Author: ColinTwiggs

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What a real bounce looks like

Question from Flint:

If this is an example of a dead cat bounce then what would we look for in a real bounce… .

The best example I can find is the mini-crash of October 1997. The Dow gapped down sharply following a fall in Asian markets, but met with strong buying support the next day. The total correction of 12% did not reach the 6400 level from start of the year. The long-term rising trendline was not tested and 63-Day Twiggs Momentum declined but failed to break below zero. Volume doubled in the week following the crash, confirming buying support.

Dow Jones Industrial Average 1997 Mini-Crash

The 2011 crash is not specific to one region as with the 1997 Asian crisis. The index had not made much progress for the year and the fall of 17% broke well below the starting level of 11500. The long-term rising trendline was breached and 63-Day Twiggs Momentum dropped sharply below zero. Volume doubled in the week following the crash, as in 1997, but this is a completely different scenario: it would take similar volume for 4/5 successive weeks to stop the bear market in its tracks.

Dow Jones Industrial Average 2011 Crash

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China bucks the trend

Despite the global bear market, Dow Jones Shanghai Index rallied above resistance at 330, with bullish divergence on 21-day Twiggs Money Flow indicating buying pressure. Expect a test of 360. In the long term, breakout above 360 would signal reversal to an up-trend.

Dow Jones Shanghai Index

* Target calculation: 330 – ( 360 – 330 ) = 300

Dow Jones HongKong Index displays a similar bullish divergence on 21-day Twiggs Money Flow, indicating buying pressure. Resistance at 450 is unlikely to hold, leading to a re-test of 480.

Dow Jones HongKong Index

* Target calculation: 450 – ( 480 – 450 ) = 420

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Japan, Korea hesitate

The Dow Jones Japan Index ($JPDOW) formed a small pennant consolidation, favoring continuation of the down-trend. Follow-through below 50.50 would confirm, whereas recovery above 52.00 would indicate retracement to test 53.30. 21-Day Twiggs Money Flow deep below zero warns of strong selling pressure.

Dow Jones Japan Index

* Target calculation: 54 – ( 58 – 54 ) = 50

DJ South Korea encountered resistance below 400, indicated by a red candle and up-tick in volume. Reversal below 360 would warn of another down-swing.

Dow Jones South Korea Index

* Target calculation: 370 – ( 430 – 370 ) = 310

The Dow Jones Taiwan Index fared slightly better, advancing to 186 on light volume. Follow-through on Tuesday would confirm a rally to test resistance at 200.

Dow Jones Taiwan Index

* Target calculation: 196 – ( 216 – 196 ) = 176

I have used the Dow Jones Index Series as data is 15-minute delayed. I will update the better-known Nikkei and KOSPI indices when these are updated at 7:00 p.m. ET.

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ASX 200 rallies on declining volume

The ASX 200 is headed for a test of 4500. Declining volume is typical of such a rally; a surge would indicate increased selling pressure — especially when accompanied by a narrow range or red candle. Expect resistance at 4500 to hold, followed by another test of support at 4000.

ASX 200 Index

* Target calculation: 4000 – ( 4500 – 4000 ) = 3500

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Buying support for resources

The Bovespa Index rallied strongly off support at 48000 and is likely to test resistance at 58000. Breach of the descending trendline on 13-week Twiggs Money Flow indicates short-term buying pressure. But we are in a bear market and this is unlikely to change in the near future.

Brazil Bovespa Index

* Target calculation: 58000 – ( 72000 – 58000 ) = 44000

Another resource-rich market, the JSE, signals medium-term buying support with a bullish divergence on 13-week Twiggs Money Flow. Recovery above 30000 is likely, but we remain in a bear market and can expect a future test of support at 27000*.

South Africa JSE Overall Index

* Target calculation: 30000 – ( 33000 – 30000 ) = 27000

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Early “Denial” stage in Europe

The FTSE 100 closed above 5300, indicating a rally to test resistance at 5600. This behavior is again typical of the early “denial” stage of a bear market. Resistance is likely to hold, leading to another test of 5000. In the longer term, failure of support at 5000 would offer a target of 4400*.

FTSE 100 index

* Target calculation: 5000 – ( 5600 – 5000 ) = 4400

The DAX rallied strongly, headed for a test of 6500 on the weekly chart. The bear market is not over, even if resistance is penetrated.

German DAX Index

* Target calculation: 6500 – ( 7500 – 6500 ) = 5500

A CAC-40 recovery above 3250 would signal a rally to test 3700. Expect resistance to hold, followed by another test of 3000*.

France CAC-40 Index

* Target calculation: 3000 – ( 3700 – 3000 ) = 2300

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Dead cat bounce

We have a clear bear market signal across a wide range of indexes and current behavior is typical of the early “Denial” stage. If we look at 2008, the Dow broke primary support at 12800 in January, falling sharply before encountering strong buying support at 12000, signaled by weekly volume over 1.5 billion [1]. The rally failed, but buyers again snapped up bargains, with weekly volumes [2] above 1.5 billion. A third rally even penetrated resistance, but buyers soon lost interest and the next down-swing [3] led to a strong bear market over the next year.

Current buying support, with weekly volume close to 2 billion [4] is typical of the first stage of a bear market . Expect a rally to test 12000 followed by another test of  support between 10600 and 10800.

Dow Jones Industrial Average

* Target calculation: 10800 – (11800 – 10800 ) = 9800

Friday’s doji candlestick on the S&P 500 Index indicates hesitancy, and 21-Day Twiggs Money Flow below zero warns of selling pressure. Breakout above 1200 would indicate a similar rally to test 1260, but reversal below 1100 would signal another down-swing.

S&P500 Index

* Target calculation: 1125 – ( 1250 – 1125 ) = 1000

The Nasdaq 100 Index displays stronger buying support, as evidenced by the long tail and small bullish divergence on the weekly chart. Expect penetration of resistance at 2200, but the primary trend remains downward and reversal below 2200 would confirm.

Nasdaq 100 Index

* Target calculation: 2200 – ( 2400 – 2200 ) = 2000

For those who follow classic Dow Theory, the Transport Index broke below 5000, confirming the bear market. 63-Day Momentum further strengthened the signal with a strong fall below zero.

Dow Jones Transport Average

* Target calculation: 5000 – ( 5600 – 5000 ) = 4400

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Jermy Grantham: Danger – Children at Play

The main long-term risk is that after two massive bubbles and two equally massive resurrection programs, the Fed may be out of ammunition. Should more building blocks fall (government bond downgrade and further market declines have missed my deadline) and a serious global double-dip develop,  then the pattern of market behavior this time may be more historically typical. That is, instead of quickly recovering, markets will become cheap and stay below long-term averages for several years as was the case pre-Greenspan.

Jeremy Grantham: Danger – Children at Play (Scribd).

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Italy, EMU and the Evil Eye – Telegraph Blogs

The deeper issue is that Italy is 20pc over-valued within EMU and is now trapped in very low growth and a stubborn current account deficit. This is a slow rot. It is directly linked to EMU membership.

Italy could have used the decade and half since Euroland’s currencies were locked together after Maastricht to free up labour markets and carry out the `micro’ reforms needed to make EMU viable. It did not do so. It is very late in the day now.

via Italy, EMU and the Evil Eye – Ambrose Evans-Pritchard Telegraph Blogs.

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