Category: US & Canada

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October correction nearing end

  • DAX and FTSE in a down-trend
  • China and Hong Kong retreat
  • US stocks remain in a bull market
  • ASX ends correction

The new reporting season is under way and fund managers are now looking for opportunities rather than selling off under-performers.

The S&P 500 broke resistance at 1900 and 1925. Penetration of the descending trendline suggests that the October correction is over. Recovery of 21-Day Twiggs Money Flow above zero indicates medium-term buying pressure. Expect a test of resistance at 2000 followed by consolidation or retracement to confirm support at 1925. Narrow consolidation below 2000 would be a bullish sign.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1850 ) = 2150

CBOE Volatility Index (VIX) at 16 again indicates low risk typical of a bull market.

S&P 500 VIX

The Nasdaq 100 recovered above resistance at 4000, indicating a fresh advance. Penetration of the descending trendline signals that the correction is over. Completion of a 13-week Twiggs Money Flow trough high above zero would indicate long-term buying pressure. Reversal below 4000 is unlikely, but would warn of another test of support.

Nasdaq 100

* Target calculation: 4100 + ( 4100 – 3800 ) = 4400

Dow Jones Euro Stoxx 50 recovered above its former primary support level at 3000, suggesting a bear trap. The primary trend remains downward, but recovery of 13-week Twiggs Money Flow above zero would suggest another test of 3300.

Dow Jones Euro Stoxx 50

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

China’s Shanghai Composite Index retreated below support at 2340/2350 and the rising trendline, warning of a correction. A 13-week Twiggs Money Flow trough above zero would confirm the primary up-trend, while reversal below zero would warn of a bear market.

Shanghai Composite Index

The ASX 200 recovered above resistance at 5250 and 5350 and the descending trendline, indicating that the correction is over. Breach of resistance at 5450 would signal another test of 5650. Bullish divergence and rising 21-day Twiggs Money Flow (above zero) indicate medium-term buying pressure. Reversal below 5350 is unlikely, but would indicate another test of 5120.

ASX 200

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Treasury yields fall and the Dollar finds support

The yield on ten-year Treasury Notes is in a primary down-trend (since breaking support at 2.50%). Expect retracement to test resistance at 2.30%. Respect is likely and would indicate another test of primary support at 2.00%*. A 13-week Twiggs Momentum peak below zero signals bear strength. Recovery above 2.30 is unlikely, but would test the descending trendline and resistance at 2.50%.

10-Year Treasury Yields

* Target calculation: 2.30 – ( 2.60 – 2.30 ) = 2.00

Inflation expectations are falling, with the 5-year inflation breakeven rate (5-year treasury yields minus the 5-year TIPS rate) now close to 1.4%.

5-Year Inflation Breakeven Rate

The Dollar Index respected its new support level at 84.50. Recovery above 86.5 would confirm a primary advance and a target of 89*. Rising 13-week Twiggs Momentum suggests a healthy (primary) up-trend. Failure of support at 84.50 is unlikely, but would warn of a correction to the primary trendline.

Dollar Index

* Target calculation: 84 + ( 84 – 79 ) = 89.00

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Shots fired in parliament building, Ottawa [video]

The suspect had apparently already shot and killed a reservist soldier standing guard at the National War Memorial.

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Get Ready for Iraq War IV

Retired army officer John A. Nagl writes:

The United States is now at war in Iraq for the third time in my lifetime, and after being in the middle of the first two I’m planning to sit this one out.

The first Iraq war was necessary and conducted well, as wars go; the second was unnecessary and conducted poorly at first, but ended up in a reasonable place given what a fiasco it had been at the start. This third war was entirely preventable, caused by a premature departure of U.S. troops after the second. Although it’s too soon to say how it will turn out, it is not too early to say that unless we get the endgame right, the United States will fight yet another war in Iraq before too long.

Read more at Get Ready for Iraq War IV.

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Another bear trap?

Bellwether transport stock Fedex found support at $154, the long tail and rising 13-week Twiggs Money Flow indicating buying pressure. Expect a test of $165. Reversal below $150 is unlikely, but would warn of a test of primary support at $130. Continuation of the primary up-trend signals improvement for the broad economy.

Fedex

* Target calculation: 165 + ( 165 – 150 ) = 180

The S&P 500 is testing its new resistance level at 1900/1910. Last week’s long tail indicates short-term buying pressure but declining 13-week Twiggs Money Flow continues to warn of long-term selling pressure. Recovery above 1910 would suggest that the correction is over, while penetration of the descending trendline would strengthen the signal.

