Nikkei Strong Bull Signal

By Colin Twiggs
February 03, 2007 1.00 a.m. ET (5:00 p.m. AET)

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.

USA: Dow, Nasdaq and S&P500

The Dow Jones Industrial Average passed its target of 12500 (11600+[11600-10700]) and momentum is slowing, highlighted by decelerating trendlines on the chart below. The bearish divergence on Twiggs Money Flow (21-day) warns of distribution and possibly a secondary correction.

Long Term: The primary trend is headed upwards with support at 11600/11650 (the preceding high) and 10700 (the preceding low).

dow jones industrial average medium-term

Short Term: The index completed a short double-bottom with a breakout above 12600 and is headed for the target of 12750: 12600 + (12600 - 12450). Short retracements of 1 or 2 days would be a further bullish sign.

dow jones industrial average short term

The Dow Jones Transportation Average completed a bullish higher trough before breaking above the May 2006 high of 5000 to signal the start of a primary up-trend. This confirms the existence of a bull market. The Twiggs Money Flow trough above zero at [A] signals strong accumulation.

Short Term: The only negative is Friday's weak close and we should perhaps wait for a break above yesterday's high before acting on the signal.

dow jones transport average

The Nasdaq Composite broke through resistance at 2470. All we need to complete the bullish scenario is a break above 2500 (high of the previous marginal break) and completion of a higher trough on Twiggs Money Flow. TMF (21-day) has respected zero, but continues to display a bearish divergence.

Long Term: The index remains in a primary up-trend with support at 2350/2370 (preceding high) and at 2000 (preceding low).

nasdaq composite

The S&P 500 shows an accelerating up-trend, with the index holding above the upper border of its 3-year trend channel (drawn at 2 standard deviations around a linear regression line). The index has surpassed its target of 1430 (1325+[1325-1220]) and we should not rule out a secondary correction (or large consolidation). Twiggs Money Flow (21-day), although displaying a large bearish divergence, has completed a bullish higher trough above zero at [A], signaling accumulation.

standard and poors 500

LSE: United Kingdom

The FTSE 100, is consolidating between 6160 and 6320; a bullish position, above the new support line at 6100. A fall below 6160, however, would warn of a secondary correction -- confirmed if the index breaks below 6000.

Twiggs Money Flow (21-day) is whipsawing around zero, as you would expect during a consolidation when buyers and sellers are evenly matched, but we need to be wary of the large bearish divergence.

Long Term: The primary up-trend continues, with support at 6000/6100 (preceding high) and at 5500 (preceding low).

ftse 100

Nikkei: Japan

The Nikkei 225 displays a strong bull signal, with a narrow consolidation [N] below resistance at the April high of 17600. Twiggs Money Flow (21-day) troughs above the zero line (at p1 and p2) signal strong accumulation. Expect a breakout above 17600.

The target for the breakout is the next major resistance level of 21000: 17600 + (17600 - 14200).

Long Term: The primary up-trend continues, with support at 14200 (preceding low) and resistance at 17500/17600 (preceding high).

nikkei 225

ASX: Australia

The All Ordinaries reached its target of 5800 [5300 + (5300-4800)] and is approaching the upper border of the trend channel (drawn at 2 standard deviations around a linear regression line). Twiggs Money Flow (21-day) is rising, but continues to display a bearish divergence; TMF divergence signals are often early, as in 2004/2005.

Long Term: The primary trend is up, with support at 5300 (the preceding high) and 4800 (preceding low).

all ords long-term

Short Term: Short retracements on Monday and Wednesday signal buyer enthusiasm, with no sign of a reversal despite this being the third leg of the latest upswing (Sep06 to Feb07), and having reached the short-term target of 5800 [5650 + (5650 - 5500)].
Reversal below 5740 would warn of a retracement.

Medium Term: A fall below the first line of support at 5650 would indicate that upward momentum is slowing, while a break below support at 5480 would warn of a secondary correction.

all ords short-term

Kindness is more important than wisdom,
and the recognition of this is the beginning of wisdom.

~ Theodore Isaac Rubin

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.

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