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Trading Diary
June 5, 2004

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 Dow Industrial Average is still edging upwards but low volume and Friday's weak close make the rally unconvincing.

In the longer-term, the break below 10000 (at [2] on the P&F chart) now appears to have been a false break, with the index rallying back above resistance at [3]. A rally above the high of [1] (at 10570) would signal resumption of the primary up-trend. Failure to break above this level would be a bear signal.
Twiggs Money Flow (not shown) is still bearish.

The Nasdaq Composite has encountered resistance at 2000 and lacks sufficient volume to penetrate this level. 
Twiggs Money Flow
continues to display a strong bear signal.

The S&P 500 is in a similar situation to the Dow: consolidating on low volume after recovery above a key support level (1090).

A clear break above resistance at 1150 would signal resumption of the primary up-trend. Failure to break above this level would be bearish. Twiggs Money Flow continues to display a strong bear signal.

NYSE Bullish Percent Index

The Chartcraft Bullish Percent Index recovered to 62.07% but is still on Bear Alert status.

Treasury yields

The yield on 10-year treasury notes appears to be consolidating above support at 4.50%. This would confirm the strength of the primary up-trend.

The yield differential (10-year T-notes minus 13-week T-bills) at 3.6% reflects imminent rates increases.


New York: Spot gold penetrated support at 390 before recovering to $390.60 shortly before Friday's close. A pull-back that respects support at 390 would signal a likely re-test of resistance at the previous 2004 highs. A break below support at 390 would indicate a bearish consolidation or slow down-trend.

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ASX Australia

The All Ordinaries showed brief consolidations at [2] and [5] on lower volume, after breaking through resistance at 3450. This signals an absence of selling pressure and we should see an attempt to establish a new high in the next week.

The index is not yet out of the woods. I would like to see a significant new high (as opposed to a marginal break of one box) followed by confirmation in the form of a pull-back that respects the new support level. Only then will I be convinced that we are back in a strong bull market. 
Volume over the last few days appears light; and Twiggs Money Flow (not shown) continues to display a bearish divergence.

Point & Figure - Consolidation Patterns

It is important to use a low reversal amount when scanning for consolidations. I find a reversal amount of 2 most useful for this purpose, being roughly equivalent to the method originally used by
De Villiers & Taylor (The Point & Figure Method of Anticipating Stock Price Movements, 1933). Higher reversal amounts eliminate the narrow fluctuations found in most consolidations.

Narrow consolidations above and below support or resistance levels give important signals about buyer and seller behavior. I first discovered their importance when reading Schwager on Futures: Technical Analysis by Jack Schwager.

Consolidation at Resistance

In an up-trend we are likely to encounter consolidation in a narrow range above or below resistance:
  • Consolidation below resistance indicates that buyers do not have sufficient strength to overcome selling pressure at the resistance level. But instead of being overwhelmed, with a resultant correction, they are buying up all available stock in a narrow band below resistance. Continued accumulation is likely to result in a shortage of available stock - and a consequent rise in price.
  • Consolidation above resistance, after a breakout, also signals accumulation - and a subsequent price rise.
IBM has a good example of consolidation below resistance. Price had established a clear resistance level with three equal highs at [1] to [2]. Support is evident at 75.00. We then have a bullish higher low at [3] before a breakout at [4].

The subsequent pull-back has penetrated IBM's new support level. A reversal above 80.00 would still be reasonably bullish: continuing the sequence of higher lows.

Consolidation at Support

The opposite occurs in a down-trend: consolidation is likely to occur at support levels.
  • Consolidation above support indicates that sellers do not have sufficient strength to overcome buying pressure but, instead of being overwhelmed, they continue to sell stock in sufficient quantity to maintain price in a narrow band above support. Continued distribution is likely to result in a shortage of ready buyers (a surplus of stock) - and a consequent price fall.
  • Consolidation after a breakout below support, signals that there are insufficient buyers to rally price above the new resistance level and are likely to give way under continued selling pressure.
Caltex Australia provides a fine example of bearish consolidation below a support level, at [5] to [6] on the chart below. Price had been creeping downwards since failing to hold above the 5.00 resistance level at [0] and again at [4]. CTX then fell through support at 4.00 and failed to recover back above this level, apart from a false break at [5]. Price fluctuated in a narrow range for almost a year, before a downward breakout at [6] and subsequent down-trend.

The latest CTX rally is a good example of an upward spike, explained in last week's Trading Diary. My preferred strategy is to lock in profits, with a sell-stop at the reversal point which would start a new downward column.

Basic point and figure chart patterns are explained at the Trading Guide: P&F Chart Patterns.

About the Trading Diary has been expanded to offer further assistance to readers, including directions on how to search the archives.

Colin Twiggs

In this game, the market has to keep pitching, but you don't have to swing.
You can stand there with the bat on your shoulder for six months until you get a fat pitch.

~ Warren Buffett

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