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Stocks & Indexes

By Colin Twiggs
October 14, 2006 0:30 a.m. ET (2:30 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 next newsletter (an update on Gold, Crude Oil and the Dollar) will be on October 17th.


The Big Picture

The Dow confirmed its breakout above 11750 -- a strong bull signal. The Dow Transportation Average is rallying and a new high would confirm that we are in a bull market.

Crude oil confirmed its break below support at $60/barrel and appears headed for a test of $55. The dollar has strengthened to $1.25 against the euro.  Falling fuel costs and lower long-term interest rates may stimulate the economy, but too fast a recovery would raise inflationary pressures and revive fears of further rate hikes. Gold recovered to $589.50, but is trending downwards in the medium term. The probability of recession in the next four quarters increased to a moderate 39 per cent according to the Wright model.





USA

The Dow Industrial Average made another narrow bullish consolidation after the breakout above 11750. Low volume on Monday is from the bank holiday. The upward breakout on Thursday [Th] confirms the larger breakout above 11750. A small hanging man on Friday hints at further resistance, but this is likely to be short-lived. The pattern of the last few months continues: short consolidations or retracements, followed by strong blue candles occurring in pairs. 





Medium Term: The index is well above the 100-day moving average, sign of a strong up-trend, and the upward spike on Twiggs Money Flow (21-day) signals strong accumulation. The target for the breakout is 12700 (calculated as 11650 + {11650 - 10700}).

Long Term: The Dow remains in a primary up-trend, with support at 10700. A new high on the Transport Index would confirm a bull market.





Fedex is leading the Dow Jones Transportation Average towards a test of its May high of 5000. The small ascending flag over the last two weeks is a continuation signal. A break above 5000 would signal reversal to a primary up-trend and confirm the existence of a bull market.









The Nasdaq Composite Index is headed for a test of the April high of 2370, rallying strongly above the 100-day moving average. Narrow consolidation below the resistance level would be a bullish sign. Breakout above resistance would have a target of 2720 (calculated as 2370 + {2370 - 2020}). Twiggs Money Flow (21-day) trending up while above zero signals strong accumulation.





The S&P 500 follows a similar pattern to the Dow: holding above its 100-day moving average, with short consolidations/retracements interspersed with strong blue candles. Expect a test of the upper border of the linear regression channel. The target for the latest rally is 1425 (calculated as 1325 + {1325 - 1225}).





Medium Term: The Twiggs Money Flow (21-day) spike above zero signals strong accumulation and the pace of the up-trend may accelerate.

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






United Kingdom

The FTSE 100 rallied strongly to close above the April high of 6130 -- a bullish sign. A retracement that respects the new support level at 6130/6100 would confirm the breakout.

Medium Term: The target for the breakout is 6700 (calculated as 6100 + {6100 - 5500}). Twiggs Money Flow (21-day) signals strong medium-term accumulation.

Long Term: The primary trend is up, with support at 5500.





Japan

Despite uncertainty caused by North Korean nuclear tests, the Nikkei 225 has so far respected the first line of support at 16400. A rise above 16600 would confirm the strong up-trend. Narrow candles, however, signal uncertainty and further closes below 16400 would confirm this.

Medium Term: The latest rally is headed for a test of the April high of 17500. Twiggs Money Flow (21-day) is improving, but will only offer a strong signal if the latest trough above zero is completed.

Long Term: The index is in a primary up-trend, with support at 14200.









ASX Australia

The All Ordinaries started the week with a bullish short retracement at [M] followed by a rally on strong volume on Tuesday/Wednesday. Strong volume continued on the short retracement at [Th], signaling increased resistance. The theme continued on Friday, with a tall shadow indicating profit-taking. A follow-through above Friday's high would signal that buyers have regained control, while a fall below Thursday's low (though less likely) would mean further retracement.





Medium Term: The index is approaching resistance at the previous high of 5300/5350. Narrow consolidation below this level would be a bullish sign, while breakout above the previous high would indicate a test of the upper border of the regression channel -- a target of 5800 (5300 + {5300 - 4800}). Twiggs Money Flow (21-day) trending upwards above the zero line signals long-term accumulation.

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







I have always found that plans are useless
but planning is indispensable.

~ Dwight D Eisenhower


Predictions

I believe that Technical Analysis should not be used to make predictions because we never know the outcome of a particular pattern or series of events with 100 per cent certainty. The best that we can hope to achieve is a probability of around 80 per cent for any particular outcome: something unexpected will occur at least one in five times.

My approach is to assign probabilities to each possible outcome. Assigning actual percentages would imply a degree of precision which, most of the time, is unachievable. Terms used are more general: "this is a strong signal"; "this is likely"; "expect this to follow"; "this is less likely to occur"; "this is unlikely"; and so on. Bear in mind that there are times, especially when the market is in equilibrium, when we may face several scenarios with fairly even probabilities.

Analysis is also separated into three time frames: short, intermediate and long-term. While one time frame may be clear, another could be uncertain. Obviously, we have the greatest chance of success when all three time frames are clear.

The market is a dynamic system. I often compare trading to a military operation, not because of its' oppositional nature, but because of the complexity, the continual uncertainty created by conflicting intelligence reports and the element of chance that can disrupt even the best made plans. Prepare thoroughly, but allow for the unexpected. The formula is simple: trade when probabilities are in your favor; apply proper risk (money) management; and you will succeed.

For further background, please read About The Trading Diary.


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The weekly Trading Diary offers fundamental analysis of the
economy and technical analysis of major market indices,
gold, crude oil and forex.
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