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In A Cleft Stick
By Colin Twiggs
December 15, 2:00 a.m. ET (6:00 p.m. AET)
The Fed is now fighting a war on two fronts, limiting its ability to manouevre. On the one hand, we have the liquidity crisis in financial markets. Citigroup's decision to take $49 billion of SIV assets back onto its balance sheet may help to restore confidence (Bloomberg), but the banking sector faces further losses in 2008 — before the housing market recovers.
On the other hand, we have the specter of inflation, with the consumer price index rising 0.8% in November and core CPI up 0.3% (Marketwatch), while producer prices (finished goods) spiked 3.2% (BLS news release).
The prospect of further rate cuts fades as the Fed has to make some hard choices. Restoring confidence in the banking sector will remain priority #1, but taming inflation is likely to take precedence over bouyant stock prices and consumption.
The Dow is in a market top, with failed upward/downward breakouts accompanied by heavy volume. Twiggs Money Flow continues to display a large bearish divergence, signaling long-term distribution; a fall below -0.05 would warn of a (primary) reversal.
Short Term: Probability of a bear market remains about 2 to 1, but would increase if Monday breaks through short-term support at 13300, warning of another test of primary support at 12800. Recovery above 13800, while not expected, would signal a test of resistance at 14200.
The S&P 500 displays a similar top to the Dow. The failed breakout above resistance at 1500 is a bearish sign, warning of another test of primary support at 1400. Twiggs Money Flow displays a large triangle and breakout would indicate future direction.
The Russell 2000 is falling faster than large cap indexes. A close below 750 would confirm the primary down-trend. The falling price ratio (to the large cap Russell 1000) shows investors favoring the relative safety of large cap stocks.
The Dow Jones Transportation Average is in a (primary) down-trend. Attempted recovery above 4700 failed, with Fedex (often a lead indicator for the broader economy) dragging the index lower. UPS (another indicator of broad economic activity) is also edging lower, but remains above primary support.
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The FTSE 100 displays a market top similar to the Dow and S&P 500. The index is testing short-term support at 6300; failure would threaten primary support at 6000, while recovery above 6600 would test (primary) resistance at 6700 to 7000. Twiggs Money Flow signals short-term distribution and a fall below zero would warn of a bear market.
The Sensex broke through resistance at 20000 before retracing to test the new support level. Respect would signal a new (primary) advance, while failure would most likely test support at 18500. Normally failure would be a relatively low probability, but bearish signs on other major indexes even up the odds. A large bearish divergence on Twiggs Money Flow also warns of distribution.
The Nikkei 225 is in a primary down-trend and Twiggs Money Flow shows no signs of recovery. Reversal below 15000 would signal another decline, with a target of 14000.
The Hang Seng is headed for a test of primary support at 26000; breakout would commence a primary down-trend. Twiggs Money Flow displays a large bearish divergence — and breakout below its August (primary) low of zero warns of a bear market. Recovery above 30000, while not expected, would indicate another primary advance.
The Shanghai Composite continues a secondary correction. Friday's short-term reversal indicates another test of the upper trend channel is likely. However, penetration of the low of 4850 would warn of a swing to the lower channel border. Twiggs Money Flow signals short-term accumulation.
The bull market is in stage 3 (the final phase), with a price earnings ratio above 30.
The All Ordinaries is in a broadening top pattern, drifting towards the lower trend channel. Breakout below the trend channel would warn that the (primary) up-trend is losing momentum. Twiggs Money Flow reversal below -0.05 would warn of a bear market, while recovery above 0.2 would be bullish.
Short Term: The index is testing short-term support at 6550. Failure would warn of a downward breakout from the broadening top formation, with a target of primary support at 5650. Recovery above 6750, on the other hand, would indicate a test of the upper channel border.
If I were walking along a railway track and saw an express
train coming at me at sixty miles an hour, I would be a damned
fool not to get off the track and let the train go by. After it
had passed, I could always get back on the track again, if I
~ Jesse Livermore: How To Trade In Stocks (1940).
To understand my approach, please read Technical Analysis & Predictions in About The Trading Diary.