Markets Face Critical Day On Monday
By Colin Twiggs
October 20, 2007 4:00 a.m. ET (6:00 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.
The housing slump and credit squeeze appear to be spilling over into other
sectors of the economy, with companies like Caterpillar and Hershey reporting
lower sales. The Fed is likely to make further cuts in the federal funds rate if
the contagion spreads ? weakening the dollar and increasing import prices for
commodities such as crude oil.
The Fed continues to inject liquidity into the financial markets, with
repurchase operations totalling more than $28 billion according to Reuters.
Spreads between commercial paper and equivalent Treasury bill yields have again
widened, reflecting investors perceptions of market risk. A fall of 3-month
T-bill yields below support at 3.50% would be a bear signal for both financial
and equity markets.
The Dow Jones Industrial Average turned down sharply after making a
new all-time high above 14000, completing a typical bull
trap. Expect a test of the lower trend channel and primary support at 12800.
The long-term bearish divergence on Twiggs
Money Flow is now backed by short-term distribution.
Short Term: High volume on Wednesday signaled buying support, but this
soon dissipated and was overcome by strong selling on Friday ? the tenth
anniversary of Black Monday during the October 1987 crash. Monday will be a
critical day for the market: another strong red candle would indicate a serious
test of primary support at 12800.
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Fedex is testing support at $103 and the Dow Jones Transportation
Average is likely to follow suit, with a test of primary support at 4700.
Expect Fedex to test primary support at $100/$98; a fall below this level would
be a bear signal for the economy.
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The Russell 2000 Small Caps Index is leading the market lower, with a close
below 800 signaling a test of primary support at 750/760. The shift to safety of
large cap stocks is evident from the down-trend in relative strength (compared
to the large cap Russell 1000 Index).
The S&P 500 is at a watershed. The index is testing support at the
key support level of 1500, from the high 7 years ago, and a large bearish
divergence on Twiggs Money Flow warns of distribution. A break below 1500
appears likely ? and would signal a test of primary support at 1400. Not at all
promising when we have just had a breakout to a new all-time high above 1500.
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