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

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

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

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

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.

Read more at Roiling the Waters.

An appeaser is one who feeds a crocodile, hoping it will eat him last.
~ Winston Churchill

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

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

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:

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

Weakening yen boosts Japanese stocks

The US Dollar retreated to test new support at ¥102 to ¥103. Respect is likely and would signal an advance to ¥110*. A rising Dollar/Yen exchange rate will assist Japanese stocks.

Nikkei 225

* Target calculation: 106 + ( 106 – 102 ) = 110

The Nikkei 225 retreated below its new support level at 16000, but respect of the rising trendline would confirm a healthy up-trend. 13-week Twiggs Money Flow holding above zero suggests healthy buying pressure. Reversal below 15000 is unlikely but would indicate a strong correction.

Nikkei 225

* Target calculation: 16000 + ( 16000 – 15000 ) = 17000

Footsie breaks out

The FTSE 100 broke resistance at 6800, indicating a test of long-term resistance at 6950/7000. Completion of another 13-week Twiggs Money Flow trough above zero would signal long-term buying pressure. Retracement to test the new support level at 6800 is likely. Respect would strengthen the bull signal. Reversal below 6700 is unlikely, but would warn of a correction.

FTSE 100

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