reversal below 3350 would warn of a correction. Short corrections and narrow consolidations are typical of an accelerating trend. Unsustainable in the long-term, accelerating trends almost inevitably lead to a sharp correction.

Nasdaq 100

* Target calculation: 3400 + ( 3400 – 3250 ) = 3550

Overall, I am bullish on the US market. Attempting to time entries and exits from secondary movements is expensive and our strategy at Research & Investment is to remain in the market unless risks become elevated.

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What is contributing to the surge in US corporate profits?

Some concern has been expressed in the media about the rising level of margin debt in the US. When expressed as a percentage of GDP, NYSE margin debt is approaching 1999/2007 levels.

NYSE Margin Debt as percentage of GDP

But not only margin debt is rising. Market capitalization, while not as fast, is also on the increase.

NYSE Market Cap as percentage of GDP

And market cap merely reflects the underlying rise in corporate profits, measured here as a percentage of GDP.

Corporate Profits as percentage of GDP

My initial reaction was to attribute the rise to increasing globalization of US corporations, but Rebecca Wilder points out that earnings from abroad have scarcely grown. Closer scrutiny of the Bureau of Economic Analysis Q1 2013 release shows Manufacturing is the top growth sector.

So what is contributing to the surge in corporate profits?

Employee compensation has declined as a percentage of net value added by the corporate sector over the last decade.

Corporate Profits as percentage of GDP

And there has been a sharp rise in petroleum and coal output, reflected by producers’ annual value shipped ($billion) in the graph below.

Petroleum and Coal shipments

Also, the percentage of corporate profits paid as taxes is shrinking. The following graph compares corporate profits after tax to corporate profits before tax. Less than 20 percent of corporate profits is currently being paid in taxes.

Corporate Profits as percentage of GDP

Are these ratios sustainable?

While unemployment remains high, growth in employee compensation is expected to be low. And corporate taxes are likely to remain low until there is a major overhaul of the tax code (don’t hold your breath). So market capitalization is likely to remain strong for at least the next two to three years.

Australia

Australian margin debt is declining steeply as a percentage of GDP.

ASX Margin Debt to GDP

ASX market capitalisation as a percentage of GDP is also trending lower. The 2009/2012 lows should provide a sound base for further gains.

ASX Market Cap to GDP

The ASX is muted compared to US markets, but offers value in the long-term.

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Aussie down-trend

The Aussie Dollar found short-term support at $0.91 against the greenback. Expect a rally to test the descending trendline and resistance at $0.93. Respect of the trendline is likely and would warn of a down-swing to primary support at $0.89. The peak below zero on 63-day Twiggs Momentum signals continuation of the down-trend. Breakout above $0.93 is unlikely, but would suggest that the down-trend is ending. The RBA needs a weaker Aussie Dollar, without lowering interest rates, and will do all it can to assist the decline.

Aussie Dollar

* Target calculation: 0.91 – ( 0.93 – 0.91 ) = 0.89

Aussie breach of support at $1.12 against its Kiwi neighbor, warns of a primary down-trend. Retracement is likely to respect the new resistance level and would confirm the down-trend. Follow-through above $1.13 is unlikely but would warn of a bear trap. The peak below zero on 63-day Twiggs Momentum signals continuation of the down-trend. Target for the decline is $1.08*.

Kiwi Dollar

* Target calculations: 1.12 – ( 1.16 – 1.12 ) = 1.08

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Gold: $1200 next?

Spot gold consolidating in a narrow band below support at $1250/ounce suggests a test of $1200. The 63-day Twiggs Momentum peak below zero strengthens the signal. Breakout below the June low ($1200) would confirm a primary down-trend. Recovery above $1260 is unlikely, but would indicate a rally to $1350.

Spot Gold

* Target calculation: 1250 – ( 1350 – 1250 ) = 1150

Silver broke through support at $20.50/ounce and is headed for a test of primary support at $18/ounce. Completion of a 13-week Twiggs Momentum peak below zero warns of a primary down-trend. Breach of primary support would confirm.

Spot Silver

Often a leading indicator of spot prices, the Gold Bugs Index, representing un-hedged gold stocks, broke primary support at 210 to signal a primary down-trend. Completion of a 13-week Twiggs Momentum peak below zero would strengthen the signal.

