Trading Diary
January 7, 2006

USA

After consolidating for several weeks, the S&P 500 has broken through resistance at 1270, signaling resumption of the primary up-trend. The index initially tested support at [1] before rallying on strong volume to a new 4-year high.

The index broke out above the upper border of the long-term bearish rising wedge pattern, signaling a stronger primary up-trend. The signal would be confirmed if a retracement respects the new support level (of 1270) in the next few weeks (in a similar fashion to the Nasdaq Composite). Twiggs Money Flow (21-day) completed a higher trough at [L1], often the first sign of longer-term accumulation.

The Dow Industrial Average appears decidedly bullish, having consolidated for several weeks in a narrow band below primary resistance at 11000. A breakout above 11000 would be a huge boost for the market. Twiggs Money Flow (21-day), however, continues to trend downwards. Watch for positive signs from a new high/ higher low. Expect resistance at 11000 to be formidable and it may be some time before there is a clear breakout.

The Dow Jones Transportation Average, Fedex and UPS continue to show strong primary up-trends: a positive sign for the economy and equity markets.

The Nasdaq Composite successfully tested the upper border of the bearish rising wedge pattern: a bullish sign for equity markets. Twiggs Money Flow (21-day) signals accumulation after holding above the zero line.

Treasury yields

On the fundamental side, the yield differential (10-year T-notes minus 13-week T-bills) fell sharply over the past few weeks. A negative yield differential (signaling a negative yield curve) is an excellent predictor of economic down-turns and the Fed may be forced to slow short-term interest rate hikes in an attempt to prevent this. Not a good position to be in if inflation starts to rise.

Gold

New York: Spot gold rallied strongly since dipping briefly below the $500 support level in mid-December, closing at $538.80 on Friday. A breakout above $540 would confirm the strong primary up-trend and give a target of $580: 540 + (540 - 500).

United Kingdom

The FTSE 100 has rallied strongly since the bull signal at [d]: holding above support at 5500. Twiggs Money Flow (21-day) signals accumulation after initially respecting the former downward trendline at [c] followed by a higher low respecting zero at [d]. The target for the breakout is close to 6000: 5500 + (5500 - 5140) = 5860.

Japan

The Nikkei 225 remains in a strong primary up-trend, having reached its long-term target of 16400: 12000 + ( 12000 - 7600 [April 2003]). Cautious investors may commence taking profits, but this bull-trend appears far from spent. Twiggs Money Flow (21-day) signals massive accumulation, having held above the zero line since July 2005.

ASX Australia

The All Ordinaries rallied strongly since mid-December. This seems to be a regular pattern over the past few years, with the index rising strongly on reduced volume over the last two weeks of the calendar year -- when most institutional buyers/sellers would be expected to be absent. The index completed a cup ([A] to [B]) and handle with a strong breakout at [C]. The retracement at [4] will indicate the strength of the up-trend, but as long as it holds above the new support level of 4620 the market is in positive territory.

The index is in a strong primary up-trend with a target close to 5000: 4620 + (4620 - 4300) = 4940. However, Twiggs Money Flow (21-day) did not confirm the cup and handle pattern, completing a lower trough at L1. Failure of the next trough to hold above the zero line, or at least form a higher low, would be a bearish warning.