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

DAX heading for 10000

Germany’s DAX broke resistance at 9600, heading for the psychological barrier of 10000. Reversal below the secondary trendline is unlikely, but would warn of a correction. Completion of another 13-week Twiggs Money Flow high above zero would signal strong long-term buying pressure.

DAX

* Target calculation: 9400 + ( 9400 – 9000 ) = 9800

Low DAX Volatility suggests a bull market.

DAX

European markets bullish despite weak euro

The Euro penetrated its rising trendline, warning of a correction. Breach of primary support at $1.33 is unlikely, but would signal a reversal.

Euro

* Target calculation: 1.38 + ( 1.38 – 1.33 ) = 1.43

Dow Jones Euro Stoxx 50 appears undeterred, following through above resistance at 3100 to signal an advance to 3350*. 13-week Twiggs Momentum oscillating above zero suggests a healthy up-trend. Breach of the secondary trendline is unlikely, but would warn of a correction.

Dow Jones Euro Stoxx 50

* Target calculation: 3100 + ( 3100 – 2850 ) = 3350

Canada: Bull market

Canada’s TSX 60 is heading for a test of resistance at the 2011 high of 820* after successfully testing its new support level at 780. Rising 13-week Twiggs Money Flow suggests strong buying pressure. Breach of the rising trendline is unlikely, but would warn of a correction.

TSX 60

* Target calculation: 780 + ( 780 – 740 ) = 820

Declining TSX 60 VIX, below 20, flags a bull market.

TSX 60 VIX

Bull market but correction overdue

Both the S&P 500 and Nasdaq 100 have exceeded their targets. Absence of a significant correction for several months indicates extreme bullishness, but makes the advance more precarious as buyer/seller imbalances grow.

The S&P 500 is testing medium-term resistance at 1850. Breakout would confirm a target of 1900*. Respect is less likely, but would warn of a correction if followed by reversal below 1810. Rising 21-day Twiggs Money Flow suggests (short-term) buying pressure, but reversal below the rising trendline would warn of medium-term bearishness.

S&P 500

* Target calculation: 1850 + ( 1850 – 1800 ) = 1900

Declining CBOE Volatility Index (VIX) readings for the S&P 500 continue to indicate a bull market.

VIX Index

The Nasdaq 100 is similarly testing resistance at 3600. Twiggs Money Flow troughs high above the zero line indicate strong buying pressure. Absence of a significant correction makes the advance more precarious, but the imbalance can endure for several months.

Nasdaq 100

* Target calculation: 3600 + ( 3600 – 3500 ) = 3700