Trading Diary
June 4, 2005

USA

The Dow Industrial Average has consolidated in a narrow range above 10400 over the last two weeks. Volume does not yet give a clear indication of a potential breakout, although higher volume on Tuesday [1] and low volume at [3] could both be said to favor the downside. A close above 10560 would signal a test of resistance at 10900/11000; while a close below 10400 is also a reasonable possibility and would signal a re-test of support at 10000.

The last year has established strong support at 10000/9750 with successful tests at [1] through [4] and again at [7]. There is also strong resistance at 11000/11500, shown by price action from 1999 to 2001 and by recent highs at [5] and [6]. I expect that we will see a lot more price action between these levels before there is a clear breakout.

The S&P 500 does not yet show clear direction in the short-term: the break above 1200 halted after one day and now appears headed for a re-test of support at 1190. If price respects 1190 that would be a bullish sign, signaling a test of resistance at the March high of 1225. A close below 1190 would herald another visit to 1145/1140.

In the long-term the index is wedging upwards in a rough rising wedge formation. The pattern is meandering rather than tight (with successive rallies and corrections clearly defining the borders) but would add increased (bearish) significance to a break below 1150. The primary trend will reverse upward if there is a close above 1225 but beware of a marginal breakout that respects the upper border of the wedge pattern; that would be another bearish sign. Twiggs Money Flow (100-day), on the other hand, is rising strongly and a pull-back that holds above the signal line would be a strong bull signal.

Treasury yields

The yield on 10-year treasury notes fell below support at 4.0%. Friday pulled back to test resistance at the new level. A successful test will signal further weakness, while failure would signal a rally back to 4.5%. T-bills (13-week), on the other hand have climbed to 2.9% and the yield differential (10-year T-notes minus 13-week T-bills) has fallen to 1.0%. Further falls would be a long-term bear signal for equities.

Gold

New York: Spot gold is whipsawing around the $420 level, closing at $423.10 on Friday, in a gradual down-trend.
The primary trend will reverse downward if price falls below support at the February low of $410.

A close above the March highs, preferably by both indices, would signal resumption of the primary up-trend. Beware, though, of a marginal break above the highs; that would be a strong bear signal.

Twiggs Money Flow (21-day) signals strong accumulation in the intermediate term.

If resistance at 4255 holds then expect another test of support at 3900. My warning about 3450 remains. I still see more downside than upside and this could well be a stage 3 top. Failure of support at 3900 would signal that a test of support at 3450 is likely; amounting to roughly a 50% retracement of the previous up-trend. A review of the All Ords over the past 25 years shows that the index regularly cuts back to test support at previous highs.