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Oil Softens

By Colin Twiggs
June 5, 2008 5:00 a.m. ET (7:00 p.m. AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.

Crude Oil

West Texas Intermediate crude is testing support at $123/$122. A fall below this level would signal a secondary correction that would test support at $110 (the 50% retracement level) and possibly $100 (70% retracement of the advance from $85 to $135). Respect of support at $122 remains as likely, however, and reversal above $130 would signal another rally.

West Texas Intermediate crude oil

Stocks

The Dow continues in a secondary correction, headed for a test of primary support at 11750. Declining volumes over the last few months reflect investor uneasiness. A Twiggs Money Flow fall below -0.05 would warn of abnormal selling pressure.

Dow Jones Industrial Average

An S&P 500 fall below 1370 would confirm the Dow signal.

S&P 500

The FTSE 100 broke through support at 6000, echoing the Dow warning. Expect a test of primary support at 5400. Twiggs Money Flow declining steeply to below zero reflects unusual selling pressure.

FTSE 100

The German Dax is hesitating, like the S&P 500. Failure of support at 6900 would warn of a test of 6500 — and possibly primary support at 6200.

German DAX

The Fear Index

Financial markets remain relatively stable — with the spread between the fed funds rate and 3-month T-bills below 0.50 percent.

The Fear Index: fed funds rate minus 3-month treasury bills

Treasury Yields

Ten-year treasury yields are testing resistance at 4.00 percent. Respect of short-term support at 3.90% would be a bullish sign. Breakout would signal the start of a primary up-trend — a positive long-term sign for the economy, allowing the Fed some leeway to raise short-term rates without risking a negative yield curve. Expect immediate pain, however, with rising mortgage rates exposing banks to further housing losses.

10 year treasury yields and yield differential with 3 month treasury bills

Financial Markets — Commercial Paper

The Fed has indicated that further rate cuts are unlikely. The effective fed funds rate holding firm at the target rate would confirm this, while further dips below 2.00% would warn that banks remain under pressure.

commercial paper rates compared to federal funds rate and treasury bills

Asset-backed commercial paper ticked up, offering short-term relief, but the primary down-trend continues.

commercial paper total balances

Corporate Bonds

Corporate bond spreads remain high, reflecting the continuing liquidity squeeze.

corporate bond spreads

Housing

Thirty-year fixed mortgage rates have started to rise in response to long-term yields, warning of further pain in the housing market.

30 Year Fixed Mortgage Rates Compared to Treasuries

Bank Credit

Bank credit growth is likely to fall sharply when the distortion from unraveling off-balance sheet items clears. FDIC statistics show zero growth in total loans for the last quarter. Net interest margins remain steady at 3.3%, but profitability (average return on assets) has halved in the last 12 months — due to rising default rates.

bank credit growth

Consumers

Consumer confidence fell below its 2003 low. Consumers are likely to tighten their belts and cut back on spending, further slowing the economy.

Bank Consumer Credit Growth

Wright Model

Jonathan Wright's recession prediction model (looking four quarters ahead) remains at zero. It does not, however, reflect that we are most likely already in a recession.

wright's recession prediction model


Eventually the US government will have to use taxpayers' money to arrest the decline in house prices......... markets can be self-reinforcing on the downside as well as the upside. They are waiting for the housing market to find a bottom on its own, but it is further away than they think.

~ George Soros: The New Paradigm For Financial Markets

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