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Dollar Weakens, Gold Rises

By Colin Twiggs
November 28, 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 testing resistance at $640 after rallying strongly since the breakout above $600.





Source: Netdania


Medium Term: Expect further resistance between $640 and $675, but a weakening dollar should increase demand for gold. Breakout above $675, or a narrow consolidation below that level, would be a strong bull signal.

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


Crude Oil

January 2007 Light Crude rallied to $60.32 on Monday and appears headed for a test of resistance at $63.00/barrel.

Medium Term: A breakout from the broadening formation would signal the direction of crude oil prices over the next few months. A failure to test the opposite border may indicate which direction that is likely to be.





Long Term: Failure of support at $55 support level would warn of a long-term down-trend. Consolidation above this level would establish a base for continuation of the up-trend. 


Currencies

The euro broke out from its consolidation of the last 6 months, rallying to $1.3145 dollars. Expect a pull-back to test the new support level at $1.30.





Source: Netdania


Medium Term: The upward breakout is likely to test the early 2005 high of $1.37.

Long Term: Threat of a large head and shoulders reversal has receded and the euro's up-trend against the dollar is likely to continue.





Source: Netdania


Treasury yields

The 10-year yield continues in bear territory below its 100-day moving average. Having penetrated support at 4.60%, the yield is headed for a test of the long-term trendline.

Medium Term: Failure of the long-term trendline would complete the bearish picture for long-term yields.

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 43 per cent last week, according to the Wright Model. A rise above 50 per cent would be cause for concern. 







There's (a) problem that I think is brewing, and that is the end of the housing boom in the United States
and the ability of households to spend more than they earn because the value of their house is rising.

~ George Soros


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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