Gold & Oil Consolidate, Stocks Edge Higher

By Colin Twiggs
October 9, 2007 10:00 p.m. ET (12:00 p.m. AET)

These extracts from my 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.

Economy

Bank credit is steadily increasing, while the commercial paper market has leveled off at $1.9 trillion after a $300 billion contraction.

Declining real estate investment, where housing starts have fallen 38 per cent since August 2005, and tighter credit are likely to have a dampening effect on the economy. The Fed's action in expanding the money supply, and rising exports resulting from the weakening dollar, are unlikely to be sufficent to offset the negatives.

Gold

Gold is consolidating at the May 2006 high, between $720 and $750. This is a bullish sign and an upward breakout would confirm the long-term target of $900 [730+(730-550)]. Breakout below $720/ounce is not expected and would warn of another correction. Gold is likely to appreciate as the US dollar weakens.

Source: Netdania

Crude Oil

Similar to gold, December Light Crude is consolidating above support at $77.50 barrel. A close above $82 would signal another primary advance, while failure of support would warn of another secondary correction. Crude is likely to appreciate as the dollar weakens.

Currencies

The euro is retracing against the dollar after testing the upper trend channel. The first line of support is at $1.3850. Breakout above the trend channel would warn of an accelerating up-trend.

Source: Netdania

The yen is exceptionally weak at present, possibly due to the revival of carry trades, as it is weakening against a falling dollar. The dollar broke out above a symmetrical triangle, signaling a test of resistance at 122/124.

Source: Netdania

The Australian dollar respected support at the former high of $0.8875 (against the greenback) after a breakout. A rise above $0.9000 would confirm the long-term target of parity. Reversal below $0.8900, while not expected, would warn of another correction.

Source: Netdania

Treasury Yields

Ten-year treasury yields respected support at 4.50%, signaling that recent dollar strength may be fading. Expect support at 4.40%/4.50% to hold as the US dollar index remains in a primary down-trend.

The yield differential (10-year minus 13-week treasury yields) is trending upwards, easing pressure on bank margins, but concern over the credit squeeze remains.

The spread between 3-month treasury yields and 90-day commercial paper remains high, reflecting the financial market's aversion to risk.

Stock Markets

The Dow Jones Industrial Average respected the new support level of 14000, signaling another primary advance, but low volumes continue to warn of a lack of commitment. Reversal below 13950 would indicate another correction.

The Nikkei is consolidating in a narrow band above 17000, at the upper border of the trend channel. Upward breakout from the consolidation would signal a test of primary resistance at 18300, while downward breakout would mean a test of the lower trend channel.

The FTSE 100 is headed for a test of resistance at 6750 after twice respecting support at 6500.

The Australian All Ordinaries is rallying strongly, with Twiggs Money Flow signaling accumulation. The (conservative) target is 7000 [6400+(6400-5800)].

The Shanghai Composite index is trading at a forward PE of 34, while Hang Seng is at 17 according to Forbes. Expect the two markets to converge, with funds flowing from China into the Hong Kong market, with the Hang Seng likely to become similarly overvalued as a result. The outflow is likely to slow Shanghai's accelerating up-trend, but risk of a sharp reversal in the next one to three years remains.

Wright Model

Probability of recession in the next four quarters eased to a low 23 per cent according to the Wright Model. The model fairly accurately predicts recessions caused by contraction of the money supply, but I suspect that it may not be as reliable in identifying mischief caused by artificially low interest rates.

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

~ Henry Ford

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