Gold , Oil & The Dollar
By Colin Twiggs
November 7, 2006 6:30 p.m. AEDT (2:30 a.m.
ET)
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. The next newsletter (an update on Stocks & Indexes) will be on
Saturday.
Gold
Spot gold rallied strongly since breaking through resistance at $600. There
has been no retracement, so far, to test the new support level, but this remains
a likely possibility.
Source: Netdania
Medium Term: Breakout from the upper border of the large symmetrical
triangle is a bullish sign. The target is calculated as $790 : (600 + {730 -
540}), but resistance at the previous high makes $730 a more conservative
objective.
Long Term: Gold is in a primary up-trend with support
at $540. If oil prices continue to weaken, the present pattern may evolve into a
stage 3
top, followed by a test of the long-term supporting trendline.
Source: Netdania
Crude Oil
December Light Crude respected resistance at $62 while troughs edged
progressively lower (at $59, $58 and then $57). The pattern is rather untidy,
but recognizable as a
right-angled descending broadening formation. Breakouts may
occur in either direction and are a reliable indicator of future trend
direction. A
failure
swing would give early indication of likely breakout direction: watch for a
higher trough or a lower peak.
Medium Term: Expect strong support
at $55.
Long Term: Retracement from $80 to $55 may merely establish the base
for continuation of the larger up-trend, but this could take time to
emerge.
Currencies
The euro encountered short-term resistance at $1.280. A brief
retracement or consolidation below this level would be a bullish
sign.
Medium Term: Consolidation of the last 6 months is bounded
by support at $1.25 and resistance at $1.30. Expect the current rally to test
$1.30, but direction of any future breakout remains uncertain.
Long
Term: Upward breakout (from the consolidation) would test the previous high
of $1.37, while a downward breakout would test primary support at $1.165,
threatening to complete a large head and shoulders reversal.
Source: Netdania
Treasury yields
The 10-year yield respected support at 4.60%, but remains in bear territory
below its 100-day
moving
average.
Medium Term: Breakout above the recent high of 4.80%
would complete a small
double
bottom with a target of 5.00%. Failure of support and a break of the
long-term trendline, on the other hand, would signal long-term
weakness.
The
yield
differential (10-year T-notes minus 13-week T-bills) continues its
down-trend below zero, increasing the risk of an economic
slow-down.
Long Term: Probability of recession in the next four quarters
increased to
41 per cent according to the
Wright Model.
A rise above 50 per cent would be cause for concern.
What follows is ever closely
linked to what precedes;
it is not a procession of isolated events, merely
obeying the laws of sequence, but a rational continuity.
Moreover, just as
the things already in existence are all harmoniously coordinated,
things in
the act of coming into existence exhibit the same marvel of
concatenation,
rather than simply the bare fact of succession.
~
Marcus Aurelius
Technical Analysis and
PredictionsI believe that Technical Analysis should not be
used to make predictions because we never know the outcome of a particular
pattern or series of events with 100 per cent certainty. The best that we
can hope to achieve is a probability of around 80 per cent for any
particular outcome: something unexpected will occur at least one in five
times.
My approach is to assign probabilities to each possible
outcome. Assigning actual percentages would imply a degree of precision
which, most of the time, is unachievable. Terms used are more general:
"this is a strong signal"; "this is likely"; "expect this to follow";
"this is less likely to occur"; "this is unlikely"; and so on. Bear in
mind that there are times, especially when the market is in equilibrium,
when we may face several scenarios with fairly even
probabilities.
Analysis is also separated into three time frames:
short, medium and long-term. While one time frame may be clear, another
could be uncertain. Obviously, we have the greatest chance of success when
all three time frames are clear.
The market is a dynamic system. I
often compare trading to a military operation, not because of its'
oppositional nature, but because of the complexity, the continual
uncertainty created by conflicting intelligence and the element of chance
that can disrupt even the best made plans. Prepare thoroughly, but allow
for the unexpected. The formula is simple: trade when probabilities are in
your favor; apply proper risk (money) management; and you will succeed.
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