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Markets Uncertain, Transport Falls

By Colin Twiggs
August 12, 2006 1:00 a.m. ET

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.


The Big Picture

The Dow and S&P 500 signal uncertainty, while the Nasdaq 100 and Dow Transport Index signal weakness and may drag the other indexes lower. The FTSE is mildly bullish, while the ASX and Nikkei are consolidating with no clear trend.

The Fed missed an opportunity to establish its credentials as an inflation hawk, pausing in the cycle of interest rate hikes. Inflation concerns are pushing long-term yields higher and may require the Fed to later make more substantive hikes. The yield differential is close to zero and the risk of an economic down-turn in the next four quarters is 29% and rising steeply, according to the Wright model.

Gold has formed a large symmetrical triangle. Expect an upward breakout if crude oil continues to strengthen and the dollar weaken.





USA

The Nasdaq 100 is consolidating in a narrow band below resistance at 1520. A close below 1475 would be a bearish sign, while a close below 1450 would confirm the primary down-trend. A close above 1520 would obviously be bullish, but Twiggs Money Flow (21-day) has been below zero for more than 3 months, signaling strong distribution.





Confirmation from the Nasdaq Composite Index would strengthen the bear signal.





The Dow Jones Transportation Average confirmed the primary down-trend after a brief consolidation below resistance at 4450. Lead indicator Fedex followed UPS into a down-trend. Twiggs Money Flow (21-day) is below zero, signaling distribution





The Dow Industrial Average failed to overcome resistance at 11250, with low volumes indicating an absence of buyers. A close below 11050 would signal a test of primary support at 10700, while another test of resistance at 11250 (after a short retracement) would be a bullish sign.





Medium Term: Twiggs Money Flow (21-day) has remained below zero since the start of July and is now falling, signaling long-term distribution.

Long Term: The Dow is in a primary up-trend, but a fall below 10700 would mean reversal.






The S&P 500 encountered strong resistance at 1280. The magnitude of the subsequent retracement will indicate the relative strength of buyers and sellers. A fall below 1260 would signal a test of primary support at 1220, while another test of resistance at 1280 would be a bullish sign.





Medium Term: Twiggs Money Flow (21-day) is below zero and falling, signaling distribution.

Long Term: The S&P 500 is in a slow up-trend, with primary support at 1220.






Treasury yields

The yield on 10-year Treasury notes is rising as fears of inflation surface after the pause in interest rates. 

Medium Term: Long-bond yields are likely to continue in an up-trend.

Long Term: The yield differential (10-year T-notes minus 13-week T-bills) is close to zero, making the economy vulnerable.




The probability of recession in the next four quarters has risen to 29 per cent, according to the Wright Model developed by Fed economist Jonathan H Wright. While not yet cause for concern, the model incorporates a fair amount of lag, through the use of 3-month averages, and we can anticipate further increases in the next few months.





Colors on the Wright chart should be interpreted as follows:
  • 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.




Gold

Spot gold is testing the lower border of a large symmetrical triangle.

Medium Term: A downward breakout would be bearish, confirmed if there is a close below support at $600. On the other hand, an upward breakout would be confirmed if there is a close above $675

Long Term: The primary up-trend continues, with primary support at $540/$550.





Source: Netdania


Crude Oil

After a lower high at $79, Light Crude appears headed for a test of intermediate support at $74.50. A close below this level would signal a test of primary support at $72, while a close above $79 would mean another test of resistance at $81.





Currencies

The dollar is weakening against major trading partners.

The Euro is testing resistance at 1.30 dollars. A rise above this level would mean a test of the high at 1.36 (and a bullish sign for gold).





Source: Netdania


United Kingdom

The FTSE 100 is trending slowly upwards. Having earlier penetrated initial support at 5800, if the trend now respects this level (and the 100-day exponential moving average) we should see a rally test 6130. Long tails on Wednesday/Thursday suggest that this is likely.

Medium Term: Twiggs Money Flow (21-day) is trending upwards, signaling accumulation. A rise above 6000 would confirm the up-trend, while reversal below 5650 would signal another test of primary support at 5500.

Long Term: The primary up-trend is intact, unless there is a fall below 5500.





Japan

The Nikkei 225 has formed a bullish ascending triangle below resistance at 15700.

Medium Term: Twiggs Money Flow (21-day) signals accumulation. A breakout above 15700 would signal reversal to a primary up-trend, while a fall below 14400 would confirm the primary down-trend.

Long Term: The index is consolidating with no clear trend as yet.









ASX Australia

The All Ordinaries continues to consolidate in a narrow band between 4880 and 4980, unusually positioned half way between the high and low, indicating market uncertainty. A rise above 4980 would be bullish, signaling an up-trend if the index is able to break through resistance at 5100. However, a fall below 4880 would mean another test of primary support at 4800.





Medium Term: A rise above 5100 would indicate that a test of the upper channel line is likely. Twiggs Money Flow (21-day) whipsawing around zero signals continued uncertainty.





Long Term: The All Ordinaries is in a primary up-trend, but a close below support at 4800 would change this.




There's a problem that I think is brewing, and that is the end of the housing boom in the United States
and the ability of households to spend more than they earn because the value of their house is rising.

~ George Soros.


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