S&P 500

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

Someone asked why I felt the correction was over, when there are so many bearish signs on the charts. My answer in brief was:

  • Strong support on the Dow and S&P 500;
  • Breach of descending trendline on the ASX 200;
  • October sell-off nearing an end;
  • US reporting season has started and fund managers will revert to accumulation of stronger performing stocks.

I could have added that our market filters continue to indicate low to moderate risk.

I am also suspicious of breaks of support after the bear traps of 2010 and 2011.

S&P 500

Breaches are indicated by red arrows, recoveries by green.

S&P 500

Investors remain extremely skittish after the 2009 crash and likely to jump at shadows.

CBOE Volatility Index (VIX) has retreated below 20%, suggesting low risk typical of a bull market. Recovery above 20% is not likely, but a (significantly) higher trough would warn of rising risk.

VIX Index

The Nasdaq 100 rallied off support at 3700. Follow-through above 3900 would suggest another test of 4100. Recovery above 4000 and the descending trendline would strengthen the signal. Divergence on 13-week Twiggs Money Flow indicates mild selling pressure. Reversal below 3700 and the rising (secondary) trendline would warn of a test of primary support at 3400.

Nasdaq 100

* Target calculation: 3750 – ( 4100 – 3750 ) = 3400

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October sell-off: Drawing to a close?

  • DAX and FTSE find support, but remain in a down-trend
  • China is bullish, but Japan bearish
  • US stocks find support and continue to indicate a bull market
  • ASX respects primary support

The S&P 500 found support at 1820 and is testing resistance at 1900. Breach of resistance would suggest that the correction is over. 21-Day Twiggs Money Flow below zero, however, continues to warn of medium-term selling pressure. Respect of resistance is more likely, indicating another test of support at 1800*.

S&P 500 Index

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

CBOE Volatility Index (VIX) retreated to 22, indicating moderate risk, but nowhere near the 30+ levels typical of a bear market.

S&P 500 VIX

Dow Jones Industrial Average recovered above resistance (the former support level) at 16300, the long tail indicating short-term buying pressure. Follow-through above the descending trendline would signal that the correction is over. Recovery above the recent highs at 25% on 13-week Twiggs Money Flow would suggest that buyers have regained control.

Dow Jones Industrial Average

Germany’s DAX is retracing to test resistance at 9000. Respect would confirm a primary down-trend. 13-Week Twiggs Momentum below zero strengthens the bear signal. Target for the decline is 8000*. Recovery above 9000 remains unlikely, but would warn of a bear trap.

Dow Jones Euro Stoxx 50

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

The Footsie displays a similar long tail, indicating buying pressure. Recovery above 6500 is unlikely, but would warn of a bear trap. Respect of resistance would offer a target of 6000*.

FTSE 100 Index

* Target calculation: 6400 – ( 6800 – 6400 ) = 6000

China’s Shanghai Composite Index is testing support at 2340/2350. Breach would warn of a correction. But the primary up-trend remains and rising 13-week Twiggs Money Flow signals medium-term buying pressure.

Shanghai Composite Index

Japan’s Nikkei 225 Index plunged through support at 14800, warning of a test of primary support at 13900/14000. Reversal of 13-week Twiggs Money Flow below zero indicates (long-term) selling pressure.

Nikkei 225 Index

The ASX 200 recovered above resistance at 5250 and the descending trendline, suggesting that the correction is over. Bullish divergence and a rising 21-day Twiggs Money Flow (above zero) indicates medium-term buying pressure. Recovery above 5350 would confirm that buyers are back in control, while reversal below 5250 would indicate another test of 5000/5050.

ASX 200

* Target calculation: 5350 – ( 5650 – 5350 ) = 5050

ASX 200 VIX remains below 20, indicating low risk typical of a bull market.

ASX 200 VIX

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Treasury yields plunge

The yield on ten-year Treasury Notes broke primary support at 2.00%, plunging to a low of 1.86% in the morning before recovering to 2.10% at the close. Expect strong support at 2.00*. 13-Week Twiggs Momentum (below zero) has been warning of a primary down-trend for some time. Recovery above 2.30 is unlikely at present.

10-Year Treasury Yields

* Target calculation: 2.30 – ( 2.60 – 2.30 ) = 2.00

Falling inflation expectations are behind the drop, with the 5-year inflation breakeven rate — 5-year treasury yields minus the 5-year TIPS rate — making a new 2-year low.

5-Year Inflation Breakeven Rate

A falling dollar suggests that domestic purchases are driving the surge in Treasury prices, rather than international buyers. The Dollar Index is testing its new support level at 84.50. Respect would confirm a primary advance with a target of 89*. Rising 13-week Twiggs Momentum continues to indicate a healthy (primary) up-trend. Failure of support at 84.50 is unlikely, but breach of the secondary trendline would warn of a correction to the primary (trendline).

