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

ASX 200 breaks resistance

The ASX 200 broke resistance at 5340/5350 in the first hour of trading this morning. Expect retracement to test the new support level on the hourly chart. Respect would confirm that the correction is over.

ASX 200

Hang Seng falters

Hong Kong’s Hang Seng Index is testing support at 23000. Reversal of 13-week Twiggs Money Flow below zero warns of a primary down-trend. Breach of support at 21000 would confirm.

Hang Seng Index

China’s Shanghai Composite Index continues to test its new support level at 2340. Respect would suggest an advance to 2500*. Breach would warn of a correction. I remain wary because of weakness in Hong Kong.

Shanghai Composite Index

* Target calculation: 2250 + ( 2250 – 2000 ) = 2500

India’s Sensex tests support

India’s Sensex penetrated its secondary rising trendline, warning of a correction. Bearish divergence on 13-week Twiggs Money Flow continues to warn of selling pressure. Breach of support at 26000 would offer a target of 25000 and the primary trendline. Respect of support and follow-through above the descending flag would indicate an advance to 28000*.

Sensex

* Target calculation: 27000 + ( 27000 – 26000 ) = 28000

Aussie Dollar and ASX find support

The Australian Dollar is testing resistance at $0.8900, but the primary trend is down. Breakout would suggest a bear rally, while respect would warn of another decline. 13-Week Twiggs Momentum below zero indicates a primary down-trend. Breach of primary support at $0.8650 would offer a target of $0.80*.

AUDUSD

* Target calculation: 0.87 – ( 0.94 – 0.87 ) = 0.80

ASX 200 penetrated its descending trendline, suggesting the correction is over. The index would be further buoyed by a rally of the Aussie Dollar. Bullish divergence and recovery of 21-day Twiggs Money Flow above zero indicates medium-term buying pressure. Breach of resistance at 5350 would strengthen the bull signal. Reversal below 5250, however, would warn of a test of primary support at 5000/5050.

ASX 200

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

The ASX 200 VIX at 15.5 continues to indicate low risk typical of a bull market. A significantly higher trough is unlikely, but would be a bearish sign.

ASX 200

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

Robert Shiller’s CAPE

I have long held the view that using Robert Shiller’s CAPE to determine whether stocks are under- or over-priced is misleading. Average levels for CAPE have shifted over time, and one cannot rely solely on historic highs and lows as a measure of whether the market is over-bought or over-sold.

So I was interested to learn that Robert Shiller currently maintains 50% of his investment portfolio in stocks. From an interview with Jason Zweig at WSJ:

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.

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

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

ASX and Aussie Dollar rally

The Australian Dollar found support at $0.8650/$0.8700. Respect of resistance at $0.8900, however, would suggest another decline. 13-Week Twiggs Momentum below zero warns of a primary down-trend. Breach of primary support at $0.8650 would offer a target of $0.80*.

AUDUSD

* Target calculation: 0.87 – ( 0.94 – 0.87 ) = 0.80

The ASX 200 rallied in line with short-term buoyancy on the Aussie Dollar. Bullish divergence on 21-day Twiggs Money Flow and recovery above zero indicates medium-term buying pressure. But the trend remains down and failure of (short-term) support at 5120 would warn of a test of primary support at 5000/5050. Breach of the declining trendline is unlikely, but would suggest that the correction is ending. Follow-through above 5350 would confirm.

ASX 200

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

The ASX 200 VIX continues to indicate low risk typical of a bull market.

ASX 200