June 1st, 2010

Market Update
For daily commentary see
SeattleTechnicalAdvisors.com
Fly in the Ointment

High Yield Fly in the Bullish Ointment

We were prepared for 14-day RSI to break its declining trendline on Thursday. If
Deflation that had happened on Wednesday, it would have triggered a buy-signal. Instead,
coincident with RSI breaking above its declining trendline, the Bandwidth
Sentiment indicator breached a previous low taking the mode from buy back to sell!
We expect a bounce in equities this week (1,145 SPX), followed by a resumption of
the decline. Be sure to read this week’s ‘3 Peaks and a Domed House’ commentary
US Equities in the US Treasuries section as it helps lay out a road map for the rest of the year in
S&P 60 minute both bonds and equities.
S&P Daily

High Yield
S&P Fib Zones

Some 17 percent of junk bonds yield at least 10 percentage points more than
Foreign Equities Treasuries, up from 9.2 percent last month, Bank of America Merrill Lynch’s
Nikkei Global High-Yield Index shows. U.S. distressed bonds have lost 10 percent
FTSE/Xinhua25 this month, according to the indexes.

US Treasuries Redemptions from high-yield funds “topped $1 billion” in the third week of May,
30-year Treasury according to EPFR Global, a research firm in Cambridge, Massachusetts, that
3 Peaks/ Dome tracks fund flows.

Commodities
CCI
Deflation
Japan's core consumer prices fell 1.5 percent in the year to the end of April,
Crude Oil
marking 14 straight months of annual falls, government data showed, as the
Gold
world's No.2 economy remains mired in deflation.

In the U.S. core inflation is now at a sub-1% rate.

Currencies
Dollar
Euro
Yen
Sentiment
Investors Intelligence: Bulls slip to 39%, Bear gain to 29%. Not quite a buy yet.

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US Equities
S&P 500
Minimum Bounce
Head and Shoulders on the S&P’s 60-minute chart points to a minimum move to 1,040.

Figure 1: S&P 500, 60-minute chart

Maximum Bounce? Resistance

If we are expecting a minimum move to 1,040 then we need to look for resistance past that. The
first Fibonacci zone past our 1,140 minimum target is between 1,145 and 1,150. We’ll call 1,145
our target for now.

Figure 2: S&P 500, daily with Fibonacci zone

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Last week was week-15 of the 20 week cycle. The cycle low is due the week ending June
25th. We don’t expect cycle bottoms to be perfect and the 20-week does seem to have been
getting shorter lately but this is too much. We expect a bounce this week then a resumption of
the downtrend.

We wrote in last Friday’s Daily Commentary “14-day RSI moved above its declining trendline on
Thursday in all 3 equity indices we follow. But there is a fly in the ointment! Both the S&P and
Dow saw their bandwidth indicators move back into the sell-mode! “

The next Fibonacci confluence zone is at 1050 but our best-case scenario is a 38.2%
retracement of the Mar’09 advance which would put SPX at 1010. We are targeting 1050 for
the week of June 21st (the 20th week of the 20 week cycle) then a summer rally followed by a
decline into the 40 and 80 week cycle lows in mid-September. We see Fibonacci confluence
zones surrounding 975 and 805.

Figure 3: S&P 500, Fibonacci Confluence Zones

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Foreign Equities
Nikkei
The Nikkei breached the Fib zone surrounding 9,600 and Thursday’s intraday low touched the
top of the zone at 9,350. The index is very oversold after having dropped 1,880 points (+16%) in
7 weeks. The CCM is still in a sell-mode but bouncing. 10,200 is a 38.2% retracement of the
decline and there is thick resistance there as well.

Figure 4: Nikkei 225

Interesting analogue provided by Tom McClellan at McClellan Financial.

Figure 5: NASDAQ, Nikkei Analogue

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FTSE/Xinhua 25, FXI
FXI is in an unconfirmed buy-mode. 3-day RSI has broken above 80 and the declining trendline
on price has been broken. We see a Fibonacci zone surrounding the 50% retracement (40.80) of
the Apr’10 decline. Longer term we see support at 35 and 31.50.

