Bull Market Confirmed

By Colin Twiggs
February 17, 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 has passed its target of 12500 (11600+[11600-10700]) and is signaling further accumulation, with Twiggs Money Flow (21-day) making a new high above [2]. This is not a good time to enter the trend as it is already extended.

dow jones industrial average medium-term

Long Term: The primary trend is up. Support is at the previous high of 11600/11650 (also the Jan-2000 high) and at the previous low of 10700.

Short Term: Declining volume over the last few weeks signals that the up-trend may be losing momentum. Increased volume and a narrow range on Friday [F] signal resistance. A fall below support at 12550 would warn of a secondary correction.

dow jones industrial average short term

The Dow Jones Transportation Average completed a bullish short retracement before breaking out above the May 2006 high of 5000. This confirms the bull market. New highs on Fedex and UPS would strengthen the signal.

dow jones transport average

The Nasdaq Composite continues a bullish consolidation between 2400 and 2500, while Twiggs Money Flow (21-day) signals accumulation with a double-bottom above the zero line. Breakout above 2500 would signal continuation of the up-trend, with a target of 2800 [ 2400 + ( 2400 - 2000)]. A fall below 2400, though unlikely, would signal another test of support at 2000.

Long Term: The index remains in a primary up-trend with support at 2400 and at the preceding low of 2000.

nasdaq composite

The S&P 500 passed its target of 1430 ( 1325 + [ 1325 - 1220 ]) and is at the upper border of the trend channel (drawn at 2 standard deviations around a linear regression line). Probability of a secondary correction (or large consolidation) is increasing. Despite Twiggs Money Flow (21-day) showing signs of accumulation, this is not a good time to enter the trend.

standard and poors 500

LSE: United Kingdom

The FTSE 100 is trending upwards, with a target of 6700 [6100 + (6100 - 5500)]. Twiggs Money Flow (21-day) signals accumulation, rising sharply above the zero line.

Long Term: The primary trend is up, with support at the preceding high of 6000/6100 and the preceding low of 5500.

ftse 100

Nikkei: Japan

The Nikkei 225 completed a strong breakout above 17600 after a bullish narrow consolidation [R] below resistance at the April high of 17600. Twiggs Money Flow (21-day) signals strong accumulation, holding well above zero. Target for the breakout is the next major resistance level of 21000 [ 17600 + ( 17600 - 14200 )].

Long Term: The primary trend is up, with support at the preceding high of 17500/17600 and at the preceding low of 14200.

nikkei 225

ASX: Australia

The All Ordinaries is well past its target of 5800 [5300 + (5300-4800)] and at the upper border of the trend channel (drawn at 2 standard deviations around a linear regression line). Probability of a secondary correction is increasing. Despite the new high on Twiggs Money Flow (21-day), the trend is too extended for this to be a good time to enter.

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

all ords long-term

Short Term: Another short retracement at [M] confirms buyer enthusiasm. The index is fast approaching the psychological barrier of 6000 and buyer behavior over the next week should provide us with further insight into the state of the market. A rapid surge through 6000 should indicate that we are close to a blow-off, while narrow consolidation below this level would provide some level of stability. A downward break below the trendline would warn of a short-term retracement.

all ords short-term

The usual bull market successfully weathers a number of tests until it is considered invulnerable,
whereupon it is ripe for a bust.

~ George Soros

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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