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Sorting the wheat from the chaff

By Colin Twiggs
June 2, 2016 11:00 a.m. AEST (9:00 p.m. EDT)

Advice herein is provided for the general information of readers and does not have regard to any particular person's investment objectives, financial situation or needs. Accordingly, no reader should act on the basis of any information contained herein without first having consulted a suitably qualified financial advisor.

Recovery of the S&P 500 over the last 3 months has been exceptional and the latest short correction followed by a strong surge to 2100 is clearly a bullish sign. Breakout above 2100 would signal a fresh advance, while follow-through above 2130 would confirm. But bearish divergence on 13-week Money Flow indicates there are still some doubters and another correction may be needed to sort the wheat from the chaff.

S&P 500 Index

* Target calculation: 2100 + ( 2100 - 1800 ) = 2400

A correction that respects support at 2000 would retain the bullish bias.

Dow Jones Industrial Average is retracing short of resistance at 18000, suggesting a similar pattern to the S&P 500 but perhaps with a stronger correction to test support at 17000. I have displayed shorter-term 21-day Money Flow here to better illustrate the bearish divergence.

Dow Jones Industrial Average

A CBOE Volatility Index (VIX) at 14 continues to indicate low market risk. Long-term measures have also eased.

S&P 500 VIX

Bellwether transport stock Fedex displays a short correction after an impressive rally to break resistance at 164/165. Follow-through above 170 would confirm the bullish sign for Fedex ....and the wider economy.

S&P 500 VIX

Canada's TSX 60 broke resistance at 820, strengthening the bottom signal of recent months. Penetration of the rising trendline is likely and would warn of a test of 750. But the long-term prospect is bullish and a higher trough would confirm. Rising 13-week Twiggs Momentum suggests a long-term primary up-trend.

TSX 60 Index

Europe

Germany's DAX recovered above 10000, forming a rising trend channel. Follow-through above 10500 and the descending trendline would signal that a bottom is forming. Reversal below the trend channel would indicate another correction, but a higher trough would is needed to confirm a primary up-trend. Money Flow troughs above zero continue to signal buying pressure.

DAX

The Footsie respected support at 6000 but looks set for another test. Follow-through above 6400 would confirm a primary up-trend. Again, Money Flow troughs above zero signal buying pressure.

FTSE 100

* Target calculation: 6400 + ( 6400 - 6000 ) = 6800

Asia

The Shanghai Composite Index found support at 2800 and Money Flow respected the zero line, indicating buying pressure. But prospects of a breakout above 3100 are slim.

Shanghai Composite Index

* Target calculation: 3000 - ( 3600 - 3000 ) = 2400

The Yuan is coming under pressure with expectations of another rate rise from the Fed. The Dollar is testing resistance at 6.60 (USDCNY) and breakout would spur further capital outflows from China. The PBOC is likely to step in to calm the waters, selling foreign reserves and buying Yuan. But this adds further pressure on the Chinese economy as the money supply contracts.

USDCNY

Chinese manufacturing remains under duress, despite recent stimulus, and there seems no easy way out for the PBOC. The dollar-peg is a two-edged sword: great when your economy is expanding but you pay the price when it contracts.

Japan's Nikkei 225 Index has formed a rising trend channel but is likely to encounter stubborn resistance at 18000. Breach of the channel would warn of another decline.

Nikkei 225 Index

* Target calculation: 15000 - ( 18000 - 15000 ) = 12000

India's Sensex completed a bullish breakout above 26000, indicating that a bottom is forming. Bearish divergence on 13-week Money Flow warns of a correction, but a higher trough would confirm a primary up-trend.

SENSEX

Australia

The ASX 200 encountered resistance at 5400. Bearish divergence on 21-day Money Flow warns of medium-term selling pressure. Expect a correction to the lower trend channel at 5200. We are entering the seasonal sell-off before financial year end. In the present bullish climate, support is likely to hold. A trough above zero on 21-day Money Flow would confirm the primary up-trend.

ASX 200

If voting made any difference they wouldn't let us do it.

~ Samuel Langhorne Clemens

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