The correction we had to have

By Colin Twiggs
January 24th, 2013 7:00 p.m. ET (11:00 a:m AEDT)

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US markets were overdue for a correction and continuation of the advance for much longer would have resulted in instability, from an imbalance between buyers and sellers.

At Research & Investment we do not attempt to time entries and exits on secondary corrections. Our research shows that this is expensive and erodes performance. What we do pay a lot of attention to, on the other hand, are macro-economic and volatility indicators of market risk, exiting to cash when risks become elevated.

With a long-term view of the market, secondary fluctuations are relatively insignificant, but they do present opportunities to increase investment in the market.

The S&P 500 broke support at 1810, signaling a correction. Bearish divergence on 21-day Twiggs Money Flow strengthens the signal. Expect support at the Setember 2013 high of 1730.

A monthly chart places the latest breakdown in perspective. Respect of support at 1700 — and the secondary trendline — would confirm a healthy primary up-trend. A 13-week Twiggs Money Flow trough above zero would again strengthen the signal.

* Target calculation: 1800 + ( 1800 - 1700 ) = 1900

The VIX is rising steeply, but continues to indicate low risk and a bull market.

The FTSE 100 retreated below short-term support at 6700 after a false break above 6800, signaling a correction to test primary support at 6400. Bearish divergence on 13-week Twiggs Money Flow warns of long-term selling pressure. Recovery above 6800 is unlikely, but would signal a fresh advance.

* Target calculation: 6800 + ( 6800 - 6400 ) = 7200

Germany's DAX shows medium-term selling pressure, with bearish divergence on 13-week Twiggs Money Flow. Breach of support at 9400 — and the latest rising trendline — would warn of a correction to 9000. Respect of 9400 is unlikely, but would signal a primary advance to 10200*.

* Target calculation: 9800 + ( 9800 - 9400 ) = 10200

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