Nikkei Bear Signal
November 25, 2006 5:30 p.m. AET (1:30 p.m. ET)
The Big Picture
Crude oil rallied to $59.24/barrel. Failure of key support at $55/barrel would signal a long-term down-trend. The dollar is weakening, breaking above $1.30 against the euro (the high of its 6 month's consolidation). Gold strengthened to $637.20 in response.
Probability of recession in the next four quarters increased to 43 per cent according to the Wright model. A climb above 50% would be cause for concern.
USA: Dow, NASDAQ & SP500
Long Term: The Dow remains in a primary up-trend, with support at 10700.
Long Term: The S&P 500 is in a primary up-trend, with support at 1220.
LSE: United Kingdom
Medium Term: Respect of support at 6100 would be a bullish signal that the primary up-trend is likely to resume. Twiggs Money Flow (21-day) displays a bearish triple divergence, so failure of support at 6100/6000, and a secondary correction, remain a possibility.
Long Term: The primary up-trend continues, with support at 5500.
Medium Term: Twiggs Money Flow (21-day) displays a bearish peak [X] below the zero line, signaling strong distribution. Penetration of support at 15500 would warn of a test of primary support at 14200.
Long Term: The index is in a primary up-trend, but primary support may be weakened by failure of the index to test its previous high of 17500.
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Long Term: The All Ordinaries is in a primary up-trend with support at 4800.
It's very destructiveness on both friend and foe has rendered it useless
as a means of settling international disputes.
~ 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.
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