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Gold , Oil & The Dollar

By Colin Twiggs
November 14, 2006 5:30 p.m. AEDT (1:30 a.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 next newsletter (an update on Stocks & Indexes) will be on Saturday.


Gold

Spot gold continues to rally, but is likely to encounter a band of resistance between $640 and $675. Retracement to test the new support level at $600 is still possible, while narrow consolidation below $640 would be a bullish sign. A fall below $600 would signal trend weakness.





Source: Netdania


Medium Term: A break above $675 would signal an attempt on the previous high of $730.

Long Term: Gold is in a primary up-trend with support at $540/$550. If oil prices continue to weaken, the present pattern may evolve into a stage 3 top.


Crude Oil

December Light Crude again respected resistance at $62, close enough not to be classified as a failure swing. The right-angled descending broadening formation is untidy, but still recognizable. Breakout in either direction would be a reliable indicator of future trend direction, while a significantly higher trough or lower peak (called a failure swing) may give an early indication.

Medium Term: Expect strong support at $55 (the low from November 2005).





Long Term: A fall below $55 would warn of a long-term down-trend, while consolidation above $55 would establish a base for continuation of the present up-trend. 


Currencies

The euro broke through short-term resistance at $1.280 before retracing to test the new support level. Support is likely to hold and we can expect a test of resistance at $1.30.

Medium Term: The last 6 month's consolidation continues and the direction of any future breakout remains uncertain.

Long Term: Upward breakout (from the consolidation) would test the previous high of $1.37, while a downward break would test primary support at $1.165, threatening to complete a large head and shoulders reversal. A wild card is the large dollar holdings of foreign central banks -- a shift to diversify into other currencies would remove substantial support for the greenback.





Source: Netdania


Treasury yields

The 10-year yield continues to test support at 4.60%, remaining in bear territory below its 100-day moving average.

Medium Term: Breakout above the recent high of 4.80% would complete a small double bottom with a target of 5.00%. Failure of support and a break of the long-term trendline, on the other hand, would signal long-term weakness.

The yield differential (10-year T-notes minus 13-week T-bills) continues its down-trend below zero, increasing the risk of an economic slow-down.




Long Term:  Probability of recession in the next four quarters remains at 41 per cent according to the Wright Model. A rise above 50 per cent would be cause for concern. 







One cannot wage war under present conditions without the support of public opinion,
which is tremendously molded by the press and other forms of propaganda.

~ General Douglas MacArthur


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, medium 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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