July 27, 2006
The falling yield differential is further cause for concern. The slowing economy increases the likelihood of the Fed pausing in its cycle of rate hikes, but this is by no means certain.
Gold is weakening along with crude oil as the dollar strengthens.
Long Term: The Dow is in a primary up-trend, but a fall below 10700 would mean a reversal.
Long Term: The S&P 500 is in a slow up-trend, oscillating within a channel drawn at 2 standard deviations around a linear regression line. A fall below the lower border of the channel would be bearish -- and a close below 1220 would signal a primary trend reversal.
The yield on 10-year Treasury notes has so far respected support at 5.0%, a positive sign.
Medium Term: Long-bond yields are likely to respect their 100-day exponential moving average and continue in an up-trend.
Long Term: The yield differential (10-year T-notes minus 13-week T-bills) is close to zero and cause for concern. A negative yield differential/yield curve would make the economy extremely vulnerable.
- probability rises above 25%: while not yet cause for concern, watch the indicator regularly for signs of further deterioration;
- above 50%: the situation is becoming volatile -- so exercise caution;
- above 75% means dire risk of an economic downturn.
Spot gold is retracing on the back of a stronger dollar. The index briefly broke through support at $620 before recovering to above $630.
Medium Term: Expect another test of resistance at $680. Failure to break out above this level would again place support at $620 under threat.
Long Term: Gold continues in an up-trend, with primary support at $540.
Light Crude broke through initial support at $75 and is now consolidating below the support level. This is a bearish sign and we can expect a test of primary support at $70. Recovery above $75, on the other hand, would indicate another test of resistance at $79/$80.
The dollar is strengthening against major trading partners in the short-term.
EUR/USD: The euro is consolidating between support at 1.25 and resistance at 1.30. An upward breakout would signal a test of the previous all-time high of 1.37. A downward breakout would signal a test of support at 1.185/1.165.
Long-term: A fall below 1.165 would complete a major head and shoulders reversal (with a target of 0.97: 1.17 - (1.37 - 1.17)).
The FTSE 100 is trending upwards and would receive further confirmation from a rise above 5900.
Medium Term: A rise above 5900 would signal a test of 6130, while reversal below 5700 would mean another test of primary support. Twiggs Money Flow (21-day) is trending upwards, signaling accumulation.
Long Term: The primary up-trend is intact.
The Nikkei 225 is currently trading at 15180. If it can hold above 15000, that would be a positive sign, but reversal below 15000 would be a stronger bear signal.
Medium Term: A close below 14400 would reinforce the bear signal and below 14200 would confirm the primary down-trend. Above 15500, on the other hand, would signal the (doubtful) start of an up-trend.
Long Term: The index is in a primary down-trend, with support at 14200, 13000 and major support at 12000.
The All Ordinaries is consolidating in a narrow band between 4880 and 4980, with rising volume indicating support. Expect another test of resistance at 5100, but a fall below 4880 would mean another test of primary support at 4800.
~ Theodore Roosevelt (Arbor Day message to the school children of the United States, April 1907)