S&P 500 and Europe: Likely to blow over

By Colin Twiggs
March 19th, 2013 4:00 a.m. EST (7:00 p.m. AEDT)

These extracts from my trading diary are for educational purposes. Any advice contained therein is provided for the general information of readers and does not have regard to any particular person's investment objectives, financial situation or needs and must not be construed as advice to buy, sell, hold or otherwise deal with any securities or other investments. Accordingly, no reader should act on the basis of any information contained therein without first having consulted a suitably qualified financial advisor. Full terms and conditions can be found at Terms of Use.


Question: Is the outcry in Europe going to tip the S&P 500 into a correction?

Answer: The outcome is uncertain. While there is a strong case for giving depositors and bondholders a haircut, the timing — so soon after an inconclusive Italian election — could not be worse. But let's see what the market are saying...

Longish tail on the S&P 500 shows buying support at the close. Mild bearish divergence (mild because TMF has leveled out rather than falling sharply) on 21-day Twiggs Money Flow indicates medium-term selling pressure. We are likely to see retracement to the first line of support — at the previous high of 1525/1530 — but only breach of this level and the rising trendline would warn of a correction. Target for the current advance is 1600*.

S&P 500 Index

* Target calculation: 1525 + ( 1525 - 1475 ) = 1575

VIX Volatility Index remains low — near its 2005 lows at 0.10. Breakout above 0.20 would be a warn of rising uncertainty.

VIX

The FTSE 100 exhibits an even longer tail, but bearish divergence on 21-day Twiggs Money Flow also indicates medium-term selling pressure. Reversal below the latest rising trendline (6400) would warn of a correction, while breakout above 6550 would continue the advance to 6800*.

FTSE 100

The DAX showed even greater resilience, closing back above 8000. Follow-through above 8100 would signal a fresh primary advance. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure.

DAX

Conclusion

There is bound to be some turbulence but markets are showing resilience and the storm is likely to blow over.



Compassion is the antitoxin of the soul: Where there is compassion even the most poisonous impulses remain relatively harmless.

~ Eric Hoffer