December 9, 2006 7.00 a.m. ET (11:00 p.m. AET)
The Big Picture
January light crude, currently at $62.03/barrel, threatens another rally. The euro encountered resistance at $1.3350 against the dollar and is consolidating at $1.32; appearing headed for a test of the 2005 high of $1.37 in the longer term. Gold retreated to $623.90 after testing $650 and appears headed for a test of support at $615.
Probability of recession in the next four quarters increased to 44 per cent according to the Wright model. A rise above 50% would be cause for concern.
USA: Dow, Nasdaq and S&P500
Long Term: The Dow remains in a primary up-trend, with support at 10700.
Long Term: The S&P 500 continues in a primary up-trend, with support at 1220.
LSE: United Kingdom
Medium Term: The small double bottom respected support at 6000, the 100-day moving average, and the long-term trendline. Twiggs Money Flow (21-day) recovered strongly above zero. A rise above the recent high of 6250 would complete a bull signal.
Long Term: The primary up-trend continues, with support at 5500.
Medium Term: Penetration of support at 15700, or reversal of Twiggs Money Flow (21-day) below the zero line, would warn of a test of primary support at 14200.
Long Term: The index remains in a primary up-trend. Primary support will be weakened if the index fails to test its previous high of 17500.
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Long Term: The All Ordinaries remains in a primary up-trend with support at 4800.
What the petty man demands is something of others.
~ The Analects of Confucius
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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