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Markets Bullish After Crude Falls

By Colin Twiggs
August 17, 2006 21:30 p.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

Equity markets look distinctly bullish after mild inflation figures raised the prospect of an extended pause in interest rates. The Nasdaq 100 has reversed above its resistance level while the Dow Transport Index is also testing resistance at its former breakout level.

The Fed appears to have called the pause in interest rates correctly, with latest data signaling a slow-down in manufacturing and an easing of inflationary pressure. A fall in crude oil prices has also helped. The yield differential remains cause for concern: it has fallen well below zero and may cause problems in the months ahead.

Gold is weakening, accompanying the fall in crude oil, but the dollar has yet to show any real gains. This may be a prospect in the weeks ahead.





USA

The Nasdaq 100 reversed above resistance at 1520 after several weeks consolidation, signaling the start of an intermediate up-trend. Note the strong volume on Wednesday [W] when buyers overcame resistance. Twiggs Money Flow (21-day) crossed to above zero for the first time in more than 3 months.





The Dow Jones Transportation Average has again pulled back to test resistance at 4450, with lead indicator Fedex following suit. Considering recent signals on the Dow and S&P 500, watch for an upward breakout.





The Dow Industrial Average broke through resistance at 11250/11300 after a short pull-back.





Medium Term: The target for the breakout is close to the recent high of 11650: 11250 + (11250 - 10700) = 11700. Twiggs Money Flow (21-day) shows early signs of accumulation but remains below zero.

Long Term: The Dow continues in a primary up-trend, with support at 10700.






The S&P 500 broke through resistance at 1280 after a short pull-back, completing an ascending triangle. The target for the breakout is close to the recent high of 1330: 1280 + (1280 - 1220) = 1340.





Medium Term: Twiggs Money Flow (21-day) rose to above zero for the first time in over a month.

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 respected resistance at 5.0% and is now trending downwards. 

Medium Term: Mild recent inflation figures have eased upward pressure on yields.

Long Term: The yield differential (10-year T-notes minus 13-week T-bills) fell sharply, making the economy extremely vulnerable.




The probability of recession in the next four quarters has risen to 30 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 likely to weaken if crude oil establishes a primary down-trend.

Medium Term: The metal has broken out below a large symmetrical triangle. Penetration of support at $600 would signal another down-trend. The target for the triangle breakout is $450: (630 - (730 - 550)).

Long Term: The primary up-trend appears uncertain. Primary support is at $540/$550.





Source: Netdania


Crude Oil

Light Crude has fallen through primary support at $72.00, signaling the start of a primary down-trend. A pull-back that respects the new resistance level would confirm the down-trend.





Currencies

Mild inflation figures and falling crude and gold prices should boost the dollar, but this is not yet evident on the charts.

The Euro is consolidating below resistance at 1.30 dollars. A rise above this level would mean a test of the high at 1.35/1.36 (and a bullish sign for gold).





Source: Netdania


United Kingdom

The FTSE 100 is trending slowly upwards. Having respected initial support at 5800 (from the first peak), and overcome resistance at 5900, we should see a rally test 6130.

Medium Term: A rise above 6000 would add further confirmation, while reversal below 5800 would signal another test of primary support at 5500. Twiggs Money Flow (21-day) is trending upwards, signaling accumulation.

Long Term: The index is in a primary up-trend.





Japan

The Nikkei 225 broke out from a bullish ascending triangle.

Medium Term: We may see a pull-back to test the new support level at 15700. The target for the breakout is close to the previous high of 17500: (15700 + (15700 -14200)) = 17200. Twiggs Money Flow (21-day) is rising, signaling accumulation

Long Term: The index has reversed to a primary up-trend.









ASX Australia

The All Ordinaries broke through the top of the recent consolidation at 5000. This is a bullish sign and we can expect a test of 5100 shortly. A breakout above 5100 would confirm that the intermediate up-trend has resumed.





Medium Term: A rise above 5100 would indicate that a test of 5300 is likely. Twiggs Money Flow (21-day) is rising, signaling accumulation.





Long Term: The All Ordinaries is in a primary up-trend, with support at 4800.




To sit home, read one's favorite paper, and scoff at the misdeeds of the men who do things is easy, but it is markedly ineffective. It is what evil men count upon the good men's doing.

~ Theodore Roosevelt (1895).


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