Dow and China fall
By Colin Twiggs
June 2nd, 2011 2:00 a.m. ET (4:00 p:m AET)
The Dow Jones Industrial Average fell sharply, retreating below medium-term support at 12400 to confirm the correction signaled earlier by the Nasdaq, S&P 500, and the bearish divergence on 21-day Twiggs Money Flow.
The Shanghai Composite Index followed, breaking support at 2700 Thursday to signal a primary down-trend.
This confirms the warning from the Shenzhen Index and will have negative implications for global markets, particularly resource-rich countries such as Australia, Brazil and South Africa.
The Dollar Index retreated from resistance at 76, but a large bullish divergence on Twiggs Momentum suggests a reversal. Breakout above 76.50 would confirm, while failure of support at 73 would test long-term support at 71.
* Target calculation: 76 - ( 81 - 76 ) = 71
Gold is holding above $1525. A retracement that respects the new support level would confirm the new advance. Breach of the medium-term trendline, however, would warn of a bull trap and test of the long-term trendline around $1400. Behavior of the dollar will be a major influence.
* Target calculation: 1575 + ( 1575 - 1475 ) = 1675
The Gold Miners ETF continues to range between 6400 and support at 5300; breakout would signal future direction. Bearish divergence on 13-week Twiggs Money Flow warns of selling pressure; confirmed if the indicator reverses below zero. Completion of a double top on gold miners would warn of a primary trend reversal on the physical metal.
Silver is ranging between $33 and $39; breakout will indicate future direction. A Twiggs Momentum trough below zero would suggest a downward breakout.
The CRB Commodities Index is similarly consolidating between 335 and 350. Breakout will indicate future direction. Again, the dollar is likely to have a strong influence.
Brent crude is testing resistance at $117/barrel. Breakout would signal an advance to $125, while respect would warn of another test of support at $108. A slowing of the global economy would weaken demand for crude, making reversion to the long-term trendline at $90 more likely. A stronger dollar would also lower prices.
The euro respected resistance at $1.45, indicating another test of support at $1.40. Failure of support would signal a decline to $1.35.
* Target calculation: 1.40 + ( 1.40 - 1.30 ) = 1.50
There has been discussion recently of holding 5% of your investments in local currency (in cash, not a bank account) so that you are liquid if ever there is another financial crisis. If I were going to hold short-term deposits in any other currency, my personal preference would be the Swiss franc. Firstly, because of their neutrality; second, the Swiss franc has been appreciating against the dollar for most of the past 40 years; and third, because CHF is now appreciating against both the yen and the euro. In the short-term, we are now approaching the target of $1.20 and may be due for a correction.
* Target calculation: 1.00 + ( 1.00 - 0.80 ) = 1.20
The pound continues to range above $1.60. Failure of support would warn of a correction to $1.53, while respect would signal continuation of the up-trend.
* Target calculation: 1.63 + ( 1.63 - 1.53 ) = 1.73
The dollar continues to test long-term support at ¥80. Failure would signal a down-swing to ¥75*.
* Target calculation: 80 - ( 85 - 80 ) = 75
The kiwi dollar is testing support at $0.81 against the greenback. Penetration of the rising trendline at $0.80 would warn of a correction, while respect would signal an advance to $0.84.
* Target calculation: 81 + ( 81 - 78 ) = 84
The Aussie dollar encountered resistance at $1.075 against the greenback. Expect another test of $1.05. Failure of support would test medium-term support at $1.02, while breakout above $1.075 would signal an advance to $1.15*.
* Target calculation: 1.10 + ( 1.10 - 1.05 ) = 1.15
Because of the crisis, we grew the too-big-to-fail banks into ever more too-big-to-fail banks — we consolidated them. Now we've got this psychology in Washington of “We can't really go after them the way we would want to or in a real manner because we could destabilize them. So let's actually just pretend there's not a problem”. That's the real danger of too-big-to-fail. When you can't enforce the rule of law because you are afraid of harming these institutions, you're really giving them a free pass and free reign to continue to take on more and more risky behaviors.
~ The Fed's “Fatal Flaw”: Gretchen Morgenson & Jonathan Rosner on Why Nothing's Changed Since the Crisis