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Gold , Oil & The Dollar

By Colin Twiggs
October 24, 2006 2:30 a.m. ET (4:30 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 Stocks & Indexes) will be on Saturday.


Gold

Spot gold respected resistance at $600/$607, confirming the down-trend. Expect a test of primary support at $540. A fall below the recent low of $560 would confirm this.

Medium Term: Falling oil prices have eased inflationary expectations, causing a drop in demand for gold.

Long Term: A fall below support at $540 would signal a primary trend reversal. However, given current political instability, gold appears to have more upside than downside potential in the long-term.





Source: Netdania


Crude Oil

The latest retracement on Light Crude respected resistance at $60 before closing below last week's low -- signaling the start of another intermediate down-swing.

Medium Term: Expect further support at $55.





Long Term: Peak oil is still a major consideration: oil producers are not discovering new resources as fast as existing fields are being depleted. Retracement from $80 to $55 may merely establish the base for continuation of the larger up-trend, but this could take some time to emerge.





Source: futures.tradingcharts.com


Currencies

The euro is headed for another test of support at $1.250/$1.245. 

Medium Term: Descending highs suggest weakness -- failure of $1.245 would be likely to test primary support at $1.165. A less likely scenario is respect of support and a rise above $1.265, signaling a reversal.

Long Term: Penetration of primary support at $1.165 would complete a large head and shoulders pattern, but that is only one of many possibilities at this stage.





Source: Netdania


Treasury yields

Long-term treasury yields are recovering, with the 10-year yield making a short retracement (or scallop) below its 100-day moving average, a bullish sign.

Medium Term: If the 10-year yield respects support at 4.60% that will confirm we are still in a primary up-trend. Failure of support at 4.60% appears unlikely at this stage.

The yield differential (10-year T-notes minus 13-week T-bills) remains below zero, warning of further weakness in the economy.




Long Term:  Probability of recession in the next four quarters remains at 39 per cent according to the Wright Model. The rate of increase is slowing -- a positive sign. A rise above 50 per cent, however, would be cause for concern. 







How far you go in life depends on your being tender with the young,
compassionate with the aged, sympathetic with the striving
and tolerant of the weak and the strong.
Because someday in life you will have been all of these.

~ George Washington Carver


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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