Author: Colin Twiggs

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Australia: Housing market weakens

Housing credit growth is at its lowest level in over 30 years: lower than the dip of the early 1980s and the crash of 1987. The current rate of growth is barely sufficient to match already depressed construction rates for new homes*. The decline should see a gradual softening of housing prices, accelerating if there are any further falls in housing credit growth.

RBA Housing Credit Growth

*Housing finance, for both owner-occupied and investor housing, totaled $59.8 billion for the year ended June 2012 according to the RBA, while residential construction — excluding land — was $44.2 billion according to ABS estimates.

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ASX 200: Australian miners hurt by falling iron ore prices

The ASX is feeling the effect of slowing manufacturing in China, with falling iron ore prices causing weakness in RIO, FMG and BHP. Rio Tinto is testing support at $50, while steeply falling 13-week Twiggs Money Flow warns of strong selling pressure.

Rio Tinto Weekly

Impact on the ASX 200 index is more diluted but 13-week Twiggs Money Flow below zero again warns of selling pressure. Breakout above 4400 is unlikely in the present climate.

ASX 200 Index Weekly

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Asia: China & Japan bearish, India hesitant

China’s official manufacturing PMI fell to a nine-month low in August, below 50 at 49.2; steel prices are at their lowest level since 2009 and rail cargo volumes have experienced their sharpest fall since 2008. In the circumstances, stocks have held up surprisingly well, with a gradual rather than vertical descent. The Shenzhen Composite index is headed for a test of support at 800 and declining 63-day Twiggs Momentum below zero indicates a primary down-trend, but the index is still a long way above its 2008 low of 450.

Shanghai Composite Index

* Target calculation: 800 – ( 1000 – 800 ) = 600

The Shanghai Composite is a lot closer to its 2008 low of 1660. 13-Week Twiggs Money Flow below zero indicates selling pressure and follow-through below 2100 offers a target of 1800*.

Shanghai Composite Index

* Target calculation: 2150 – ( 2500 – 2150 ) = 1800

Hong Kong’s Hang Seng is drifting sideways, approaching the apex of its large triangle, but failure of 63-day Twiggs Momentum to cross above zero warns of downside risk. Breach of primary support at 18000 would signal a decline to 16000*.

Hang Seng Index

* Target calculation: 18 – ( 20 – 18 ) = 16

India’s Sensex retreated below its new support level at 17500, warning of a false break. Penetration of the rising trendline would suggest a bull trap, while respect would test 18500*. Reversal of 13-week Twiggs Money Flow below zero would indicate selling pressure.

Sensex Index

* Target calculation: 17.5 + ( 17.5 – 16.5 ) = 18.5

The NSE Nifty Index also retreated below its new support level and 63-day Twiggs Momentum is above zero. Respect of the rising trendline would indicate a test of 5600, while penetration would warn of a bull trap.

Sensex Index

Singapore’s Straits Times Index is retracing to test support at 3000. The up-trend appears weak and failure of support would signal a test of the lower trend channel. It is unclear whether 63-day Twiggs Momentum will oscillate around zero, indicating a ranging market, or above zero, indicating a healthy up-trend. The next trough should clarify this: respect of zero indicating a primary up-trend.

Singapore Straits Times Index

Japan’s Nikkei 225 index retreated below 9000, indicating a false breakout. Matching peaks below zero on 63-day Twiggs Momentum and 13-Week Twiggs Money Flow warn of a strong down-trend. Failure of primary support at 8200 would confirm.

Nikkei 225 Index

South Korea’s Seoul Composite index retraced to test support after breakout above 1900. Declining peaks on 13-Week Twiggs Money Flow depict rising selling pressure. Failure of support at 1900 would suggest another test of primary support at 1750.

Seoul Composite Index

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European buying pressure

The FTSE 100 is testing medium-term support at 5700. Respect would test resistance at 6000/6100*, while failure would warn of a correction. A 63-day Twiggs Momentum trough above zero would strengthen the bull signal. Breakout above 6100 is still some way off but would offer a long-term target of 6750.

FTSE 100 Index

* Target calculation: 5900 + ( 5900 – 5700 ) = 6100

Dow Jones Europe Index is consolidating below 250 after breaking resistance at 240. Follow-through above 250 would signal an advance to the 2012 high of 265. Bullish divergence on 63-day Twiggs Momentum suggests a primary up-trend, but this would require a trough above zero — or breakout above 265 on the weekly chart — to confirm.

Dow Jones Europe Index

* Target calculation: 260 + ( 260 – 210 ) = 310

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Canada: TSX60 resistance

The TSX 60 respected resistance at 700 on the weekly chart. Penetration of the descending trendline suggests that a bottom is forming, but failure to break 700 would mean a re-test of primary support at 640. Money Flow remains strong but formation of a peak below zero on 63-day Twiggs Momentum would warn of continuation of the primary down-trend.

