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Trading Diary
October 29, 2005

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 S&P 500 continues to consolidate below the new 1200 resistance level. The narrow range indicates continuation of the secondary correction, but frequent tall blue candles, accompanied by strong volume, alert us to the presence of buyers. A close below support at 1175 would lead to a test of primary support at 1140, while a close above 1200 would signal the end of the secondary correction.





The index is consolidating below the lower border of the bearish rising wedge pattern. An upward breakout would be likely to test the upper border of the pattern, while a close below the low would indicate that primary support at 1140 is under threat. The target for the downward breakout is 1000: 1200 - (1240 - 1060) = 1020; confirmed if primary support at 1140 is broken. Twiggs Money Flow (21-day) signals strong distribution with a peak below the zero line.







The Dow Industrial Average continues to consolidate between 10200 and 10400. Twiggs Money Flow (21-day) signals strong distribution and, while tall blue candles indicate buying support, the overall pattern favors a downward continuation, testing primary support at 10000.
In the long-term, the Dow is likely to range between 10000 and 11000 for some time, restraining advances on other indices. A close below 10000, however, would signal the start of a primary down-trend.





The Dow Jones Transportation Average is consolidating in a narrow range below the previous peak: a bearish sign. Fedex is in a strong up-trend, a positive sign for the market, while UPS remains in the doldrums, forming a broad base above support.





The Nasdaq Composite is headed for a test of the lower border of the bearish rising wedge pattern, while Twiggs Money Flow (21-day) signals distribution. A close below lower border of the rising wedge pattern would be a bearish sign, while a fall below 1900 would confirm the start of a primary down-trend.







Treasury yields

Many economists maintain that a neutral Fed funds rate is between 2.5% and 3.0% above the rate of inflation. The question is: "what is the rate of inflation?" Should the Fed concentrate on core inflation, around 2.0% per annum, or should it focus on the broader consumer price index, closer to 5.0 %, which includes volatile food and energy prices?  Short-term price spikes can obviously be ignored, but longer-term shifts in food and energy prices will raise inflation expectations and are likely to become embedded in price and wage demands. If that starts to occur, the Fed may not let up until rates are above 7.0%. 

Long-bond yields are close to 4.6%, while short-term yields are also rising. The yield differential (10-year T-notes minus 13-week T-bills) remains below 1.0%; a long-term bear signal for equity markets.







Gold

New York: Spot gold closed up at $472.80 on Friday. The metal has consolidated in a narrow, rectangular band above support at $460. This is normally a continuation pattern and price appears headed for a test of resistance at $500; confirmed if there is a close above the upper border.




United Kingdom

The FTSE 100 pulled back to test the new 5225 resistance level. Consolidation below this level is likely to lead to a test of initial long-term support at 5050, from the February 2005 high. If that fails, which may be likely with Twiggs Money Flow (21-day) signaling strong distribution, expect a test of primary support at 4800.
On the other hand, a close above 5250 would signal a bullish resumption of the primay up-trend.





Japan

The secondary reaction on the Nikkei 225 is so far muted, with a marginal break below 13200 before a retreat back above the support level. Twiggs Money Flow (21-day) above the zero line signals continued accumulation. A short-term low that respects support at 13200 would be a positive sign, while a close below 13000 would be bearish.

The primary up-trend continues, with a long-term target of 16400: 12000 + ( 12000 - 7600 [April 2003]).







ASX Australia

The All Ordinaries continues with a descending broadening wedge pattern. I want to make it quite clear that traders should not buy on dips within the pattern because of the high failure rate: each new low is likely to take out your stops from the previous dip. You are likely to get your fingers burnt if you try to pick the bottom. Wait for a close above the upper trendline or a partial decline: a dip that does not carry as low as the previous one.

Buying support is evident at 4300, with long tails and strong volume, while selling increased at 4400, the upper border of the pattern.





Twiggs Money Flow (21-day) is whipsawing around zero, signaling consolidation, while the index remains in a strong primary up-trend. Trend strength will be confirmed if the index respects initial support at 4250. The target for the next rally would be 5000: 4600 + (4600 - 4250) = 4950.

Failure of support at 4250, on the other hand, would mean a test of primary support at 3900. At present, the primary trend appears unlikely to reverse, but a fall on the Dow or S&P 500 could have a domino effect on the local index.





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Colin Twiggs


Think of your many years of procrastination; how the gods have repeatedly granted you further periods of grace, of which you have taken no advantage. It is time now to realize the nature of the universe to which you belong, and of that controlling Power whose offspring you are; and to understand that your time has a limit set to it. Use it, then, to advance your enlightenment; or it will be gone, and never in your power again.
~ Marcus Aurelius




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