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Crude Oil Tests Key Support Level

By Colin Twiggs
November 21, 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 is consolidating between $630 and $615 after failure of the mid-month breakout. Expect the current short-term rally to test the upper border of the consolidation.





Source: Netdania


Medium Term: An upward breakout above $630 remains likely, although this will encounter further resistance between $640 and $675. Failure of support at $615, on the other hand, would test initial support at $600

Long Term: Primary support at $540/$550 may come under pressure if oil prices continue to weaken.





Source: Netdania


Crude Oil

December Light Crude closed higher at $55.81 after testing $55.00 at Monday's opening.

Medium Term: Expect strong support at $55 (the low from November 2005), causing an intermediate rally or consolidation.





Source: Tradingcharts.com


Long Term: Failure of the $55 support level 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 retraced after reaching $1.290 dollars, but the intermediate trend remains intact (confirmed if there is a rise above $1.29). A fall below short-term support at $1.275, although less likely, would signal a reversal.

Medium Term: Consolidation between $1.25 and $1.30 continues. The direction of any future breakout, however, remains uncertain.

Long Term: Upward breakout from the consolidation would test the previous high at $1.37, while a downward break would test primary support at $1.165, threatening a large head and shoulders reversal.





Source: Netdania


Treasury yields

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

Medium Term: Failure of support at 4.60% and a fall below the long-term trendline would signal long-term weakness. A rise above the recent high of 4.80%, on the other hand, would complete a small double bottom with a target of 5.00%.

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 increased to 42 per cent according to the Wright Model. A rise above 50 per cent would be cause for concern. 







No man is entitled to the blessings of freedom unless he be vigilant in its preservation.

~ 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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The weekly Trading Diary offers fundamental analysis of the
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