PLUNGE IN CHINESE SHARES CONTINUES -- EMERGING MARKETS NEAR TEST OF 2015 LOW -- CANADA STOCKS ARE FALLING ON WEAKER COMMODITIES -- ENERGY SHARES ARE THREATENING SPRING LOW -- RISING VIX RAISES RISK LEVEL FOR STOCKS
CHINESE FREE FALL CONTINUES ... The free fall in Chinese stocks continued again today. Chinese stocks trading on the mainland and Hong Kong lost -6%. Chart 1 shows the phenomenal drop in China iShares (FXI). The FXI has fallen well below is 200-day moving average, and trendline support drawn under its 2014/2015 lows. The FXI has retraced two-thirds of its previous advance and is in a deeply oversold condition. But no sign of buying has emerged to date. The next area of potential support is the low formed last October. The plunge in China had a bearish effect on the entire Asian region, which includes a -3% loss in Japan. Heavy Asian selling continued to weigh on commodity prices, and currencies and stocks tied to them. And to countries that produce commodities like Australia and Canada. Emerging markets are taking the day's biggest hit. In addition to China, Brazil and Russia are suffering from the fallout in commodity markets.

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Chart 1
EMERGING MARKETS ISHARES NEAR CRITICAL TEST OF SUPPORT... Emerging Markets iShares (EEM) lost another -3% today. The weekly bars in Chart 2 show the (EEM) falling more than -7% this week and moving dangerously close to last December low at 36.42. The EEM is also testing a rising support line extending back to 2011. A downside violation of the fourth quarter low would be very bearish for emerging markets. Asian stocks with close ties to China accounted for some of the day's biggest losses. That includes South Korea (-2%) and Taiwan (-4%). Commodity producers also fell with Brazil and Russia losing -3% and -4% respectively. Needless to say, a technical breakdown in emerging markets would increase downside pressure on global stocks in general.

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Chart 2
CANADIAN STOCKS ROLL OVER TO THE DOWNSIDE ... The red daily bars in Chart 3 show the Toronto Composite Index losing -1.5% today and dropping to the lowest level in five months. The TSX has fallen well below its 200-day moving average. Canadian stocks are closely tied to the direction of commodity prices, and oil in particular. Energy stocks were today's biggest losers in Canada. The green line shows the Canadian Dollar in danger of falling to a six-year low. Canada is the biggest trading partner with the U.S., and there's usually a close linkage between the two stock markets. Weakness up north could lead to more selling down here.

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Chart 3
ENERGY SPDR THREATENS MARCH LOW ... Speaking of energy, they remain one of the weakest parts of the stock market. Chart 4 shows the Energy SPDR (XLE) threatening its March intra-day low at 72.84. It has already broken a rising trendline drawn under its January/March lows. A breakdown in energy stocks would be another bad sign for crude oil. And it won't be good for Canada and other commodity producers. Chart 5 shows the Market Vector Oil Services ETF (OIH) also nearing a test of the 2015 low. On a day when all market sectors are lower, energy and materials are the two weakest groups. Today's biggest material losers are aluminum and copper stocks which reflect weakness in those two industrial commodities.

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Chart 4

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Chart 5
VIX MOVES HIGHER ... It's normally a caution sign for stocks when the CBOE Volatility (VIX) Index is climbing. And it is. Chart 6 shows the weekly value for the VIX trading at the highest level in six months. Moves above 20 usually raise the risk level for stocks. The VIX closed today just shy of that risk threshold. There's something else worth noting. Since the October 2011 peak, each VIX trough has been lower than the previous trough. That has supported rising stock prices. Notice, however, that the trough formed this May was higher than the one formed last summer (rising trendline). That may be an early hint that the trend of the VIX is strenghening. That bears watching since a rising VIX usually translates into lower stock prices.

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Chart 6
STOCK GIVE BACK YESTERDAY'S GAINS... Yesterday's stock rebound didn't last long. U.S. stocks traded sharply lower today and fell back below their 200-day moving averages. Chart 7 shows the Dow Jones Industrials ending nearly 200 points below its 200-day average. Chart 8 shows the S&P 500 closing below its 200-day line as well. [The NYSE Stock Exchange halted trading for most of the day, but that doesn't seem to have affected stock prices]. The U.S. stock market is holding up better than foreign shares, and is giving ground grudgingly. But it is giving ground. The weight of technical evidence continues to suggest more selling ahead.

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Chart 7
