Trading Diary
November 19, 2005

USA

The S&P 500 broke out above resistance at 1245 to make a new 3 year high. Some profit-taking took place at [2], with a red candle and strong volume, while the tall blue candle and strong volume at [4] show buyer commitment. The index may encounter further resistance, at 1250, but this is unlikely to hold. Look for confirmation from a retracement that respects the support level.

The index remains in a long-term bearish rising wedge pattern and, unless we see a breakout above the upper border, we should expect further consolidation. Twiggs Money Flow (21-day) signals accumulation with a sharp climb above the zero line.

The Dow Industrial Average broke through resistance at 10700. A retracement that respects the new support level would be a bullish sign, signaling a test of 11000. Twiggs Money Flow (21-day) is above zero, but has yet to give an accumulation signal. In the long-term the Dow faces heavy resistance at 11000 and strong support at 10000.

There has been some discussion about recent changes to the Dow Jones Transportation Average. Delta and Northwest airlines were dropped from the index because they had filed for bankruptcy protection. The effect is fairly negligible as the two comprised only 1.18% of the total index weighting. However, there are also new additions to the index:

• airline JetBlue (market cap 2.0B; weighting 2.1%), which replaces the dropped airlines;
• trucking stock Landstar [LSTR] (market cap 2.5B; weighting of 4.5%); and 
• shipping stock Overseas Shipholding [OSG] (market cap 2.0B; weighting of 5.5%).

Both LSTR and OSG are positive performers and their substantial index weightings do not seem to make sense when compared to index stalwarts, Fedex (market cap 29.6B; index weighting 10.2%) and UPS (market cap 86.2B; index weighting 8.2%). Frequent changes to component stocks and weightings in an index undermine its value. Fortunately, both UPS and Fedex are trending upwards: a bullish sign for the economy.

The Nasdaq Composite is testing the upper border of the bearish rising wedge pattern. Twiggs Money Flow (21-day) signals accumulation, climbing steeply above zero. A breakout would signal a strong primary up-trend: a positive sign for the Dow and S&P 500.

Treasury yields

Short-term yields are rising while long-term yields have pulled back below resistance at 4.60%. The yield differential (10-year T-notes minus 13-week T-bills) fell to 0.59%. The Fed continues to face a tough choice: continue to hike short-term rates and the yield curve will go negative, but ease off the rate hikes and inflation may take root. Either result will have negative consequences.

Gold

New York: Resistance at the upper border of the consolidation is broken and spot gold appears headed for a test of resistance at $500, closing at $485.20 on Friday. The earlier downward breakout proved to be a classic bear trap.

United Kingdom

The FTSE 100 made a false break below support at 5420 on Wednesday (note the long tail and strong volume at [3]) before rallying towards the end of the week. Long shadows and big volume on Thursday/Friday signal strong selling and the failed breakout at [5] has bearish implications: expect another test of support at 5420. Twiggs Money Flow (21-day) is neutral, sitting at the zero line. There are two probable longer-term scenarios:

• a fall below short-term support at 5420 leading to a test of primary support at 5140;
• a breakout above 5500, with a target close to 6000: 5500 + (5500 - 5140) = 5860.

Japan

The Nikkei 225 has again commenced an accelerating curve. Accelerating trends are unsustainable and -- though we may see strong gains first -- allow for a correction back to the intermediate trendline. The bottom line is: tighten your stops in an accelerating curve. Twiggs Money Flow (21-day) signals strong accumulation. The primary up-trend should continue for some time, with a long-term target of 16400: 12000 + ( 12000 - 7600 [April 2003]) = 16400.

ASX Australia

The All Ordinaries encountered some profit-taking during the week, with a doji on Tuesday, increased volume and a narrow range on Wednesday [3] and tall shadow on Thursday. Friday's strong blue candle [5], however, confirms that the market is still bullish and we can expect a strong test of resistance at 4620.

Twiggs Money Flow (21-day) signals accumulation and the index is in a strong primary up-trend. A breakout above 4620 would present a target close to 5000: 4620 + (4620 - 4300) = 4940. On the other hand, though it appears unlikely, failure to break above the previous high would signal a test of primary support at 4320.