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Stocks & Indexes

By Colin Twiggs
October 21, 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 is trending upwards and we await a new high on the Dow Transportation Average to 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. Gold retreated to $591 and appears headed for a test of primary support at $540, while the dollar continues to range between $1.245 and $1.300 against the euro. 

According to the Wright model, the probability of recession in the next four quarters remains a moderate 39 per cent.





USA

The Dow Industrial Average encountered resistance at 12000, forming another bullish narrow consolidation. However, the long-legged doji on Friday, accompanied by strong volume, warns that resistance is not yet subdued. Reversal below Tuesday's low would be a bearish sign, while a rise above Wednesday's high would indicate that the up-trend is likely to continue.





Medium Term: The index is well above its 100-day moving average, sign of a strong up-trend, and the large 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 is in a primary up-trend, with support at 10700.





The Dow Jones Transportation Average is headed for a test of its May high of 5000. A break above this level would signal reversal to a primary up-trend and confirm the existence of a bull market.









The Nasdaq Composite Index is testing its April high of 2370; the latest short retracement being a bullish sign. The index is well above its 100-day moving average and Twiggs Money Flow (21-day) trending upwards while above zero signals strong accumulation. Breakout above resistance would have a target of 2720 (calculated as 2370 + {2370 - 2020}).





The S&P 500 is headed for a test of the upper border of the linear regression channel. The target for the latest rally is still some way off at 1425 (calculated as 1325 + {1325 - 1225}). Breakout above the upper border of the channel may indicate a stronger up-trend, but we are just as likely to see a retracement test the central linear regression line.





Medium Term: The index is holding above its 100-day moving average and Twiggs Money Flow (21-day) in an up-trend above zero signals strong accumulation.

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






LSE United Kingdom

The FTSE 100 encountered short-term resistance at 6180 after breaking above its April high of 6130. The narrow consolidation is a bullish sign, indicating that there are sufficient buyers to prevent retracement below the new support level.

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.





Nikkei Japan

The Nikkei 225 retraced to test support at 16500. A rise above Monday's high of 16700 would again confirm the up-trend.

Medium Term: The index has formed a trend channel (plotted at 2 standard deviations around the linear regression line) and appears headed for a test of the upper channel line. Twiggs Money Flow (21-day) is improving, but will only offer a strong signal if the latest trough above zero [+] is completed by a new high.

Long Term: The index is in a primary up-trend, with support at 14200, and appears headed for a test of the April high of 17500.









ASX Australia

The All Ordinaries encountered resistance at 5300 (from the May high), forming a bullish narrow consolidation. The break above 5300 is marginal at this stage -- a retracement that respects 5300 (from above) would be a stronger bull signal.

The actual May high was 5352 and the highest close was 5318; so we are likely to encounter a band of resistance between 5300 and 5350 rather than a single line. The lower border of 5300, however, is likely to provide the sternest test.





Medium Term: The index is testing the previous high of 5300/5350. A breakout would be likely to test 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.







Joy is not in things;
it is in us.

~ Richard Wagner (1813 - 1883)


Technical Analysis and 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 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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