Correction Or Reversal?

By Colin Twiggs
February 2, 2010 3:00 a.m. ET (7:00 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.

Global markets are undergoing a secondary correction, signaled by large bearish divergence on (13-week) Twiggs Money Flow. The Hang Seng Index, however, reversed to a primary down-trend, warning of weakness in China, and a number of other indexes now threaten to follow.

USA

Dow Jones Industrial Average

The Dow found support at 10000 after breaking through the lower border of the (rising) broadening wedge formation. Expect a brief rally followed by another test of support. Failure would signal a correction to 9000 — the base of the wedge. Twiggs Money Flow (21-day) breakout below zero would strengthen the (correction) signal. Recovery above 10500 is unlikely, but would indicate another advance.

S&P 500

The S&P 500 is testing support at 1080 after breakout below the trend channel. Twiggs Money Flow (13-week) bearish divergence indicates a correction, but reversal below zero indicates strong selling pressure. Failure of support at 1040 would warn of a primary down-trend.

Transport

Fedex is undergoing a correction, with UPS and the Transport Average likely to follow — indicating that economic activity is likely to slow.

Technology

The Nasdaq 100 is testing support at 1750 after breakout below the trend channel. Failure would confirm the secondary correction signaled by bearish divergence on Twiggs Money Flow (13-week). In the long term, reversal below 1650 would indicate a primary down-trend.

Canada: TSX

The TSX Composite found support at 11000 after breaking below its trend channel. Bearish divergence on Twiggs Money Flow (13-week) confirms a secondary correction, but reversal below zero warns of unusual selling pressure. Expect retracement to 11600 followed by another test of support. Failure of 10800 would signal a primary down-trend.

United Kingdom: FTSE

The FTSE 100 found support at 5200 after breaking its lower trend channel. Bearish divergence on Twiggs Money Flow (13-week) signals a secondary correction; but reversal below zero warns of heavy selling pressure. Failure of support at 5200 would confirm the correction, but reversal below 5000 would indicate a primary trend reversal.

Germany: DAX

The DAX found support at 5600 after breaking its lower trend channel. Bearish divergence on Twiggs Money Flow (13-week) indicates a secondary correction; reversal below zero signals heavy selling pressure. Failure of support at 5600 would confirm the correction, while reversal below 5300 would signal a primary down-trend.

India: Sensex

The Sensex penetrated support at 16600, signaling a secondary correction. Bearish divergence on Twiggs Money Flow (13-week) confirms. Recovery above 17300 is most unlikely but would indicate another advance. In the longer term, failure of support at 15500 would signal a primary down-trend.

Japan: Nikkei

The Nikkei 225 respected support at 10000, rallying to 10400 on Tuesday. Recovery above 10600 would signal an advance to 12000*, but Twiggs Money Flow (13-week) bearish divergence warns of a correction. In the long-term, reversal below 9000 would signal a primary down-trend.

* Target calculation: 11000 + ( 11000 - 10000 ) = 12000

South Korea

The Seoul Composite is headed for a test of primary support at 1520 after breaking below its trend channel. Twiggs Money Flow (13-week) bearish divergence confirms the secondary correction. Recovery above 1720 is most unlikely, but would signal an advance to 1940*. Failure of support at 1520 would indicate a primary down-trend.

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

China

The Shanghai Composite Index broke below 3000 and its broad channel, signaling a test of primary support at 2700. Declining Twiggs Money Flow (13-week) confirms the signal. Failure of support at 2700 would signal a primary down-trend.

The Hang Seng Index is in a primary down-trend after breaking support at 21000. Twiggs Money Flow (13-week) below zero confirms the signal. The index found short-term support at 20000 and is expected to retrace to the new resistance level (21000). Respect of resistance would offer a target of 19000*.

* Target calculations: 21000 - ( 23000 - 21000 ) = 19000

Commodities & Resources Stocks

The Baltic Dry Index reversed below support at 3000 and is headed for a test of primary support at 2100 — reflecting falling demand for bulk commodities, shipped primarily to Asia. Bad news for resources stocks.

Australia: ASX

The ASX 200 found support at 4500. Expect retracement to 4800, followed by another test of primary support. Twiggs Money Flow (21-day) respect of the zero line from below would warn of a primary down-trend; confirmed if support at 4500 is penetrated.

The All Ordinaries broke out of its long-term trend channel, indicating trend weakness. Twiggs Money Flow (13-week) bearish divergence on both the All Ords and ASX 200 confirms the secondary correction; reversal below zero warns of heavy selling pressure. Failure of support at 4500 would indicate a primary down-trend.

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