Bearish Divergences
By Colin Twiggs
December 2, 2006 5:30 p.m. AET (1:30 p.m. ET)
December 2, 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.
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The Big Picture
The Dow is losing upward momentum and
several indexes show signs of distribution, while the FTSE 100 and Nikkei display
weakness.
January light crude rallied to $63.43/barrel, a long-term bullish sign. The dollar weakened to $1.33 against the euro and appears headed for a test of the early 2005 high of $1.37. Gold rallied to $645 and appears headed for a test of resistance at $675.
Probability of recession in the next four quarters remains at 43 per cent according to the Wright model. A rise above 50% would be cause for concern.
January light crude rallied to $63.43/barrel, a long-term bullish sign. The dollar weakened to $1.33 against the euro and appears headed for a test of the early 2005 high of $1.37. Gold rallied to $645 and appears headed for a test of resistance at $675.
Probability of recession in the next four quarters remains at 43 per cent according to the Wright model. A rise above 50% would be cause for concern.
USA: Dow, NASDAQ & SP500
The Dow Industrial Average retraced
through initial support at 12200 on Monday, but rallied after
testing support at 12100. Thursday's
doji candle and increased volume signal resistance, but
Friday's
hammer after testing support at 12100 shows buying support
with a close near the day's high. A rise above Thursday's high
[Th] would signal continuation of the short-term rally, while a
fall below 12100 would warn of a secondary correction.
Medium Term: The medium-term view appears more ominous.
A clear break below the trend channel of the last 5 months
(drawn at 2 standard deviations around a linear regression
line) signals a loss of momentum and bearish
divergence on
Twiggs Money Flow (21-day) warns of distribution. A close
below 12000 would increase the likelihood of a secondary
correction.
Long Term: The Dow is in a primary up-trend, with support at 10700.
Long Term: The Dow is in a primary up-trend, with support at 10700.
The Dow Jones Transportation Average is retracing to
test intermediate support at 4600. A fall below this level
would signal failure to establish a new high and a test of
primary support at 4150. Respect of the 4600 support level, on
the other hand, would mean another test of resistance at 5000.
Breakout above 5000 would confirm the existence of a
bull market.
The Nasdaq Composite is retracing to test the new
support level at 2370. If support holds, that will confirm the
up-trend -- a positive sign for the broader equity
market. Failure would signal trend weakness.
The S&P 500 encountered similar mid-week resistance
to the Dow.
Medium Term: The index is consolidating at the upper
border of the trend channel (drawn at 2 standard deviations
around a linear regression line), but bearish
divergence on
Twiggs Money Flow (21-day) warns of distribution. A
retracement is likely.
Long Term: The S&P 500 is in a primary up-trend, with support at 1220.
Long Term: The S&P 500 is in a primary up-trend, with support at 1220.
LSE: United Kingdom
The FTSE 100 fell through initial support at 6100 (from
the April high) and is now consolidating above
6000.
Medium Term: Failure of support at 6000 would confirm that the index is undergoing a secondary correction. Twiggs Money Flow (21-day) below zero after a bearish triple divergence warns of strong distribution.
Long Term: The primary up-trend continues, with support at 5500, but the marginal new high (at 6250 compared to 6100 in April) is bearish.
Medium Term: Failure of support at 6000 would confirm that the index is undergoing a secondary correction. Twiggs Money Flow (21-day) below zero after a bearish triple divergence warns of strong distribution.
Long Term: The primary up-trend continues, with support at 5500, but the marginal new high (at 6250 compared to 6100 in April) is bearish.
Nikkei: Japan
The Nikkei 225 rallied to test resistance at
16400/16500.
Medium Term: Twiggs Money Flow (21-day) recovered to above zero, but will only turn bullish if the next retracement respects the zero line. Penetration of support at 15500 would warn of a test of primary support at 14200.
Long Term: The index remains in a primary up-trend. Primary support will be weakened if the index fails to test its previous high of 17500.
Medium Term: Twiggs Money Flow (21-day) recovered to above zero, but will only turn bullish if the next retracement respects the zero line. Penetration of support at 15500 would warn of a test of primary support at 14200.
Long Term: The index remains in a primary up-trend. Primary support will be weakened if the index fails to test its previous high of 17500.
ASX: Australia
The All Ordinaries is having difficulty overcoming
resistance at 5450, with strong volume accompanying the
consolidation between 5300 and 5450. Breakout above Friday's
high would signal that buyers have prevailed, while a fall
below Wednesday's low would indicate that sellers have the
upper hand.
Medium Term: A fall below 5300 would signal that the
lower border of the trend channel (channel lines drawn at 2
standard deviations around a linear regression line) is likely
to be tested, while an upward breakout from the consolidation
would indicate a test of the upper channel line.
Twiggs Money Flow (21-day) displays a bearish divergence
warning of distribution and favoring a downward breakout.
Long Term: The All Ordinaries remains in a primary up-trend with support at 4800.
Long Term: The All Ordinaries remains in a primary up-trend with support at 4800.
The object of skilled investment should be to
defeat the dark forces of time and ignorance which envelop our
future.
The actual, private object of the most skilled investment today is 'to beat the gun', as the Americans so well express it,
to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow......
Nor is it necessary that anyone should keep simple faith in the conventional basis of valuation having any genuine long-term validity.
For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs.......
~ John Maynard Keynes
The actual, private object of the most skilled investment today is 'to beat the gun', as the Americans so well express it,
to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow......
Nor is it necessary that anyone should keep simple faith in the conventional basis of valuation having any genuine long-term validity.
For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs.......
~ John Maynard Keynes
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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. |
Author: Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.