Markets Warn Of Correction

By Colin Twiggs
July 13, 3:00 a.m. ET (5:00 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.

USA

The June 30 quarter-end has passed and, with reduced support from investment fund managers, most major markets are signaling a correction — likely to test the lows of March 2009.

Dow Jones Industrial Average

The Dow completed a head and shoulders reversal and is now consolidating in a bearish narrow band below resistance at 8200. Expect a down-swing to test primary support at 6500. Twiggs Money Flow (21-Day) bearish divergence confirms selling pressure.

S&P 500

The S&P 500 is so far tentative. A fall below 870 or Twiggs Money Flow (21-Day) cross below zero, would confirm the reversal, but a marginal close below support and Twiggs Money Flow (21-Day) holding above the zero line are not convincing. Declining volume over the last six weeks, however, reflects an absence of buyers. The target for a correction would be primary support at 670. Recovery above 950, while most unlikely, would signal a primary up-trend with a target of 1100.

Transport

Bellwether stock Fedex exhibits a gentle decline over the past 10 weeks. Recovery above $60 would be a bullish sign for the broader market, while breakout below the lower channel border would signal a test of primary support at the March low of $34.

Technology

The Nasdaq 100 is testing support at 1400. Breakout would signal a secondary correction, while recovery above 1500 would signal a primary advance to 1600. Twiggs Money Flow (21-Day) crossing below zero would confirm the correction.

Canada: TSX

The TSX Composite is testing support at 9500. Breakout would confirm a secondary correction, especially if accompanied by Twiggs Money Flow (21-Day) crossing to below zero. Recovery above 10500, however, would signal another primary advance.

United Kingdom: FTSE

FTSE 100 broke through support at 4200, accompanied by a strong bearish divergence on Twiggs Money Flow (21-Day). Expect a test of primary support at 3500. Reversal above 4500 is highly unlikely, but would test primary resistance at 4650.

Europe: DAX

The DAX broke through support at 4650, completing a head and shoulders reversal and warning of a test of primary support at 3600. Strong bearish divergence on Twiggs Money Flow (21-Day) confirms the signal.

India: Sensex

The Sensex broke through medium-term support at 14000, warning of a secondary correction to test support (from the large gap) at 12000. Bearish divergence on Twiggs Money Flow (21-Day) confirms. Recovery above 15000 is most unlikely, but would indicate another primary advance.

Japan: Nikkei

The Nikkei 225 broke through support at 9500, warning of a secondary correction, while Twiggs Money Flow (21-Day) displays a strong bearish divergence. If support at 9000 fails, expect a test of primary support at 7000. Recovery above 10000 is most unlikely, but would signal a primary advance with a target of 12000.

China

The Shanghai Composite Index up-trend is accelerating (sometimes referred to as a "runaway trend"). Rising Twiggs Money Flow (21-day) confirms strong buying pressure. The self-reinforcing nature of an accelerating trend leads to steep gains — followed by a sharp fall as it reaches its "blowoff" point.

China faces mounting criticism for the rapid expansion of its money supply, but this will take time to translate into higher inflation — and a slow-down in bank lending — which would impact on the stock market.

The Hang Seng is testing support at 17500. Breakout would warn of a secondary correction. Twiggs Money Flow (21-day) bearish divergence indicates selling pressure, and would confirm the signal if it crosses below zero. Recovery above 19000, however, would signal another primary advance.

Australia: ASX

The CRB Commodities Index broke through support at 245, signaling a secondary correction. Failure of support at 230 would test primary support at 200 — a bear signal for resources stocks.

All Ordinaries breakout below 3700 would confirm a head and shoulders reversal, warning of a secondary correction to test primary support at 3100. Bearish divergence on Twiggs Money Flow (21-Day) would be strengthened if the indicator breaks below -0.05. Reversal above 3950/4000 is most unlikely — but would signal another primary advance.

ASX 200 reversal below 3700 [orange] would signal a secondary correction to test primary support at 3150 [red]. Bearish divergence on Twiggs Money Flow (13-Week) would be strengthened if the indicator breaks below 0.1.

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