TSX 60 Index

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Lackluster S&P 500 and Dow Industrials

The S&P 500 Index is currently consolidating between 1400 and 1420. Lackluster momentum suggests another correction; confirmed if Twiggs Momentum (63-day) reverses below zero. Breakout above 1420, however, would signal an advance to the 2007 high of 1560*.

S&P 500 Index

* Target calculation: 1420 + ( 1420 – 1280 ) = 1560

The Dow Jones Industrial Average is similarly testing support at 13000 on the weekly chart. Downward breakout would penetrate the rising trendline, suggesting another correction. Weak volume signals a lack of interest from buyers rather than resistance from sellers. Upward breakout above 13300 is unlikely, but would indicate an advance to the 2007 high of 14200.

Dow Jones Industrial Average

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The Fed and the impact of QE

Unless the Fed announces a new round of quantitative easing before the November election, I do not see the S&P 500 this year advancing past its 2007 high of 1560.

The market generally overreacts to balance sheet expansion by the Fed, anticipating higher inflation. What it seems to overlook is the deflationary effect of private sector deleveraging which should enable the Fed to maneuver a soft landing.

The real impact of Fed policy is to subsidize debtors and starve creditors — private investors and pension funds — of yield. The net result is that investors are driven to higher yields — accompanied by higher risk — which is likely to cause more pain at the next down-turn.

The only way to compensate creditors would be to lower taxes on interest, but I question how high this would rank in either party’s priorities.

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Bernanke Speech Makes Detailed Case for Fed Action – NYTimes.com

The Fed Chairman hinted at further measures to stimulate employment but is still playing his cards close to his chest as to when and how much:

“It is important to achieve further progress, particularly in the labor market,” Mr. Bernanke said. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

via Bernanke Speech Makes Detailed Case for Fed Action – NYTimes.com.

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Forex: Euro, Pound Sterling, Canadian Loonie, Australian Dollar and Japanese Yen

A monthly chart shows the euro testing long-term support at $1.20 against the greenback. Recovery above the steeply descending trendline would indicate another test of the upper triangle border, while failure of support would indicate long-term re-alignment. Indications, from president Mario Draghi, that the ECB will further expand its balance sheet explains euro weakness, but similar moves by the Fed would restore the status quo.

Euro/USD Monthly

On the daily chart, the Euro is headed for resistance at $1.275. The primary trend remains downward, but breach of the descending trendline indicates it is losing momentum. Failure of support at $1.240 and penetration of the rising trendline, however, would indicate another test of primary support at $1.205.

Euro/USD

Pound Sterling formed a descending triangle, testing support at €1.255 against the Euro. Failure of support would indicate a test of €1.225. 63-Day Twiggs Momentum is falling, but continues to indicate a primary up-trend.

Pound Sterling/Euro

* Target calculation: 1.255 – ( 1.285 – 1.255 ) = 1.225

Canada’s Loonie is consolidating in a narrow band below resistance against the greenback at $1.02.  Breakout above resistance at $1.02 would indicate an advance to $1.06, while reversal below parity would test $0.95/$0.96.

Canadian Loonie/Aussie Dollar

The Aussie Dollar is retracing to find support against the greenback, with $1.02 a likely target. Respect would suggest another test of $1.08. Narrow oscillation of 63-day Twiggs Momentum around zero would suggest a ranging market.

Aussie Dollar/USD

Australian Dollar appreciation against the yen is slowing. Reversal below ¥79.50 would indicate another test of primary support at ¥74.

US Dollar/Japanese Yen

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Gold and dollar test support

The Dollar Index is testing primary support at 81.00/81.50. Failure would signal reversal to a primary down-trend. Reversal of 63-day Twiggs Momentum below zero would also suggest a reversal, while respect of the zero line would indicate continuation of the primary up-trend.

US Dollar Index

* Target calculation: 82 + ( 82 – 78 ) = 86

Spot Gold is retracing to test its new support level after breaking resistance at $1650 per ounce. Respect of $1640 would confirm the primary up-trend. Respect of the zero line by 63-day Twiggs Momentum would strengthen the signal. Reversal below $1640 is unlikely but would indicate a false signal and re-test primary support at $1525.

Spot Gold

* Target calculation: 1650 + ( 1650 – 1500 ) = 1800

The CRB Commodities Index is retracing after breaking medium-term resistance at 305. Recovery of 63-Day Twiggs Momentum above zero suggests a trend reversal, but only a trough above zero would confirm.

CRB Commodities Index

Brent Crude retreated from resistance at $115 per barrel. Reversal below $108 is unlikely, but would signal another test of support at $100. Breakout would indicate a test of the March high at $126. 63-Day Twiggs Momentum recovery above zero would strengthen the bull signal.

ICE Brent Crude Afternoon Markers

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