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China Threatens Correction

By Colin Twiggs
December 23, 2009 6:00 a.m. ET (10:00 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.



Markets are fraught with uncertainty in the short term but the picture becomes clearer as the time frame grows longer. It is uncertain whether the Dow will be up or down in the next few weeks, but it is most unlikely that the primary up-trend will reverse while interest rates are close to zero. I am also sure that the Dow cannot break out to new highs without a sizable jump in (non-financial) debt levels. You cannot create an asset bubble without a corresponding debt bubble as surely as you cannot start a fire without oxygen. Private debt levels are currently falling, indicating a period of slow growth with market fluctuations dictated by interest rates — similar to the US in the 1960s and 1970s or the last 20 years in Japan.

Dow Jones Industrial Average 50 Years

In the shorter term, the Baltic Dry Index reflects falling bulk shipping rates — signaling a decline in commodity demand, primarily from Asia.

Baltic Dry Index

Resources stocks and indexes such as the ASX Metals & Mining Index are so far unaffected, but traders need to remain vigilant. A large bearish divergence on Twiggs Money Flow (13-week) indicates weakness.

Baltic Dry Index

USA

Dow Jones Industrial Average

The Dow continues to consolidate between 10250 and 10500; breakout will indicate future direction. Bearish divergence on Twiggs Money Flow (21-day) warns of a correction; breakout below the ascending broadening wedge, at 10000, would signal a test of the base at 9000.

Dow Jones Industrial Average

S&P 500

The S&P 500 threatens a breakout above the recent consolidation around 1100, but bearish divergence on Twiggs Money Flow (13-week) continues to warn of a correction. A rise above 1120, however, would signal a primary advance. Reversal below 1080, and the rising trendline, would warn of a correction — confirmed if support at 1030 fails.

Standard & Poors 500 chart

Fedex & Transport

Fedex is retracing to test support at $80; respect would signal a strong up-trend. Primary up-trends for Fedex and the Dow Transport Index are a positive sign for the broader US economy.

Dow Jones Transportation Average

Technology

The Nasdaq 100 broke out above it its recent consolidation, signaling an advance to 1850*. Rising Twiggs Money Flow (13-week) indicates buying pressure. Reversal below 1750 is unlikely, but would warn of a correction.

Nasdaq 100

* Target calculation: 1750 + ( 1750 - 1650 ) = 1850

Canada: TSX

The TSX Composite is once again testing resistance at 11600, but the sharp decline in Twiggs Money Flow (13-week) warns of selling pressure. Reversal below 11300 would signal a correction, while recovery above 11800 would indicate a primary advance to 12400*.

TSX Daily

* Target calculation: 11600 + ( 11600 - 10800 ) = 12400

United Kingdom: FTSE

The FTSE 100 Index displays a large bearish divergence on Twiggs Money Flow (13-week); failure of support at 5200 would signal a correction.

FTSE 100 Daily

Germany: DAX

The DAX broke through resistance at 5850/5900, offering a target of 6500*. Rising Twiggs Money Flow (13-week) indicates buying pressure. Reversal below 5600 is unlikely, but would warn of another correction.

German DAX

* Target calculation: 5900 +( 5900 - 5300 ) = 6500

India: Sensex

The Sensex respected resistance at 17300, but rallied Wednesday for another test. The large down-trend on Twiggs Money Flow (13-week), however, warns of a correction; reversal below 16600 would confirm. In the long term, failure of support at 15400 would signal a primary trend reversal.

Sensex India

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

Japan: Nikkei

The Nikkei 225 broke out above 10200, offering a target of 10600 — the base of the large descending broadening wedge formation. Twiggs Money Flow (13-week) continues to reflect selling pressure, but breakout above the declining trendline on the Momentum Oscillator indicates reversal to an up-trend.

nikkei 225 japan

South Korea

The Seoul Composite continues to head for a test of resistance at 1720. Rising Twiggs Money Flow (21-day) indicates buying pressure. Breakout above 1720 would signal an advance to 1940*.

Seoul Composite Index

* Target calculation: 1720 + ( 1720 - 1520 ) = 1940

China

The Shanghai Composite Index reversed below support at 3100, failing to recover on Wednesday. Declining Twiggs Money Flow (13-week) and Momentum confirm a correction. The initial target is 2850*, with primary support at 2700. Recovery above 3100 is unlikely but would re-test 3350.

Shanghai Composite Index China

* Target calculations: 3100 - ( 3350 - 3100 ) = 2850

The Hang Seng Index is testing support at 21000; failure would signal a correction. Declining Twiggs Money Flow (13-week) and Momentum Oscillator (21-day) indicate weakness. Primary support is at 19500. Recovery above 22500 is unlikely, but would indicate an advance to 25000*.

Hang Seng Index Hongkong

* Target calculation: 23000 + ( 23000 - 21000 ) = 25000

Australia: ASX

The All Ordinaries, so far unfazed by declining Chinese markets and international commodity shipments, is headed for a test of resistance at 4800. Rising Twiggs Money Flow (21-day) indicates short-term buying pressure. Breakout above 4800 would test resistance at 5000*, but reversal below support at 4600 would warn of a secondary correction.

ASX All Ordinaries

* Target calculation: 4800 + ( 4800 - 4600 ) = 5000

Declining Twiggs Money Flow (13-week) on the ASX 200 warns of long-term selling pressure. Failure of support at 4500 would signal a correction. Resource stocks will be adversely affected if the Baltic Dry Index reverses to a down-trend.

ASX 200


This is my last newsletter of the year and I wish you all peace and goodwill over the Christmas season and prosperity in the year ahead.

Candle Peace

When you make peace with yourself, you make peace with the world.

~ Maha Ghosananda

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