Nikkei Bear Signal

By Colin Twiggs
November 25, 2006 5:30 p.m. AET (1:30 p.m. ET)

These extracts from my daily trading diary are for educational purposes and should not be interpreted as investment advice. Full terms and conditions can be found at Terms of Use. The next newsletter (an update on Gold, Crude Oil and the Dollar) will be on Tuesday.

The Big Picture

The Dow was quiet this week due to Thanksgiving holiday. The Transport index is close to its previous high of 5000 and breakout above this level would signal the start of a bull market. The FTSE 100 and Australian All Ords show reasonable strength, but the Nikkei is weakening rapidly. 

Crude oil rallied to $59.24/barrel. Failure of key support at $55/barrel would signal a long-term down-trend. The dollar is weakening, breaking above $1.30 against the euro (the high of its 6 month's consolidation). Gold strengthened to $637.20 in response.

Probability of recession in the next four quarters increased to 43 per cent according to the Wright model. A climb above 50% would be cause for concern.

USA: Dow, NASDAQ & SP500

The Dow Industrial Average consolidated on low volume due to the holiday. A rise above 12350 would signal resumption of the up-trend.

dow jones daily

Medium Term: The last few month's rally has formed a trend channel (drawn at 2 standard deviations around a linear regression line). Acceleration above the upper channel would warn of a possible spike, while breakout below would signal that the up-trend is slowing, warning of a possible reversal. I have revised the current target downwards to 12500 (calculated as 11600 + {11600 - 10700}) after rounding values to the nearest hundred. Twiggs Money Flow (21-day) continues to show a bearish divergence, warning of distribution.

Long Term: The Dow remains in a primary up-trend, with support at 10700.

dow jones medium term

The Dow Jones Transportation Average is headed for a test of resistance at the May high of 5000 (closely following Fedex). Breakout above 5000 would confirm the existence of a bull market.

dow jones transport medium term

The Nasdaq Composite Index is rallying strongly above its April high of 2370 and the Nasdaq 100 has followed suit. A positive sign for the broader equity market. Twiggs Money Flow (21-day) trending upwards above zero signals accumulation. A retracement to test the new support level of 2370 remains likely.

nasdaq composite

The S&P 500 had a quiet week with Thanksgiving holiday. 

standard and poors 500

Medium Term: Breakout above the upper trend channel (drawn at 2 standard deviations around a linear regression line) signals that the slow long-term trend may be accelerating, but bearish divergence on Twiggs Money Flow (21-day) warns of a reversal.

Long Term: The S&P 500 is in a primary up-trend, with support at 1220.

LSE: United Kingdom

The FTSE 100 broke through last week's low to test support at 6100 (from the April high). The hammer candlestick on Friday shows strong buying support, signaling a reversal. Look for a rally to test resistance at 6250. 

Medium Term: Respect of support at 6100 would be a bullish signal that the primary up-trend is likely to resume. Twiggs Money Flow (21-day) displays a bearish triple divergence, so failure of support at 6100/6000, and a secondary correction, remain a possibility.

Long Term: The primary up-trend continues, with support at 5500.

ftse 100 daily chart

Nikkei: Japan

The Nikkei 225 broke below its 100-day moving average and appears headed for a test of intermediate support at 15500.

Medium Term: Twiggs Money Flow (21-day) displays a bearish peak [X] below the zero line, signaling strong distribution. Penetration of support at 15500 would warn of a test of primary support at 14200.

Long Term: The index is in a primary up-trend, but primary support may be weakened by failure of the index to test its previous high of 17500.

nikkei 225 medium term

ASX: Australia

The All Ordinaries encountered resistance at 5450, but Friday's long tail and large volume signal buying support. A fall below Friday's low would signal another test of key support at 5300 (from the May high), while a close above 5450 would mean the start of another rally. Exceptional volume over the week indicates a clash between two opposing camps: buyers and profit-takers. So far, buyers appear to have gained the upper hand.

all ordinaries daily

Medium Term: At the start of the week, the index respected key support at 5300 -- signaling that a test of the upper border of the trend channel (channel lines drawn at 2 standard deviations around a linear regression line) is likely. Twiggs Money Flow (21-day) above zero and trending upwards signals long-term accumulation.

Long Term: The All Ordinaries is in a primary up-trend with support at 4800.

all ordinaries weekly

I have known war as few men now living know it.
It's very destructiveness on both friend and foe has rendered it useless
as a means of settling international disputes.

~ General Douglas MacArthur

Technical Analysis and Predictions

I believe that Technical Analysis should not be used to make predictions because we never know the outcome of a particular pattern or series of events with 100 per cent certainty. The best that we can hope to achieve is a probability of around 80 per cent for any particular outcome: something unexpected will occur at least one in five times.

My approach is to assign probabilities to each possible outcome. Assigning actual percentages would imply a degree of precision which, most of the time, is unachievable. Terms used are more general: "this is a strong signal"; "this is likely"; "expect this to follow"; "this is less likely to occur"; "this is unlikely"; and so on. Bear in mind that there are times, especially when the market is in equilibrium, when we may face several scenarios with fairly even probabilities.

Analysis is also separated into three time frames: short, medium and long-term. While one time frame may be clear, another could be uncertain. Obviously, we have the greatest chance of success when all three time frames are clear.

The market is a dynamic system. I often compare trading to a military operation, not because of its' oppositional nature, but because of the complexity, the continual uncertainty created by conflicting intelligence and the element of chance that can disrupt even the best made plans. Prepare thoroughly, but allow for the unexpected. The formula is simple: trade when probabilities are in your favor; apply proper risk (money) management; and you will succeed.

For further background, please read About The Trading Diary.