Figure 6: FTSE/Xinhua25, FXI

U.S. Treasuries
30-Year Treasury
The 107-day cycle top was 4 days early as it was expected on Friday, May 21st and the high hit on
Tuesday, May 25th. The 30-year bond went into a sell-mode and triggered a sell signal last
Wednesday. A big Fib resistance zone is at 126-128. There is lots of congestion dating back to
Feb-Mar’09 at the same level; we feel treasuries could grind in this area for a few months (see 3
peaks discussion below) before breaking out to a final top.

Figure 7: 30-year Treasury bond

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3 peaks and a Domed House
We first mentioned a few months ago that Treasury bonds might be forming what George
Lindsay called a “3 peaks and a Domed House” formation. We can clearly see in the chart below
the 3 peaks. The subsequent decline meets Lindsay’s requirement of a low lower than the
correction between peaks 2 and 3. We then saw a double bottom (January and April), again part
of the model’s requirements. The advance since April would be referred to as the wall of the first
story. The next formation to look for, if this is indeed 3 peaks and a domed house, is the roof of
the first story. That is built via a triangle which (in a perfect formation) will have 5 reactions, the
first of which began on May 25th. After the roof is built we should see a final break out to the
dome of the house which will look like a miniature head-and-shoulders formation.

Why is this of interest? The implication of this formation is that it is completely retraced once
finished. Our target, once we see the dome, will be the June’09 low which will take us back to
that bearish head-and-shoulders neckline we wrote of previously. Typically, the time required
from the April low to the dome is 7 months. That would take us to October – just after equities
are expected to have made their 40 and 80-week cycle bottoms. This formation may be the key
to the deflation/inflation debate. Deflation will persist until the peak and, once complete,
inflation will return. A return to the bottom of the formation could send prices below the
neckline of the head-and-shoulders which will trigger a massive fall in bonds – one which will
make the move from the dome to the neckline look like child’s play. Eventually, inflation like
that should wreak pure havoc upon the equity markets.

Figure 8: 30-year US Treasury

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Currencies
US Dollar
The Dollar is in a confirmed buy-mode but continues to consolidate after peaking on May 18th.
The peak occurred 2 days before the 107-day cycle top was scheduled. A Fibonacci confluence
zone exists at 88.50 but we think the Dollar will get closer to the zone at 90 prior to a sustained
pullback.

Figure 9: US Dollar

Euro
The Euro flipped back into its sell-mode a week ago and triggered a sell-signal on Monday. We
did see a positive divergence in RSI during last week’s decline. A close by 14-day RSI below 35
will be a fresh sell-signal. We don’t see any real support until 116-117.

Figure 10: Euro

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Japanese Yen
Could things finally be getting straightened out in this blasted currency? Its bandwidth indicator
flipped to its buy mode last Wednesday. A close by 14-day RSI over 57.87 today will be a buy-
signal. A triangle, which formed between 1999 and 2008, points to 127. We’d be long the Yen as
soon as we see a buy-trigger.

Figure 11: Japanese Yen

Commodities
Continuous Commodity Index, CCI
The CCI saw its Bandwidth indicator move into a buy-mode on Friday and, simultaneously,
trigger a buy signal. That was hardly expected, but the next 107-day cycle top is due June 12 (+/-
5 days) which fits nicely with our view that equities will advance for the next few days. We see
resistance at 470 and (of course) 485.

Figure 12: CCI, Continuous Commodity Index

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Crude Oil
Crude Oil’s 3-day RSI broke through the 80 level last Thursday but is still in a confirmed sell-
mode. We see a possible 107-day top due June 10th which, like the CCI, fits well with our equity
view. We see resistance from Friday’s close to 76.50. The area surrounding 81 could stop the
advance, too. $66 is not only a Fib zone but also the 38.2% retracement of the Dec’08 advance.
We’d be looking for opportunities to short oil (after a bounce), not buy it. Long-term target:
$43.

Figure 13: Crude Oil

Gold
You wouldn’t know gold is in a confirmed sell-mode by looking at its price for the last week.
Nice little bump… similar to what equities did during the week of May 10th. 14-day RSI went
flat on Friday. Neither stochastics nor MACD have turned up yet. Gold may have exhausted
itself prior to even seeing its 3-day RSI break above 80. Perhaps last Friday’s full moon stopped
the advance? Some resistance at 1225 and solid resistance at the previous high, 1242. The 21-
week cycle is not due to bottom until July.

Figure 14: Gold

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