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Gold Falls

By Colin Twiggs
September 15, 2006 6:15 a.m. ET (8:15 p.m. AET)

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

Low volumes still plague the Dow. Friday is triple-witching hour, when options and futures contracts on market indexes expire in the last hour of trading, and we need to watch for signs of weakness that may be exposed by this abnormal market activity.

Falling crude oil prices and a declining Dow Transport Index signal reduced inflationary pressures -- resulting in falling bond yields. The yield differential remains negative but probability of recession in the next four quarters is still a modest 34 per cent according to the Wright model.

Gold weakened on the back of falling crude prices/inflation fears. Despite this and a stronger bond market the dollar has failed to appreciably strengthen.





USA

The Dow Industrial Average formed an inside day on Thursday which may signal another retracement. Strong primary trend moves followed by short retracements (normally 4 days or less) indicate a healthy up-trend.





Medium Term: Low volumes place a question-mark over buyers' ability to break through major resistance at 11650/11750. Twiggs Money Flow (21-day), however, is holding above zero, signaling accumulation.

Long Term: The Dow continues in a primary up-trend, with resistance from the all-time high at 11750 and support at 10700.





The Dow Jones Transportation Average is testing resistance at 4450 (the former primary support level). The down-trend will be confirmed if resistance holds. Lead indicators Fedex and UPS are in a similar pattern. The primary down-trend indicates that the economy is slowing, but a break above 4450 would signal uncertainty.









The Nasdaq Composite Index is in a healthy intermediate up-trend, with Twiggs Money Flow (21-day) rising steeply above zero. Expect a test of 2370 unless the index reverses below the 100-day moving average.





Volume strengthened on the latest S&P 500 rally at [T] -- a bullish sign. An inside day on Thursday indicates some level of uncertainty: buyers are not comfortable outside of the previous range and there may be another retracement.





Medium Term: The Twiggs Money Flow (21-day) trough above zero is a bullish sign. Expect a test of resistance at the May high of 1325.

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






Treasury yields

Ten-year Treasury note yields consolidated below 4.80% as inflation fears resurfaced. 

Medium Term: The yield differential (10-year T-notes minus 13-week T-bills) is close to zero. The primary cause has been the fall in long-term yields rather than rising short-term yields, reducing the significance.




Long Term:  Probability of recession in the next four quarters increased to 34 per cent on the Wright Model (developed by Fed economist Jonathan H Wright). A spike that reaches 50% would warn of a stronger down-turn than the "soft-landing" most investors hope for.









Gold

Spot gold formed a brief consolidation below $600 before breaking through support.

Medium Term: Falling crude oil prices should weaken gold and strengthen the dollar. Expect gold to test primary support at $540.

Long Term: The primary trend remains upward until there is a fall below $540.





Source: Netdania


Crude Oil

Light Crude has fallen to $64.11 per barrel. The down-trend should encounter a strong band of support between $55 and $60, possibly triggering a short recovery.


Currencies

The US Dollar Index has consolidated in a fairly narrow range over the last few months. Remember this is a weekly chart, so the consolidation pattern is not a flag, however the longer-term down-trend is likely to continue. Any breakout below the support level will signal a test of  the extreme low of 80.00, last reached in early 2005. A weakening dollar would provide support for the gold price.

An upward breakout, though less likely, is likely to test resistance at 93.00; and a breakout above that level, though not very promising at this stage, would complete an inverted head and shoulders.





Source: Netdania


United Kingdom

The FTSE 100 has seen a surge in volumes in the last 3 days, accompanied by signs of distribution: a doji candle on Wednesday followed by a gravestone [Th]. Intermediate support at 5850 may be under threat.

Medium Term: Activity levels have been low throughout July and August, and I suspect that this rally is going to struggle to break through the April high of 6130. Twiggs Money Flow (21-day) has retreated to zero, signaling uncertainty. 

Long Term: The primary up-trend remains until primary support at 5500 is penetrated.





Japan

The Nikkei 225 has so far respected support at 15700. Failure of this level would signal a slowing of the intermediate up-trend, but as long as the index remains within the channel the longer-term trend remains positive.

Medium Term: Twiggs Money Flow (21-day) continues in a narrowing triangle around the zero line, signaling uncertainty. The next target for the up-trend is the April high of 17500, but we would need to see an improvement in TMF for this to be achieved.

Long Term: The primary up-trend remains up, with support at 14200.









ASX Australia

The All Ordinaries retraced for 5 days before rallying on Wednesday, stronger volumes signaling the presence of buying support. The rally only lasted 2 days, however, before a red candle [F] warns of further weakness. A fall below Tuesday's low would signal that a test of support at 4800 is likely, while a rise above Thursday's high would signal another test of resistance at 5100.





Medium Term: The index consolidated between 4800 and 5100 over the last 4 months. A breakout above 5100 would signal a test of the previous high at 5300 (and possibly the upper trend channel), while a fall below 4880 (and the lower trend channel) would be a bear signal -- strengthened if the index closes below 4800, which is arguably a primary support level. Twiggs Money Flow (21-day) holding above zero favors an upside breakout.

Long Term: The All Ordinaries continues in a primary up-trend.







To laugh often and much;
to win the respect of intelligent people
and the affection of children;
to earn the appreciation of honest critics
and endure the betrayal of false friends.
To appreciate beauty;
to find the best in others;
to leave the world a bit better
whether by a healthy child, a garden patch
or a redeemed social condition;
to know that even one life has breathed easier
because you have lived.
This is to have succeeded.

~ Ralph Waldo Emerson (1803 - 1882)


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