Stocks Test Support

By Colin Twiggs
May 25, 3:30 a.m. ET (5:30 p.m. AET)

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Light volume on the Dow indicates a lack of buying support at the lower border of the recent consolidation. Bearish divergence on Twiggs Money Flow (21-Day) warns of reversal of the bear rally of recent months. Breakout below 8200 is expected, signaling a test of primary support at 6500. Reversal above 8600 is unlikely, but would test primary resistance at 9000. In the longer term, strong resistance is expected at 9000, with breakout not expected in the next 6 months. A correction that stops short of 6500, however, would signal a trend change if followed by penetration of 9000.

S&P 500

The S&P 500 is testing support at 880, after encountering strong resistance at 940. Bearish divergence on Twiggs Money Flow (21-Day) warns of reversal of the recent bear rally. Breakout below 880 is expected and would test primary support at 675. Reversal above 940 is unlikely, but would give a weak (primary) up-trend signal. Readers should beware of a bull trap, however, until we see a secondary correction respecting primary support and followed by a new high.

Technology

The Nasdaq 100 also displays a bearish divergence on Twiggs Money Flow (21-Day), warning of a correction. Respect of the new support level at 1300 would confirm the primary up-trend — and the target of 1550, calculated as 1300 + [ 1300 - 1050]. Twiggs Money Flow (21-Day) crossing below zero, however, would signal trend weakness. Reversal below the 61.8% Fibonacci retracement level at 1200 is not expected, but would warn of another test of primary support at 1050.

Canada: TSX

The TSX Composite shows a similar bearish divergence on Twiggs Money Flow (21-Day), warning of a secondary correction. Respect of the new support level at 9500 would confirm the primary up-trend — and the target of 11500, calculated as 9500 + [ 9500 - 7500 ]. A Twiggs Money Flow (21-Day) fall below zero, however, would warn of trend weakness. Reversal below the 61.8% Fibonacci retracement level at 8600 is not expected, but would signal another test of primary support at 7500.

United Kingdom: FTSE

The FTSE 100 continues to consolidate between 4300 and 4500. Bearish divergence on Twiggs Money Flow (21-Day) warns of reversal of the bear rally of recent months — and TMF crossing to below zero would warn of strong selling pressure. Reversal below 4300 would signal another test of primary support at 3500. Breakout above 4500 is unlikely, but would test primary resistance at 4650. In the longer term, a correction that respects primary support would signal a primary up-trend if followed by a new high above 4650.

Europe: DAX

The DAX is testing primary resistance at 5000. Bearish divergence on Twiggs Money Flow (21-Day) warns of an end to the bear rally of recent months — and a TMF fall below zero would signal strong selling pressure. Reversal below 4700 would signal a test of primary support at 3600. Upward breakout, however, would offer a weak (primary) trend reversal. Prudent investors should wait for a stronger signal: a secondary correction that respects primary support, followed by a new high.

India: Sensex

Again, the Sensex shows a bearish divergence on Twiggs Money Flow (21-Day), warning of retracement to test the new support level at 10500. Respect of support is expected — and would confirm the primary up-trend. Failure, however, would warn of a test of primary support at 8000.

Japan: Nikkei

The Nikkei 225 consolidates in a narrow range below primary resistance at 9500 on light volume.
A bullish sign. Twiggs Money Flow (21-Day) remains neutral. Breakout above 9500 would signal a primary up-trend — with a target of 12000, calculated as 9500 + [ 9500 - 7000 ]. Reversal below 9000 would warn of a down-swing to test primary support at 7000.

China

The Shanghai Composite continues in a strong primary up-trend. Having reached its medium term target of 2700, it may due for a test of the lower trend channel. Twiggs Money Flow (21-Day) is positive — unless it reverses below the April low of 0.1.

Expect retracement of the Hang Seng Index to test its new support level at 15000. Twiggs Money Flow (21-day) indicates long-term buying pressure, but short-term selling pressure (hence the retracement). Respect of support would confirm the primary up-trend — and target of 21000, calculated as 16000 + [ 16000 - 11000 ]. Reversal below 14000 (the 61.8% Fibonacci retracement) is unlikely, but would test primary support at 11000.

Australia: ASX

The CRB Commodities Index threatens to break out above primary resistance at 245, completing an inverted head and shoulders pattern with a target of 290. The short retracement [v] is a bullish sign. A primary up-trend for commodities would be a promising signal for resources stocks. Though we need to look for confirmation that demand is sustainable — driven by increased investment and/or consumption and not merely stockpiling at low prices.

The All Ordinaries is testing support at 3700. Light volume indicates the absence of buying pressure. Bearish divergence on Twiggs Money Flow (21-Day) indicates weakness — strengthened if TMF crosses below zero. Breakout below 3700 would warn of a test of primary support at 3100. Reversal above 3800 is unlikely, but would signal continuation of the bear rally.

The ASX 200 displays a stronger bearish divergence on Twiggs Money Flow (21-Day). Breakout below 3700 would signal a test of primary support at 3150. In the longer term, failure of support at 3150 would offer a target of the 2003 low of 2700 — while respect of support would signal a primary up-trend if followed by a new high above 3900.

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~ Henry David Thoreau