Trading Diary
January 21, 2006

USA

The S&P 500 failed to respect support at 1270, falling sharply [4] on strong volume. We are likely to see a test of intermediate support at 1245.

The index has returned to the long-term bearish rising wedge pattern, signaling a slower primary up-trend. If intermediate support at 1245 fails, we can expect a test of the lower border of the wedge pattern. A downward breakout would have long-term bearish consequences. Twiggs Money Flow (21-day) has weakened with a lower high [H2].

The Dow Industrial Average broke through [1] the short-term support level at 10950, followed by a sharp fall [4] to below intermediate support at 10700. Unless there is a reversal back above the support level in the next few days, the index can be expected to test long-term support at 10000. Twiggs Money Flow (21-day) retreated back below zero, signaling weakness.

The Dow Jones Transportation Average, Fedex and UPS remain in a primary up-trend, but appear to be losing momentum.

The Nasdaq Composite pulled back to test the upper border of the long-term bearish rising wedge pattern. A fall through this level would signal further consolidation. Twiggs Money Flow (21-day), however, remains positive.

Treasury yields

Long-term yields continue to weaken, sending the yield differential (10-year T-notes minus 13-week T-bills) close to zero. This will have a negative impact on banking sector margins and is a long-term predictor of economic down-turns. The Fed may be forced to slow short-term interest rate hikes in an attempt to prevent further weakness. This may have a short-term positive effect, but later the effect of the negative yield curve can be expected to reverse this.

The Big Picture: The S&P500 and NASDAQ are in long-term consolidation patterns (rising wedges) while the Dow remains range-bound between 10000 and 11000. The attempted breakout in mid-January, boosted by the prospect of the Fed slowing rate hikes, has failed. Rising transport indicators signaled an increase in economic activity, but now appear to be losing momentum. A negative yield curve is a long-term predictor of economic down-turns and is likely to weigh heavily on the market in the next few months. We appear to be headed for a further period of consolidation.

Gold

New York: Spot gold is consolidating above support at $540, closing at $553.60 on Friday. A narrow consolidation during the primary up-trend is likely to resolve in an upward breakout.

The Big Picture: Gold is in a primary up-trend with a target of $580: 540 + (540 - 500). Increased demand signals weakness for the US dollar.

United Kingdom

The FTSE 100 broke through intermediate support on Wednesday. The attempted recovery faded, with long shadows and strong volume at [4] and [5]. Twiggs Money Flow (21-day) is declining, signaling distribution. A test of major support at 5500 is likely if the index fails to recover above 5680 in the next few days.

The Big Picture: The primary trend is up and the current target is close to 6000: 5500 + (5500 - 5140) = 5860. A close below 5500, however, would signal trend weakness.

Japan

Profit-taking on the Nikkei 225 at the 16400 caused a break of the recent trendline, signaling a loss of momentum. This was exacerbated by weakness in US markets, causing a retracement to test support at 15200. If support holds, we are likely to see another rally test resistance at 16400. Twiggs Money Flow (21-day), however, is showing signs of weakening (lower highs and lows) and a fall below 15200 would signal a secondary correction, (at least) testing support at the long-term moving average.

The Big Picture: The Nikkei is in a strong primary up-trend. A secondary correction would provide a base for further gains. The index climbed a long way above the previous base at 12000 and the accelerating trend has been hinting at a blow-off.

ASX Australia

The All Ordinaries fell sharply on Wednesday, reacting to negative sentiment in US markets and the ACCC's rejection of Toll Holdings [TOL] takeover bid for Patrick [PRK]. The strong red candle warns that there may be resistance at 4820 (the previous high), while short-term support is at 4730.

Twiggs Money Flow (21-day) continues to hold above the zero line at [A]: a positive sign if this endures for the next few weeks.

The Big Picture: The index is in a strong primary up-trend with a target close to 5000: 4620 + (4620 - 4300) = 4940.