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Trading Diary
June 19, 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 forming a pennant, normally a continuation pattern in a trend. Further bullish signs are:
  • increased volume on the two up-days at [1] and [4]; and
  • equal highs with rising lows, creating an "ascending" pattern.
The index is headed for a test of resistance at 10570. Failure to break through this level would signal a re-test of support at 10000/9900.




The Dow is undergoing a period of consolidation which may well resolve as a mid-point consolidation. A rise above 10570 would signal resumption of the primary up-trend.
Twiggs Money Flow has crossed above its signal line but is still trending downwards.




The Nasdaq Composite is consolidating above 1900. The false break below this level has been followed by a rally which is likely to test resistance at the opposite extreme of the pattern. Lower highs are a bearish sign but descending patterns are unreliable patterns in an up-trend (that is not over-extended). Low volumes on the daily chart signal ambivalence from buyers and sellers.
Twiggs Money Flow continues to trend downwards, signaling continued distribution.




The S&P 500 appears fairly weak in the short-term, with increased volume and a weak close highlighting a failed attempt to break above Monday's high. Failure to break above resistance at 1150 would signal another test of support at 1090/1080.




The outcome of the last two months consolidation pattern is still uncertain.
A clear break above resistance at 1150 would signal resumption of the primary up-trend; though it may be advisable to wait for confirmation. A break below 1080 would be a bear signal, indicating a possible test of support at 960.
Twiggs Money Flow
continues to signal distribution.





The NYSE Bullish Percent Index is at 64.03%; still on Bear Alert status.

Treasury yields

The yield on 10-year treasury notes is down slightly at 4.710%. The yield is consolidating below resistance at 4.84% after the strong breakout. A yield differential (10-year T-notes minus 13-week T-bills) of 3.5% reflects an imminent rates rise.






Gold

New York: Spot gold made a late rally to $394.90, forming a higher low. A rise above 397.20 would signal the start of an intermediate up-trend with a possible test of resistance at the April high of 427.25.




 
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ASX Australia

The All Ordinaries re-tested support at [1], low volume and a weak close indicating an absence of selling pressure. Price then rallied on strong volume; breaking through resistance at 3500 on exceptional volume; and continuing to a new high of 3523 on Friday.




We now have confirmation of the breakout, with a (short-term) pull-back respecting the new support level. The intermediate and primary trends are both up; though we could later see a secondary correction testing the new support level of 3450.
Twiggs Money Flow is rising fast, indicating strong accumulation.






Point & Figure - Triangles

Triangles represent consolidation during an up- or down-trend: when buyers and sellers are, at least for a while, in equilibrium. Breakouts offer significant entry points, either on a continuation or on reversal of the trend.

For a valid triangle there must be at least two retracements counter to the prevailing trend:
  • Two columns of Os in an up-trend; or
  • Two columns of Xs in a down-trend.

Symmetrical triangles

Symmetrical triangles present a series of rising lows and falling highs. Breakouts may occur in either direction, though the pattern is more likely to resolve in a continuation unless a trend is over-extended.

Ford Motor Co. [F] below has formed a triangle between [11] and [12] in the latest up-trend. There are two retracements (red columns) counter to the direction of the trend so this is a valid pattern.
  • An upward breakout entry would be made if the column at [12] rises above the high of the previous column. Stops would be placed below 14.00: the low of the last red column.
  • A downward breakout would occur if price reverses back below 14.00. On a trend reversal it is advisable to wait for confirmation: otherwise you could get suckered by a false break.




Ascending and Descending triangles

Ascending and descending triangles are treated in the same way as on a normal bar chart:
  • Ascending triangles are strong bull signals in an up-trend that is not over-extended. Also in an extended down-trend. In a normal down-trend, the pattern is less certain: often resulting in a bull trap.
    Breakout entries are taken when price rises above the resistance level. Stops are placed below the most recent low.
Boral [BLD] displays a good example of an ascending triangle from [1] to [2]. Two retracements run counter to the main trend, with two equal highs.




Descending triangles are also visible on the above chart: between [2] and [3] and from [4] to [5]. Both patterns resolve in the direction of the primary trend. BLD continues to display a strong up-trend.
  • Descending triangles are strong bear signals in a down-trend (when not over-extended). Also in an extended up-trend. In a normal up-trend, the pattern is less certain; watch out for bear traps.
    Breakout entries are taken when price falls below the support level. Stops are placed above the most recent high.

Allegheny Technologies [ATI] below displays a descending triangle in a down-trend: at [1] to [3]. Observe how the breakout at [2] retreats back above the previous support level. Price then forms another lower high, followed by a strong downward break at [3]: a fine bearish catapult.




Note also the bear trap at [4] before a strong upward breakout to 15.00.
More on breakouts and confirmations next week.....


Basic point and figure chart patterns are explained at the Trading Guide: P&F Chart Patterns.


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Colin Twiggs


. . . So often do the spirits Of great events stride on before the events,
And in to-day already walks to-morrow.

~ Samuel Taylor Coleridge



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