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July 17, 2004
The Dow Industrial Average is headed for a test of support at 10000/9900: consolidation over the last 8 days ended with a downward break on higher volume.
The long-term pattern also reflects consolidation and can break out in either direction. An upward breakout is more likely because we are in an up-trend, but the possibility of a reversal cannot be ignored. Direction will only be clear when we have a breakout from the pattern: above 10500, or below 9900, followed by a pull-back that confirms the breakout.
Twiggs Money Flow is falling steeply, signaling distribution.
Recovery back above 2100 would be a bullish sign.
Twiggs Money Flow is falling sharply, signaling distribution.
Twiggs Money Flow signals strong distribution.
The NYSE Bullish Percent Index eased to 64.22%. A fall below 60.0% would be a strong bear signal.
The yield on 10-year treasury notes reflects weaker economic data: a retreat back below support at 4.50% before consolidatiion in a narrow range. This was followed by a strong downward breakout on Friday.
Expect a test of support at 3.60% (if there is no immediate reversal above 4.40% on Monday or Tuesday). A break back above 4.50% would be bullish.
The yield differential (10-year T-notes minus 13-week T-bills) remains healthy at 3.0%.
New York: Spot gold closed the week at $406.20. The intermediate up-trend is likely to test resistance at $427.25.
The All Ordinaries consolidated for several days (after breaking through resistance at 3550) before a sharp fall on Wednesday [w] on higher volume. A marginal new high above a previous peak is normally a bearish sign. Declining volume over the last month signals a lack of buying pressure.
Expect either a consolidation over the next few weeks or a re-test of support levels at 3450 and 3350.
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A fall below 3350 would signal reversal of the primary trend.
Twiggs Money Flow is rising steeply, signaling strong accumulation.
In the June 5th newsletter we discussed Spikes, where a stock rallies without any significant corrections or consolidations. These tend to become more and more unstable the higher they climb. Reactions, when they do arrive, are often highly volatile and a trader can lose much of his/her hard-won gains if not careful.
A conventional stop loss strategy, moving up stops below each successive trough, will not help in this scenario - there are no recent troughs. My strategy is to exit at the first sign of a correction: at the start a new column of Os. I do not want to be judged on the strength of a single call, but it will be interesting to see how Caltex [CTX] develops over the next few weeks.
Most traders are aware that equal highs signal resistance and are often precursors to a period of consolidation and possibly even a double-top reversal. Likewise equal lows signal support and warn of a period of consolidation or a double-bottom reversal. A more elusive warning sign, often undetected on a normal bar or candlestick chart, is a marginal new high in an up-trend or marginal new low in a down-trend.
Marginal new highs are formed when price rallies above the previous high during an up-trend but fails to make significant further gains, normally only exceeding the previous column of Xs by a single box. The pattern signals a loss of momentum and often precedes a major consolidation or reversal. The All Ordinaries chart displays some excellent examples:
- Marginal new highs at [b] warn of a major top forming at the previous high, followed by a strong reversal to below 3000;
- At [d] marginal new highs signals that the attempted recovery is running out of gas; followed a sharp drop to below 2680.
- A marginal new low at [a] precedes a major recovery after the September 11 crash; and
- A marginal new low at [d] warns of a trend reversal - a bear market rally as it turns out, but a significant move nonetheless.
and the death of fear is certain.
~ Ralph Waldo Emerson
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