Gold Bugs Index

Dollar Index

The yield on ten-year Treasury Notes retreated below 2.75. Breakout would signal a fresh primary advance, with a target of 3.50 percent* (breakout above 3.00 percent would confirm). Reversal below the rising trendline is less likely, but would warn of trend weakness and another test of 2.50. Higher yields would help strengthen the dollar.

10-Year Treasury Yields

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

The Dollar Index retraced to test the new support level at 80.50. Completion of a 13-week Twiggs Momentum peak below zero would warn of a primary down-trend. Breach of primary support at 79 would confirm. Breakout above 81.50 remains as likely, however, and would indicate an advance to 84*.

Dollar Index

* Target calculation: 81.5 + ( 81.5 – 79 ) = 84

Higher interest rates and a stronger dollar would increase downward pressure on gold.

Crude Oil

Nymex crude is undergoing a strong correction and is likely to test primary support at $85/$86 per barrel. Reversal of 13-Week Twiggs Momentum below zero warns of a primary down-trend. Brent crude is rising despite an easing of tensions with Iran. The primary reason for the divergence is supply. Iain Armstrong, oil analyst at Brewin Dolphin, earlier in the year explained that Brent is effectively a global brand — affected by global issues of supply/demand — while Nymex is a “local” brand and benefits from plentiful shale oil in the US.

Brent Crude and Nymex Crude

Commodity Prices

A resurgent Shanghai Composite Index is supporting commodity prices. Recovery of the Dow Jones-UBS Commodity Index above 126 would indicate a bear trap. A peak below zero on 13-week Twiggs Momentum, however, warns of a continuing down-trend. Respect of the resistance level, as indicated by follow-through below 122, would signal a decline to 114*.

Dow Jones UBS Commodities Index

* Target calculation: 124 – ( 134 – 124 ) = 114

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Muted ASX response to Asian bulls

Japan’s Nikkei 225 is likely to retrace to test its new support level at 15000. Respect would negate the bearish divergence on 13-week Twiggs Money Flow and confirm the long-term target of 17500*. Reversal below the rising trendline, however, would warn of a correction to 12500/13000.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 12500 ) = 17500

Narrow consolidation at China’s Shanghai Composite upper trend channel suggests continuation of the rally. Follow-through above 2210 would signal a test of 2270. Reversal below 2180 is less likely, but would indicate a down-swing to the lower channel. The 21-day Twiggs Money Flow trough above zero suggests medium-term buying pressure. Breakout above 2270 would signal a primary up-trend.

Shanghai Composite Index

Hong Kong’s Hang Seng is likely to retrace to test the new support level at 23500. Respect would confirm an advance to 25500*, signaling a primary up-trend. Follow-through above 24000 would confirm. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Reversal below 23500 is unlikely, but would warn of another test of 22500.

Hang Seng Index

* Target calculation: 23500 + ( 23500 – 21500 ) = 25500

India’s Sensex is again rallying after testing support at 20200. Breakout above its 2007/2010 highs at 21000 would confirm the primary advance, offering a target of 24000*. Another 13-week Twiggs Money Flow trough above zero would strengthen the signal. Reversal below 20200 is unlikely, but would warn of a correction to the rising trendline and primary support at 18000.

Sensex

* Target calculation: 21000 + ( 21000 – 18000 ) = 24000

Singapore’s Straits Times Index is struggling with resistance at 3250/3300. 13-Week Twiggs Money Flow below zero continues to warn of selling pressure. Breakout above 3300 is unlikely at present, but would signal a primary advance to 3600*. Reversal below 3120 would warn of another correction to primary support at 3000.

Straits Times Index

* Target calculation: 3300 + ( 3300 – 3000 ) = 3600

The ASX 200 continues to encounter selling pressure, with 21-day Twiggs Money Flow below zero. Reversal below the rising trendline and short-term support at 5290 would signal a correction. Breakout above 5400 is less likely, but would suggest an advance to 5600*. Follow-through above 5450 would confirm.

ASX 200

* Target calculation: 5450 + ( 5450 – 5300 ) = 5600

Readings on the ASX 200 VIX index are more bullish, suggesting relatively low market risk.

ASX 200

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