Dow 10000 & Quarter-End Correction
By Colin Twiggs
September 18, 10:00 p.m. ET (12:00 noon AET)
I will be taking a short break next week, so my next newsletter will be on Thursday.
We are approaching the end of the third quarter, with risk of a secondary correction elevated over the next four weeks. The Dow is also approaching a key resistance level at 10000, increasing the likelihood of a correction even further. Failure to correct over the next 4 weeks, however, would signal unusual buying pressure typical of a runaway trend (i.e. the start of another dangerous bubble).
The Baltic Dry Index is testing support at 2300/2400; failure would indicate another test of the lower channel border. The index reflects bulk commodity shipping costs and further weakness would be bearish for resources stocks.
The RJ/CRB Commodities Index gives a conflicting signal, however, breaking through the descending trendline to warn that the secondary correction is weakening. Respect of support at 250 would indicate the start of a new primary advance; and a rise above 270 would confirm, offering a target of 290*. Reversal below 247, however, would signal continuation of the correction; and failure of 230, a primary down-trend.
* Target calculation: 270 + ( 270 - 250 ) = 290
The Dow is headed for a test of the upper trend channel and key resistance level at 10000*. Reversal would indicates a secondary correction to test the lower trend channel — and support at 9000. Rising Twiggs Money Flow (13-day) signals unusual buying pressure, but keep a lookout for bearish divergence over the next four weeks.
* Target calculation: 9600 + ( 9600 - 9200 ) = 10000
Note that the trend channel above is drawn around a linear regression line, but with upper and lower channels drawn at separate distances, to enclose all price action. This is done with the Raff Regression Channel [R] on the toolbar: drag the channel line that is wide of price action (normally the upper channel in an up-trend) towards the center line until it intersects with the nearest peak.
The trend channel below is drawn as a Standard Deviaion Channel, as I normally use, but drawn from the point of breakout above the previous high, rather than from the earlier low. I often find that this better depicts trend momentum, which frequently changes at the above-mentioned breakout point. Reversal below the lower channel line (around 9600) would warn of a secondary correction. Abnormal volume is attributable to triple-witching hour — the third Friday in the last month of each quarter (March, June, September and December), when options and futures contracts expire.
The S&P 500 is headed for a test of 1100*. Rising Twiggs Money Flow (13-week) indicates long-term buying pressure similar to the Dow, but mild bearish divergence on the shorter-term 21-Day index warns of immediate resistance. Reversal below the lower trend channel would warn of a secondary correction.
* Target calculation: 1000 + ( 1000 - 900 ) = 1100
The Dow Transport Average, UPS and Fedex are all in a primary up-trend — the best signal yet that economic activity is improving. FedEx Chief Executive Frederick W. Smith, during a conference call Thursday, said that a number of "encouraging signs" show the downturn has ended (WSJ).
The Nasdaq 100 broke out of its broadening top, signaling an advance to 1900*. But first expect retracement to test the new support level at 1700. Rising Twiggs Money Flow (21-day) signals buying pressure.
* Target calculation: 1700 + ( 1600 - 1400 ) = 1900
The TSX Composite is headed for a test of the upper trend channel around 12000*. Rising Twiggs Money Flow (13-week) indicates long-term buying pressure. Failure of support at 11000 is unlikely, but would warn of a secondary correction.
* Target calculation: 11000 + ( 11000 - 10000 ) = 12000
Manage Your Market Risk
Colin Twiggs' weekly review of macro-economic and technical indicators will help you identify market risk & improve your timing.
Join our free Trading Diary mailing list with over 140,000 subscribers.
The FTSE 100 broke through resistance at 5000, headed for a test of the upper trend channel. Rising Twiggs Money Flow (13-week) signals long-term buying pressure. Reversal would signal a secondary correction to test the lower trend channel around 4500.
The DAX is testing the upper trend channel around 5800. Falling Twiggs Money Flow (21-day), however, warns of selling pressure. Breakout below the lower trend channel would indicate a secondary correction.
The Sensex continues a primary advance towards 17500*. Rising Twiggs Money Flow (13-week) indicates long-term buying pressure. Respect of 17500, however, would indicate a correction to test support at 15500.
* Target calculation: 15500 + ( 15500 - 13500 ) = 17500
The Nikkei 225 continues to consolidate between 10200 and 10600. Gradual decline on Twiggs Money Flow (21-day) is typical of a lengthy consolidation, but reversal below zero would warn of a spike in selling pressure. Failure of support at 10200 would signal a secondary correction — confirmed if the index reverses below 10000. Recovery above 10600 is unlikely at present, but would indicate a primary advance with a target of 11000*.
* Target calculation: 10000 + ( 10000 - 9000 ) = 11000
The Seoul Composite Index reached its target of 1700*, encountering short-term resistance. Reversal at the upper trend channel would signal short-term retracement, while breakout below the trend channel would warn of a secondary correction. Rising Twiggs Money Flow (21-day) indicates short-term buying pressure, but a mild bearish divergence indicates growing resistance.
* Target calculation: 1450 + ( 1450 - 1200 ) = 1700
The Shanghai Composite Index is struggling to hold above the new support level at 3000, reversing sharply on Friday. Follow through on Monday would warn that the secondary correction is not over. Reversal below 2800 would warn of another down-swing with a target of 2300* — confirmed if support at 2650 is broken. Twiggs Money Flow (21-day) below the short-term rising trendline would warn of increased selling pressure.
* Target calculations: 2800 - ( 3300 - 2800 ) = 2300
Breaking through resistance at 21000, the Hang Seng Index continues to signal hesitancy, with two doji candles at the end of the week. Expect retracement to test the new support level. Respect of support would confirm the primary advance with a target of 22500*. Twiggs Money Flow (21-day) reversal below the rising trendline would indicate selling pressure, while retreat below zero would warn of a secondary correction.
* Target calculation: 21000 + ( 21000 - 19500 ) = 22500
Recovering commodity prices are a bullish sign for resources stocks. The All Ordinaries encountered short-term resistance at 4700, but this is unlikely to hold. Rising Twiggs Money Flow (21-day) indicates buying pressure and a test of 5000* is likely. The key resistance level, however, combined with the September quarter-end, increases risk of a secondary correction. Breakout below the rising trend channel, while unlikely at present, would warn of a correction.
* Target calculation: 4000 + ( 4000 - 3000 ) = 5000
The ASX 200 chart shows the major support/resistance levels at 3000, 4000 and 5000. Expect a test of 5000 followed by correction to test support at 4000. Twiggs Money Flow (13-week) is rising, but watch out for bearish divergence that would warn of a secondary correction.
Reminder: This is no blue sky rally. Enjoy it while it lasts. But the financial system is still on life support and it could all end badly.
Every government degenerates when trusted to the rulers of the people alone. The people themselves are its only safe depositories.
~ Thomas Jefferson (1743 - 1826)