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----- Original Message -----
Sent: Saturday, May 13, 2006 8:12 AM
Subject: Trading Diary: Gold & Oil Up, Dollar & Equities
Down
May 13, 2006
These extracts from my daily trading diary are for
educational purposes and should not be interpreted as investment advice. Full
terms and conditions can be found at Terms of
Use.
Shave For a CureMany thanks to our readers for their
generosity and to Ivan
for helping to focus support for this worthy cause.
USA
| The Big Picture |
| Equity markets show short-term weakness, but
remain in primary up-trends and transport indicators
continue to signal increasing economic activity. A weakening dollar may boost export sales, but will drive
long-term interest rates and oil
prices upwards, offsetting any positive benefit to equity markets. The
Wright Model reflects the risk of an economic
downturn in the next four quarters as a modest 23%. The bull market is
intact, though we can expect some turbulence before the market grows
accustomed to the new leadership style at the
Fed. |
The Dow Industrial Average retraced sharply in the last two days on
concerns over rising oil and gold prices, a falling dollar and a sharp fall in
preliminary May consumer sentiment figures from the University of Michigan (79.0
compared to 87.4 in April). Medium Term: A close below 11350 would
signal a test of primary support at 11050. Twiggs
Money Flow (21-day) is close to zero, indicating uncertainty. Long
Term: The Dow remains in a primary up-trend, with Dow Theory confirming a bull
market: both Industrial and Transport Averages are in
primary up-trends.
The Dow Jones Transportation Average and lead indicators, Fedex and
UPS, appear headed for short/medium-term weakness, but remain in primary
up-trends -- a long-term bull signal for the economy.
The S&P 500 turned down sharply on Thursday/Friday and is headed
for a test of medium-term support at 1285.
Medium Term: A close below 1285 and fall below the 100-day exponential
moving average (or linear regression line) would signal the start of a
secondary correction. The index has respected both the MA and linear regression
line since the beginning of the year (the standard deviation channel is drawn
with parallel lines fitted at 2 standard deviations around a linear regression
line). A secondary correction would most likely test support at the lower edge
of the channel. Twiggs
Money Flow (21-day) is back at zero, but the up-trend suggests longer-term
accumulation. Long
Term: The index is in a slow up-trend, with primary support at
1180.
The Nasdaq 100 is headed for a test of support at 1630, after
consolidating between 1630 and 1760 for several months. Twiggs
Money Flow (21-day) is below zero and trending downwards, indicating
long-term distribution.
A fall below 1630 would be cause for concern, signaling reversal to a
primary down-trend.
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Treasury yieldsThe 10-year treasury yield continues in a
strong up-trend, aided by the decline of the dollar and the possibility of
central banks diversifying their holdings into euros. Medium
Term: The Fed raised the fed funds rate another quarter point to 5.0%.
Increased concerns about inflation suggest that the expected pause in rate hikes
is far from certain. The real estate market is likely to be worst affected by
rising long-term rates, while banks will benefit from wider
margins. Long Term: The yield
differential (10-year T-notes minus 13-week T-bills) is trending slowly
upwards. This is a good sign as a low yield differential poses a significant
threat when short-term interest rates are high.
Wright ModelDeveloped recently by Fed economist Jonathan H
Wright, the Wright Model
combines the yield differential and fed funds rate to calculate the probability
of recession. Looking ahead at the next four quarters, the probability remains a
modest 23%.
Gold
Speculators are driving the
gold price higher, aided by the weakening dollar. The Friday New York close for
spot gold is $710.50 after briefly flirting with
$730. Medium Term: Gold is making an upward spike --
identified by strong rallies and short retracements/consolidations lasting only
a few days. Expect strong gains followed by a sharp reversal. Long
Term: The gold-oil
ratio confirmed the up-trend with a rise above 9.50. Up-turns below 10
normally signal good buying opportunities, while down-turns above 20 indicate
selling opportunities. Expect further gains if crude oil remains above
$70/barrel.
Crude Oil
Light Crude recovered to
$72.04, after testing support at $70/barrel. The successful test is a strong
bull signal for gold and oil prices. Look for confirmation from a breakout above
the recent high of $75/barrel. Though less likely, a close below $70 would
indicate weakness.
Currencies
The dollar is weakening
against major trading partners.
EUR/USD: The euro is in a strong up-trend
against the dollar, headed for a test of resistance at 1.35/1.36.
USD/JPY: The dollar is in a primary down-trend, headed for a test of
support at 102 yen.
Source: Netdania
United Kingdom The
FTSE 100 respected the linear regression line (from below) at [1] before
falling sharply through the lower border of the channel at [5], breaking support
at 6000 and signaling the start of a secondary correction. Medium
Term: Twiggs
Money Flow (21-day) climbed slightly above zero at [2] before falling
sharply below the previous low; a strong bear signal. Expect a secondary
correction to test support at the October 2005 high of 5500. Long
Term: The FTSE 100 remains in a primary up-trend, with primary support at
5150.
Japan The Nikkei
225 broke through support at 16700/16800 but encountered strong buying at
16500 (the January 2006 high), with a long tail and sizable
volume. Medium Term: If support holds, expect another test of
resistance at 17500; but if support fails, expect a secondary correction to test
the January/February lows of 15500. Twiggs
Money Flow (21-day) below zero signals short-term distribution. Long
Term: The primary up-trend continues.
ASX Australia The All
Ordinaries breakout above 5280 is unconvincing, with a tall shadow and
strong volume signaling distribution
at [3]. The subsequent inside day and red candle signal uncertainty. While there
does seem to be buying taking place at the new 5280 support level, I suspect
that this may not hold.
Medium Term: The rising broadening wedge pattern, identified by
green lines on the above chart, is a reversal signal (thanks to Matthew for
drawing my attention to this). A lower peak would be a strong bear signal (84%
reliability according to Tomas Bulkoswki's Encyclopedia of Chart Patterns),
while a rise above 5350 (Wednesday's High) would be indicate that the pattern is
likely to fail. The recent divergence
on Twiggs
Money Flow (21-day) signals short/medium-term weakness. The index
remains above the upper border of a long-term regression channel, indicating an
accelerating up-trend. Accelerating trends are unsustainable and often evolve
into a spike
followed by a sharp reversal.
Long Term: The All Ordinaries continues in a strong primary
up-trend.
Colin Twiggs
Every strike brings
me closer to the next home run.
~ Babe Ruth
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