The Big Picture

By Colin Twiggs
March 13, 2007 6:00 p.m. ET (10:00 a.m. AEDT)

These extracts from my 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.

Treasury Yields

Ten-year treasury yields are testing the long-term trendline. Respect of the trendline would signal another rally to test resistance at 5.25%, while a fall below the low of [N] would warn of reversal to a down-trend. Low long-term treasury yields encourage higher valuations in the stock market, offsetting to some extent the negative impact of an inverted yield curve.

The negative yield differential (10-year minus 13-week treasury yields) is increasing, warning of pressure on banking margins and a possible contraction of bank credit, restricting new investment. This FDIC chart clearly depicts the pressure on net interest margins in large institutions.

Equity Markets

The Dow Jones Industrial Average respected the 100-day moving average, falling almost 2% today, and appears headed for a test of support at 12000. A fall below 12000 would signal a test of support at the May 2006 high of 11600; and failure of 11600 would warn of a test of primary support at 10700. Respect of 12000, though highly unlikely, would signal that the down-trend has lost momentum. Twiggs Money Flow fell below zero, signaling distribution; a rally that fails to rise above zero would be a strong bear signal.

Gold

Spot gold is testing the long-term (green) trendline. Respect of the trendline would signal that the up-trend is healthy, while penetration would indicate that the trend is losing momentum. A fall below $600 would signal reversal to a down-trend, while a rise above $660 would signal another rally with a target of $750 ( 690 + [ 690 - 630 ] ).

Falling crude oil prices weaken demand for gold.

Source: Netdania

Crude Oil

April Light Crude broke through the $60/barrel support level and the key pattern over the last two days signals further weakness. A fall below $57.00 would signal a test of support at $52.00.

Currencies

The euro respected support at $1.3050 and is likely to test resistance at $1.34 after the latest, partial decline in a bullish broadening formation. Expect further substantial resistance at the 2005 high of $1.37 if $1.34 is penetrated.

Source: Netdania

The dollar appears headed for a test of support at 114.50 against the yen. Failure would signal reversal to a down-trend and a test of 109, possibly even long-term support at 100. Respect of support, on the other hand, would signal further consolidation between 114.50 and 121.50.

Source: Netdania

Wright Model

Probability of recession in the next four quarters has leveled off at 45 per cent according to the Wright Model.

There is some evidence that the Wright model may understate the probability of recession in a low interest rate environment (as at present).

Fortunately .... we are as a people still free to choose which way we should go -- whether to continue along the road we have been following to ever bigger government, or to call a halt and change direction.

~ Milton Friedman: Free To Choose

To understand my approach, please read Technical Analysis & Predictions in About The Trading Diary.