Secondary Correction

By Colin Twiggs
January 25, 2010 3:00 a.m. ET (7:00 p.m. AET)

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Global markets appear headed for a secondary correction, with only Japan and South Korea showing any resilience. All others reviewed display a large bearish divergence on (13-week) Twiggs Money Flow. And the Hang Seng Index signals a primary down-trend, warning of further weakness in China.

USA

Dow Jones Industrial Average

The Dow is headed for a test of 10000. Clear breakout below the lower border of the (rising) broadening wedge formation would offer a target of 9000 — the base of the wedge. Twiggs Money Flow (21-day) reversal below zero would strengthen the signal. Recovery above 10500 is unlikely, but would indicate another advance.

S&P 500

The S&P 500 broke through its lower trend channel, warning of trend weakness. Bearish divergence on Twiggs Money Flow (13-week) signals a correction. Failure of the band of support between 1080 and 1100 would confirm. Respect of support is unlikely, but would indicate another advance.

Transport

Fedex retreated below support at $82, signaling a correction. The Transport Average is likely to follow, with negative implications for the broader US economy.

Technology

The Nasdaq 100 is testing the band of support between 1750 and 1800 after breaking below its trend channel. Bearish divergence on Twiggs Money Flow (13-week) warns of a secondary correction. Failure of support would confirm. Respect of support is unlikely, but would signal another advance. In the long term, breakout below 1650 would indicate a primary trend reversal.

Canada: TSX

The TSX Composite reversed below support at 11500 after breaking its lower trend channel. Bearish divergence on Twiggs Money Flow (13-week) confirms a secondary correction. Recovery above 11500 is unlikely, but would indicate another advance. In the long term, failure of support at 10800 would signal a primary trend reversal.

United Kingdom: FTSE

The FTSE 100 reversed below support at 5400 and its lower trend channel, warning of trend weakness. Bearish divergence on Twiggs Money Flow (13-week) warns of a secondary correction. Failure of support at 5200 would confirm. In the long term, failure of support at 5000 would indicate a primary trend reversal.

Germany: DAX

The DAX similarly reversed below 5800 and its lower trend channel. Bearish divergence on Twiggs Money Flow (13-week) indicates a secondary correction. Failure of support at 5600 would confirm. In the long term, failure of support at 5300 would signal a primary trend reversal.

India: Sensex

The Sensex retreated below 17300 and is headed for a test of support at 16600. Bearish divergence on Twiggs Money Flow (13-week) warns of a secondary correction. Failure of support would confirm. Recovery above 17300 is unlikely but would indicate another advance. In the long term, failure of support at 15500 would signal a primary trend reversal.

Japan: Nikkei

The Nikkei 225 is retracing to test support at 10500. Twiggs Money Flow (13-week) breakout above the descending trendline indicates buying pressure. Respect of support would signal an advance to 11500*. Reversal below 10000 is unlikely, but would warn of trend weakness.

* Target calculation: 11000 + ( 11000 - 10500 ) = 11500

South Korea

The Seoul Composite retreated below 1700. Breakout below the trend channel would warn of a secondary correction. Twiggs Money Flow (13-week) reversal below its late 2009 trough would confirm the signal. Recovery above 1720, however, would signal an advance to 1940*. In the long term, failure of support at 1520 would indicate a primary trend reversal.

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

China

The Shanghai Composite Index is edging lower in a broad channel — more a consolidation than a down-trend. Declining Twiggs Money Flow (13-week), however, warns of selling pressure. And reversal below 3000 would test primary support at 2700. Upward breakout, however, would offer a target of 3500*.

* Target calculations: 3250 + ( 3250 - 3000 ) = 3500

The Hang Seng Index, however, issues a dire warning, with reversal below 21000 signaling reversal to a primary down-trend. Twiggs Money Flow (13-week), declining below zero, confirms. The initial target for the decline is 19000*. Recovery above 22500 is most unlikely, but would indicate an advance to 25000*.

* Target calculations: 21000 - ( 23000 - 21000 ) = 19000 and 23000 + ( 23000 - 21000 ) = 25000

Australia: ASX

The All Ordinaries found short-term support at 4700. Expect retracement to test resistance at 4800/4900, but selling pressure is strong — as indicated by the sharp fall in Twiggs Money Flow (21-day) below zero. And a test of primary support at 4500 is likely.

Twiggs Money Flow (13-week) reflects a bearish divergence on both the All Ords and ASX 200, warning of a secondary correction. Breakout below the trend channel would strengthen the signal. In the long term, failure of support at 4500 would indicate a primary down-trend.

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