Trading Diary
April 23, 2005

USA

The Dow Industrial Average ran into support at 10000 on Monday, with buying signaled by the long tail at [1]. A brief rally followed before further selling took over at [3]; strong volume qualifies this as another distribution day [d]. A strong blue bar on Thursday [4] signaled further buying support before the Alan Greenspan's warning to the Senate Budget Committee, about growing deficits and rising interest rates, caused a hesitant sell-off on Friday.

Twiggs Money Flow (100-day) signals strong distribution, with a peak below the signal line and a fall below previous lows.

Will support at 10000 hold? The round number is a strong psychological barrier. The longer the index holds above 10000 the greater the chance that the primary down-trend will fizzle out. A close below this level, on the other hand, is likely to trigger a fresh spate of selling. A fall below 9750 would signal that a test of support at 7500 (from March 2003) is likely. We have had a valid Dow trend reversal and completed a double-top, at [1] and [2] on the chart below, so I believe that support at 10000 will more than likely fail. If there is a rally above 10350 we will have to re-evaluate.

The S&P 500 fell below 1165 last week, signaling a primary down-trend. Buyers entered the market Monday, with the narrow range and strong volume signaling accumulation. Buying continued until a strong sell-off on Wednesday. Thursday [4] signaled further accumulation, with a strong blue candle and even higher volume, before a hesitant reversal on Friday. 

The S&P 500 looks the strongest of the 3 major indexes: we have seen three accumulation days and one distribution day in the past week. Expect a test of resistance at 1165 in the next few days. If that fails then the primary down-trend will appear uncertain. This does not mean that the up-trend will have resumed; just that tops are volatile and often take time to resolve into a clear direction.

Twiggs Money Flow (21-day) signals distribution.
If resistance at 1165 holds, then we can expect a test of support at 1060. If that fails, the next level is the round number of 1000.

Treasury yields

The yield on 10-year treasury notes appears headed for another test of support at 4.0%.
The yield differential (10-year T-notes minus 13-week T-bills) fell to 1.4%. Below 1.0% would be a long-term bear signal for equities.

Gold

New York: Spot gold broke back through resistance at $430, closing the week at $433.70. The upward breakout is likely to test resistance at $445 (the March high). If that resistance level holds, it will be a (long-term) bear signal: a double top below primary resistance (at $450).

The gold chart highlights an important lesson regarding narrow (intermediate or short-term) consolidations, sometimes referred to as "rectangles". In an up-trend you may find that price consolidates in a narrow band below resistance. This is a bullish sign: demand is strong enough to prevent a correction, even though price is not at a support level. After a breakout, if price consolidates in a narrow range above the new support level, there is greater uncertainty: although price is in an up-trend, sellers are sufficient to prevent a rally -- the two forces tend to offset each other.
The inverse happens in a down-trend: bear signal if there is a narrow consolidation above support; greater uncertainty if there is a narrow consolidation below a former support level (i.e. below newly-formed resistance).

Twiggs Money Flow (100-day) signals distribution, with declining peaks below the signal line (50-day MA).

The secondary correction is likely to test support at the 2002 high of 3450. This would amount to roughly a 50% retracement of the primary up-trend. This is not a prediction but a warning to those traders who may be tempted to ride out the correction. Based on observation of the All Ords over the past 25 years, the index has regularly cut back to test support at previous highs during an up-trend.