Dollar Index

* Target calculation: 84 + ( 84 – 79 ) = 89.00

Low interest rates strengthen demand for gold as they reduce the carrying cost.

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US stocks: Broad selling pressure

The S&P 500 broke through support at 1900, offering a target of 1800*. Decline of 21-day Twiggs Money Flow below zero warns of medium-term selling pressure. Recovery above 1910 is unlikely at present, but would suggest a bear trap.

S&P 500

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

CBOE Volatility Index (VIX) broke above 20%, but still indicates moderate risk. A break above 30% would suggest elevated risk.

VIX Index

Dow Jones Industrial Average is testing support at 16300. Breach would indicate a test of the (primary) rising trendline. Bearish divergence on 13-week Twiggs Money Flow continues to warn of selling pressure. Recovery above 16500 is less likely, but would suggest another rally.

Dow Jones Industrial Average

The Nasdaq 100 broke support at 3850. Follow-through below 3750 would confirm a target of primary support at 3400*. Divergence on 13-week Twiggs Money Flow indicates selling pressure. Respect of support at 3750 is unlikely, but recovery above 3850 would suggest another rally.

Nasdaq 100

* Target calculation: 3750 – ( 4100 – 3750 ) = 3400

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Robert Shiller maintains exposure to stocks | WSJ

Jason Zweig writes:

Many analysts have warned lately that Prof. Shiller’s long-term stock-pricing indicator [CAPE] is dangerously high by historical standards…..If only things were that simple, Prof. Shiller says. “The market is supposed to estimate the value of earnings,” he explains, “but the value of the earnings depends on people’s perception of what they can sell it again for” to other investors. So the long-term average is “highly psychological,” he says. “You can’t derive what it should be.” Even though the CAPE measure looks back to 1871, using data that predates the S&P 500, it is unstable. Over the 30 years ending in 1910, CAPE averaged 17; over the next three decades, 12.7; over the 30 years after that, 15.7. For the past three decades it has averaged 23.4. Today’s level “might be high relative to history,” Prof. Shiller says, “but how do we know that history hasn’t changed?” So, he says, CAPE “has more probability of predicting actual declines or dramatic increases” when the measure is at an “extreme high or extreme low.” …..Today’s level, Prof. Shiller argues, isn’t extreme enough to justify a strong conclusion. So, he says, he and his wife still have about 50% of their portfolio in stocks.

Read more at Robert Shiller on What to Watch in This Wild Market – MoneyBeat – WSJ.

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October sell-off continues

  • DAX and FTSE break support, signaling a down-trend
  • China is bullish, but rest of Asia is bearish
  • US stocks are correcting, but continue to indicate a bull market
  • ASX testing primary support

The quarter-end sell-off has been exacerbated by weakness in Europe.

Germany’s DAX broke primary support at 8900/9000, signaling a (primary) down-trend. Reversal of 13-week Twiggs Money Flow below zero strengthens the bear signal. Target for the decline is 8000*. Recovery above 9000 is unlikely, but would warn of a bear trap.

Dow Jones Euro Stoxx 50

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

The Footsie displays similar weakness, breaching primary support at 6400/6500. Target for the decline is 6000*. Recovery above 6500 is unlikely, but would warn of a bear trap.

FTSE 100 Index

* Target calculation: 6400 – ( 6800 – 6400 ) = 6000

China’s Shanghai Composite Index is holding above its new support at 2340/2350, but expect retracement to at least 2250 in response to US/European weakness.

Shanghai Composite Index

Japan’s Nikkei 225 Index broke medium-term support at 15500 and the rising trendline to warn of a correction. Reversal of 13-week Twiggs Money Flow below zero would strengthen the signal. Breach of 14800 would indicate a test of primary support at 14000.

Nikkei 225 Index

The S&P 500 is testing primary support at 1900. Declining 13-week Twiggs Money Flow warns of selling pressure. Reversal below zero would indicate a down-trend, offering a target of 1800*.

S&P 500 Index

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

CBOE Volatility Index (VIX) rose to above 20, indicating moderate risk, but nowhere near the levels typical of a bear market.

S&P 500 VIX

The ASX 200 broke support at 5250/5300, suggesting a test of long-term support at 5000. Declining 13-week Twiggs Money Flow below zero indicates strong selling pressure. Recovery above 5350 is unlikely, but would suggest that the correction is over.

ASX 200

* Target calculation: 5350 – ( 5700 – 5350 ) = 5000

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