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Trading Diary
May 22, 2004

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.




USA
The Dow Industrial Average is consolidating below 10000, after slipping below the key support level at [a]. This is a strong bear signal. Declining volume and weak closes on attempted rallies, at [b] and [c], add further confirmation.




A downward breakout from the current consolidation would be likely to test support at 9000. 
Twiggs Money Flow is bearish.




The Nasdaq Composite penetrated the key 1900 support level, giving a sell signal. 




The index rallied Friday, to 1912, but on low volume. 
Twiggs Money Flow displays a strong bear signal.




The S&P 500 is consolidating around support at 1090. Low volume and weak closes on attempted rallies are bearish. A clear break below the consolidation pattern would signal a test of support at 1000 to 960.




The primary trend is still up, despite the current secondary correction.
Twiggs Money Flow shows a strong bear signal.





NYSE Bullish Percent Index

The Chartcraft Bullish Percent Index is on Bear Alert status, having eased to 59.13%.


Treasury yields

The yield on 10-year treasury notes retraced to 4.764%. A correction that respects support at 4.50% will confirm the strong primary up-trend.

The yield differential (10-year T-notes minus 13-week T-bills) at 3.8% reflects expectations that rates will increase soon.






Gold

New York: Spot gold recovered slightly to $384.30. Expect the retracement to test resistance at $390. 
The primary trend continues downwards.




 
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ASX Australia

The All Ordinaries failed to break through the first level of support at 3350, rallying on higher volume at [b] to test resistance at the previous high of [a]. The index then broke above 3390 at [c], completing a short-term double bottom reversal. The pattern signal reversal of the intermediate down-trend, but declining volume indicates weakness. 
Reversal below 3390 on Monday will signal another test of support at 3350.




If the current secondary correction holds above 3250, it will signal a healthy primary up-trend. 
A fall below support at 3150 would signal reversal. 
Twiggs Money Flow continues to display a bearish divergence, signaling long-term weakness.








Point & Figure Charts - High/Low, Closing or Typical Price?

There is a detailed explanation of the three pricing methods at Point and Figure Construction, but here is a brief summary:
  • The High/Low method plots highs in an up-trend and lows in a down-trend;
  • Closing Price method plots only changes in closing price;
  • Typical Price calculates the average of High, Low and Closing Price.


High/Low method

The High/Low method attempts to approximate the early DeVilliers method of point and figure charting which used intra-day data. With highs in an up-trend, and lows in a down-trend, the method is more responsive to trend changes. It is suited to short-term point and figure charts: there are too many false signals for long-term charting.

Compare the High/Low and Closing Price methods with Yahoo Inc [YHOO]:




The biggest difference is at [s2]: the High/Low sell signal at $27.80, compared to $26.60 with the Closing Price method (below). 
Generally, High/Low signals are earlier.




Buy/Sell Signals
Buy [b]: When a column of Xs rises above the preceding column of Xs
Sell [s]: When a column of Os falls below the preceding column of Os

Closing Price method

Closing price is more suited to longer-term charts; eliminating false signals caused by intra-day fluctuations.
This time we take a 5-year chart of Yahoo Inc [YHOO], with a box size of 5 and reversal of 3, and zoom in on the top pattern at the end of 2002:




You can see that Closing Price gives a clear sell signal at [s] while the High/Low method (below) whipsaws in and out several times between [s] and [s4].




Typical Price method

Typical price uses a single daily price calculated as (High + Low + Close)/3. This offers further smoothing, enabling us to use a smaller, more responsive box size. Although not widely used, the method offers clearer signals, when employed on long-term charts, than the more commonly accepted Closing Price method.




Compare the Typical Price chart (above) to the signals generated by a Closing Price chart (below) with identical box size.




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The weekly Trading Diary offers fundamental analysis of the
economy and technical analysis of major market indices,
gold, crude oil and forex.
The monthly What's New newsletter covers new articles
on Trading and the Economy, as well as new software updates.



About the Trading Diary has been expanded to offer further assistance to readers, including directions on how to search the archives.

Colin Twiggs


Six mistakes mankind keeps making century after century:
Believing that personal gain is made by crushing others;
Worrying about things that cannot be changed or corrected;
Insisting that a thing is impossible because we cannot accomplish it;
Refusing to set aside trivial preferences;
Neglecting development and refinement of the mind;
Attempting to compel others to believe and live as we do.

-
Marcus Tullius Cicero.



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