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Correction Warning

By Colin Twiggs
October 5, 0:05 a.m. ET (3:05 p.m. AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.


A number of major indexes now signal a secondary correction. The third quarter has ended, but risk remains elevated for the next two weeks. The Dow is also at the key resistance level of 10000, further increasing selling pressure. A general correction across most major markets is likely.

Commodities

The Baltic Dry Index is testing the upper channel border and resistance at 2500. Breakout would indicate the end of the correction of recent months — and that demand for bulk commodity shipping is recovering; a positive sign for commodity prices and resources stocks. Respect of 2500, however, would indicate another test of the lower channel; while failure of support at 1500 would signal reversal to a primary down-trend.

Baltic Dry Index

The RJ/CRB Commodities Index is retracing for yet another test of support at 250. Failure would warn that the secondary correction is not over. Follow-through below 245 would confirm that a test of primary support at 230 is likely. In the long term, recovery above 260 would indicate the start of a primary advance to 300*, while failure of support at 230 would signal reversal to a primary down-trend.

CRB Commodities Index

* Target calculation: 266 + ( 266 - 232 ) = 300

USA

Dow Jones Industrial Average

The Dow breakout below its medium-term trend channel warns of a secondary correction. Expect a test of support at 8800/9000. Twiggs Money Flow (21-day) reversal below its September low indicates selling pressure; a drop below zero would confirm the correction. In the long term, breakout above 10000 would offer a target of 12000*, while failure of support at 8000 would signal reversal to a primary down-trend.

Dow Jones Industrial Average

* Target calculation: 10000 + ( 10000 - 8000 ) = 12000

S&P 500

The S&P 500 also warns of a secondary correction, breaking short-term support. The sharp fall on Twiggs Money Flow (13-week) indicates strong selling pressure. Failure of support at 1000 would confirm the correction. In the long-term, recovery above 1100 would signal another rally to test the upper channel around 1200*; while failure of support at 900 would indicate reversal to a primary down-trend.

Standard & Poors 500 chart

* Target calculation: 1100 + ( 1100 - 1000 ) = 1200

Transport

The Dow Transport Average, UPS and Fedex are all undergoing corrections, but remain in a primary up-trend — a positive sign for the economy.

Dow Jones Transportation Average

Technology

The Nasdaq 100 also warns of a secondary correction, breaking through short-term support at 1700. Twiggs Money Flow (21-day) below its September low indicates selling pressure; reversal below zero would confirm the correction.

Nasdaq 100

* Target calculation: 1700 + ( 1600 - 1400 ) = 1900

Canada: TSX

The TSX Composite retreating below short-term support at 11200 warns of a secondary correction, while failure of support at 11000 confirms. Expect a test of the lower trend channel at 10500. Twiggs Money Flow (21-day) below the rising trendline indicates selling pressure; below zero would add further confirmation of the correction. In the long term, recovery above 11500 would signal another advance, to the upper trend channel, while failure of support at 9500 would signal reversal to a primary down-trend.

TSX Daily

United Kingdom: FTSE

FTSE 100 breakout below its trend channel warns of a secondary correction; penetration of support at 5000 confirms. Twiggs Money Flow (21-day) reversal below zero would add further confirmation. Expect a test of 4500/4600. In the long term, recovery above 5200 would indicate another primary advance, while failure of support at 4000/4100 would signal reversal to a primary down-trend.

FTSE 100 Daily

Germany: DAX

The DAX retreated below support at 5500, signaling a secondary correction. Twiggs Money Flow (21-day) below zero confirms. Expect a test of 5150. In the long term, recovery above 5750 would indicate another advance, while failure of support at 4500 would signal reversal to a primary down-trend.

German DAX

India: Sensex

The Sensex is headed for a test of resistance at 17500. Rising Twiggs Money Flow (21-day) indicates solid buying pressure. In the long term, breakout above 17500 would offer a target of 20000*, while failure of support at 15000 would signal reversal to a primary down-trend.

Sensex India

* Target calculation: 17500 + ( 17500 - 15000 ) = 20000

Japan: Nikkei

The Nikkei 225 broke through support at 10000, warning of a secondary correction. Penetration of the lower trend channel would confirm. Bearish divergence on Twiggs Money Flow (13-week) warns of strong selling pressure. Expect a test of primary support at 9000. In the long term, recovery above 10600 would indicate a test of the upper trend channel, while failure of support at 9000 would signal reversal to a primary down-trend.

nikkei 225 japan

South Korea

The Seoul Composite broke out below its trend channel, warning of a secondary correction. Failure of support at 1600 would confirm. Bearish divergence on Twiggs Money Flow (21-day) indicates selling pressure. Expect a test of 1450. In the long term, recovery above 1700 would indicate another test of the upper trend channel, while failure of support at 1350 would signal reversal to a primary down-trend.

Seoul Composite Index

China

The Shanghai Composite Index is headed for a test of primary support at 2650. Failure would signal reversal to a primary down-trend, with a medium-term target of 2300*, while respect would indicate another test of 3000. Declining Twiggs Money Flow (21-day) reflects selling pressure.

Shanghai Composite Index China

* Target calculations: 2800 - ( 3300 - 2800 ) = 2300

The Hang Seng Index broke out from its trend channel, retreating below the new support level at 21000 to signal a secondary correction. Bearish divergence on Twiggs Money Flow (13-week) also indicates a correction. In the long term, failure of support at 19500 would signal reversal to a primary down-trend; while recovery above 21000 would suggest another primary advance.

Hang Seng Index Hongkong

Australia: ASX

The All Ordinaries broke downwards from its narrow consolidation and below its trend channel to warn of a secondary correction. Failure of support at 4500 would confirm. Twiggs Money Flow (21-day) penetration of the rising trendline indicates selling pressure; reversal below zero would also confirm the correction. In the long term, recovery above 4750 would suggest an advance to 5000*, while failure of 3700 would signal reversal to a primary down-trend.

ASX All Ordinaries

* Target calculation: 4000 + ( 4000 - 3000 ) = 5000

The ASX 200 is also retreating from its upper trend channel and the key 5000 resistance level. Twiggs Money Flow (13-week) fall below 20% would indicate a correction — and test of the lower trend channel.

ASX 200

Reminder: This is no blue sky rally. Enjoy it while it lasts, but we are not out of the woods yet.



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