By Colin Twiggs
September 6, 4:00 a.m. ET (6:00 p.m. AET)
Students of astronomy will tell you that a red star, far from indicating heat, is cooling appreciably. While its diameter may expand, its core is contracting and its temperature falling. Eventually it will either explode or shrink to become a dwarf star.
Now that I have you wondering whether you are reading the right newsletter, we can return to the global economy. We continue to receive reports of stellar GDP growth in China, but the market is warning that their economy is slowing. The Shanghai Composite Index has fallen more than 60 percent from its peak and the Hang Seng almost 40 percent. When an over-heated economy contracts, cracks soon appear. And a crash inevitably follows — normally led by an over-extended banking sector. The latest economic miracle may well follow earlier precedents: Japan in the 1980s; the Asian tigers of the early 1990s; and the US economy of the 1920s.
The Dow broke medium-term support at 11300, signaling a test of primary support at 11000. Friday's long tail and slightly higher volume indicate some support, but this is unlikely to hold.
Long Term: Twiggs Money Flow (21-day) reversal below recent lows would warn of another primary down-swing. Penetration of support at 11000 would signal a test of support between 10000 and 9700.
The S&P 500 fall below 1260 signals a test of 12000. Twiggs Money Flow (13-week) indicates continued selling pressure. Failure of 12000 would confirm another primary down-swing — to test support between 11000 and 10700.
The Dow Transport Average is moving sideways despite weaker crude oil prices. A recession would affect both negatively. Fedex and UPS show similar hesitancy.
The Russell 2000 Small Caps index respected resistance at 765 and is headed for a test of primary support. The credit squeeze has affected small caps less than their larger cousins, with the ratio to the Russell 1000 continuing to climb.
The Nasdaq 100 broke support at 1800 and is headed for a test of primary support at 1700/1670. Twiggs Money Flow falling sharply below zero warns of selling pressure. Failure of primary support would offer a target of 1400, calculated as 1700 - (2000 - 1700).
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The TSX Composite fell through 13000 and is testing primary support at 12500/12600. Long tails, stronger volume and rising Twiggs Money Flow (21-day) indicate reasonable support. Expect retracement to test the new resistance level at 13000. Failure of primary support, on the other hand, would offer a target of 10000, calculated as 12500 - (15000 - 12500).
The FTSE 100 ended up forming a right-angled broadening wedge, a bearish formation, completed by breakout below 5300. Expect a test of support at 5100. Twiggs Money Flow (21-Day) crossing below zero would warn of another primary down-swing — confirmed if support at 5100 fails. The next target is 4800, the low of April 2005.
The German Dax is testing the band of support at 6100/6000. Failure would offer a target of 5300, the June 2006 low.
The Sensex is consolidating between 14000 and 15000. Breakout will indicate the future primary trend direction. Twiggs Money Flow (21-day) holding above zero signals buying pressure, but the 13-week indicator suggests that sellers dominate in the long-term.
The Nikkei 225 is headed for a test of primary support at 12000/11800. Twiggs Money Flow signals continued selling pressure, increasing the likelihood that primary support will fail. Failure would offer a target of 10000, calculated as 12000 - (14000 - 12000).
The Hang Seng feinted back above 21000 before reversing sharply. Expect some support at 19000, the March 2007 low, but the target is 16000; calculated as 21000 - (26000 - 21000). Twiggs Money Flow confirms long and short-term selling pressure.
The Shanghai Composite broke short-term support at 2300 and is headed for the medium-term target of 2000. Twiggs Money Flow (21-day) oscillating below zero confirms selling pressure.
The All Ordinaries continues to consolidate between 4900 and 5200. Friday's long tail and rising volume indicate support at 4900. Expect short-term consolidation or retracement.
Long Term: We remain in the middle of a bear market and support at 4900 is not likely to hold. Failure would offer a target of 4300, the October 2005 low. Twiggs Money Flow crossing below zero would strengthen the signal.
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