Trading Diary
March 4, 2006

USA

The S&P 500 is testing resistance at the recent high of [A]. The weak close and low volume at [1] and the tall shadow and declining volume at [5] both signal an absence of buying pressure. 

Medium Term: A close below 1280 would signal weakness and a likely test of intermediate support at 1245/1250; consolidation in a narrow band between 1280 and 1295 would be bullish; while a close above 1295/1300 would signal a strong up-trend.
Twiggs Money Flow (21-day) is holding above zero: a positive sign.

Long Term: The index is testing the upper border of a 2-year bearish rising wedge pattern. A breakout would signal a strong primary up-trend.

The Dow Industrial Average started Monday [1] with a weak close after testing resistance at 11150. A large red candle and strong volume [2] failed to penetrate support at 10950, but a long tail and strong volume at [5] indicate continued selling pressure. Twiggs Money Flow (21-day) is above zero: a short-term positive.

Medium Term: A close below 10950 would indicate trend weakness; consolidation between 10950 and 11150 would be bullish; while a close above 11150 would signal a strong up-trend. Twiggs Money Flow (21-day) oscillates across the zero line: a neutral sign.

The Dow Jones Transportation Average and lead indicator Fedex are in strong primary up-trends. UPS, however, continues to consolidate. A rise above the high of [5] would confirm the primary up-trend; while a fall below the February low would be bearish.

The Nasdaq 100 and Nasdaq Composite have twice respected support (at [F] and [H]) from previous highs [A] and [C]. A rise above the high of [G] would be a strong bull signal for US equity markets. Twiggs Money Flow (21-day) is steadily rising above zero -- another positive sign.

Though less likely, a fall below the recent lows of [F] and [H] would signal weakness.

A reader pointed out that the recent pattern resembles the start of a head and shoulders -- with the left shoulder at [E] and the head at [G]. It is important to remember that H&S is not a valid signal until it is completed -- even if the start of the right shoulder resembles a bear flag. At a guess I would say 3 out of 4 potential H&S patterns never complete.

Treasury yields

The 10-Year treasury yield broke through resistance at 4.60/4.65% after a (bullish) narrow consolidation at [c]. Look for confirmation from a pull-back that respects the new support level. 

Medium Term: An up-trend would have a negative effect on the buoyant property market, but may avert a negative yield curve which is a serious threat to the economy. The yield differential (10-year T-notes minus 13-week T-bills) rebounded slightly after hovering just above zero for the past few weeks.

The Big Picture: All three equity indexes show positive signs, but none has yet made a decisive breakout. The Dow Transport index and lead indicator Fedex are in strong primary up-trends, but UPS remains uncertain. The yield differential (between long-term notes and short-term bills) remains close to zero and a negative yield curve would make the economy vulnerable to a down-turn. Rising long-term yields may slow growth but avoid a sharp down-turn later.

Gold

Spot gold is currently at $565.10 and is headed for a test of resistance at $575. 

Medium Term: A rise above $575 would signal continuation of the primary trend with a target of 615 (575 + {575 - 535}); while failure to break through resistance would mean either a (bullish) narrow consolidation or else a re-test of primary support at $535.

The Big Picture: Rising oil prices enhance the appeal of gold as an inflation hedge. Gold should continue its' strong primary up-trend as long as oil prices remain high. A drop below $55/barrel for Light/Brent crude would be a bear alert; while a rise above $70 would be a bull signal.

Currencies

The euro is testing primary support against the US dollar, having fallen below primary support at 1.185 before reversing to [B]. A fall below the low of [A] would confirm the primary down-trend.

Against the yen, the dollar is in a primary up-trend after breaking above 114 in October 2005. The greenback then retreated to successfully test the new support level at [C]. The up-trend will continue -- so long as the dollar holds above 114.

The Big Picture: The US dollar is strengthening against major trading partners.

United Kingdom

The FTSE 100 is consolidating between 5800 and 5880.

Medium Term: The index has reached its' target of 5860 (5500 + {5500 - 5140}) -- so we need to be alert for profit-taking (and a possible secondary correction) below 6000 -- but Twiggs Money Flow (21-day) continues to hold above zero, signaling buying support.

The Big Picture: The FTSE 100 is in a strong primary up-trend. Initial support is at 5500 and primary support at 5140.

Japan

The Nikkei 225 is headed for another test of support at 15200.

Medium Term: The index has a solid base at 15200, having respected the support level 4/5 times. However, the lower high at [E] is bearish and Twiggs Money Flow (21-day) is again testing the zero line. Other signs to look out for are a break of the 100-Day MA or the long-term trendline.

The Big Picture: The Nikkei remains in a primary up-trend, but a close below 15200 would reverse to a down-trend.

ASX Australia

The All Ordinaries displays uncertainty, with increased volume at [2] and a weak close at [5] highlighting resistance between 4880 and 4920; and strong volume at [3] and [4] indicating support at 4820. A close above 4900 would signal continuation of the primary up-trend; a close below 4820 would be bearish.

Medium Term: The index is near the target of 4940 (4620 + {4620 - 4300}) -- which may account for some of the profit-taking. A close above 4900 would signal continuation of the primary trend, while a close below 4740 would warn of a secondary correction.
Twiggs Money Flow (21-day) is oscillating above zero: a positive sign.
Accumulation-Distribution continues above its' 100-day moving average: a positive sign.

The Big Picture: The strong primary up-trend continues. Initial support is at 4600; primary support at 4300.