STA MarketUpdate 5-17-10

8/9/2019 STA MarketUpdate 5-17-10

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Euro Death WatchLast week saw what many thought was the re-emergence of the bullmarket only to have their hopes dashed on Friday (seeBear MarketRally below). This week could see important tops in most asset classesas Thursday is a 107-day cycle top for almost everything! (+5-daywindow surrounds Thursday). Domestic economic indicators have lost theirrelevance as US equity markets are trading hand-in-hand with the Euro. The Euromay be ready to bounce here but were not so sure about equities. Our best casescenario doesnt see even a short-term bottom until 9,400 Dow. The 20-week cyclepoints toward an interim bottom near July 9th.

BustedApril's tax deficit of $83 billion was the highest April deficit on record. America isnow more bankrupt than ever. Income was $245.3 billion, 8% below the totalrecorded last April. Spending was $328.0 billion, up 14% year-over-year. A yearago in April the deficit was $20.9 billion. And here is the data: tax receipts down7.9% YoY, Individual Income Tax down 21.5% YoY, and more importantly,spending: Total spending up 14.2%, National defense up 17%, Medicare up 39.4%,Social Security up 4.2% and General Government up 5.6%. - ZeroHedge.com

Bear Market RallyThe obvious question is: how can the bull market possibly be over considering thatwe enjoyed that amazing 405-point rally on the Dow just three days ago (Monday,May 10)? Wasnt that an exclamation mark that the bull is alive and well? Far fromit. There have been no fewer than 16 such rallies of 400 points or more in the past,and 12 of them occurred during the brutal burst of the credit bubble and the otherfour took place around the tech wreck a decade ago. David Rosenberg, Gluskin-Sheff

SentimentA new record in commercial short positions was seen last week in gold: last week

they hit an all time high of 450,950. Commercial hedgers are considered smartmoney. Also, speculators set a new record in short positions in the Euro.Speculators are trend-followers.

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May 17th, 2010

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US EquitiesNot enough life was shown by the 3-day RSI during last weeks rally to make us want to second-guess the CCM sell-mode equities are currently in. We did see an inflection point printed by thebandwidth indicator on Thursday so we know where to look for a change of mode. Dow-9,400represents a 38.2% retracement of the Mar09 rally and we see that as our highest probability,best case scenario. Now that we have more price data to work with, we are able sharpen ourestimates as to Fibonacci confluence zones. We now see support zones at 10,300, 9,900, 9,400

and 8,850. The May 7th

closing low (Dow) was right on the 150-day moving average. A break ofthat level and there wont be many bulls remaining not liquid bulls, anyway ( liquefiedyes,liquid-no).

Figure 1: Dow Jones Industrials, Fibonacci Confluence Zones

Most technicians look at the direction of the 200 (or 150) day moving average to determine bull

vs. bear markets. While we follow that indicator, we prefer to determine labels by the range inwhich 14-day RSI is travelling. If RSI is trading in a high range (consistently breaking above 70but never dropping below 30) we think of that as a bull market. On the day afterfat-fingerThursday RSI hit a low of 30.16. If it fails to get above 70 prior to a dip below 30, we would labelthis market as a bear.

A new moon was scheduled for last Friday. New moons are often associated with market tops.We see about a 75% chance the market will close up today but we dont expect that to last. A107-day cycle top is due this Thursday and as of today we are inside the +5-day window. The 20-week cycle bottom is due July 9th. 40 and 80-week cycle bottoms are not due until mid-September and the 3-year cycle is due to bottom in mid-August.


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While the Bullish Percent index for the NYSE has just a bit more work to do to trigger a sell-signal, the indicator did trigger a sell signal on the S&P last week.

Figure 2: S&P Bullish Percent Index

S&P 500The S&P topped out at its 50-day moving average last week. Unlike the Dow, the S&P has

broken through the 150-day moving average. New Fibonacci confluence zones exist at 1110,1095, 1050, and 975. 1,010 is the 38.2% retracement of the March 09 rally.

Figure 3: S&P 500


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Ratio ChartsWe had thought that the positive divergence in the ratio of Financials to the S&P during the bigsell-off (top chart, green trendline) might have been telling us that we were looking at a bottombut the uptrend has been broken.

Figure 4: Ratio Charts: S&P Financials/SPX, S&P Technology/SPX, SPX


5/9

Foreign EquitiesNikkeiSo much for decoupling as the Nikkeis bandwidth indicator flipped back to its sell-mode lastweek. A move by 14-day RSI below 39.62 today will trigger a CCM sell-signal and, most likely,see price drop below its advancing trendline and 200-day moving average. Thats gonna leave amark!

Figure 5: Nikkei

MSCI Emerging Markets, EEMWhats this?! EEMs bandwidth indicator switched to the buy-mode? Were not falling for that!14-day RSI popped up sharply last week making it hard to draw a trendline a break of whichwould constitute a sell signal in an unconfirmed buy-mode. Given that 14-day RSI breached 30

last week (SeeMost technicians discussion at bottom of page 2) and 3-day RSI failed to breakabove 80 during the rally, well wait to see whether the declining trendline from April 14th or the200-day moving average gets broken first. Serious support at 37.35 was broken for 2 days inFebruary (supported by a Fib confluence zone) but we dont think this time it will be quite sogenerous if broken.

Figure 6: MSCI Emerging Markets, EEM


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U.S. Treasuries30-Year TreasuryLast week we reported that the bandwidth indicator on the 30-year had slipped into a sell-modebut, with a few days of consolidation, could easily slip back into a buy-modeand thats exactlywhat happened. A CCM buy-signal was triggered on Thursday. TLT did it the hard way byseeing its BWI confirm the overbought RSI (rather than breaching a previous low or lowerBollinger Band). There is a 107-day cycle top due this Friday which is interesting as it is only one

day after the 107-day cycle top due for equities. Other 107-day cycle tops are due June 3rd

, 18th

,and 30th. Weve updated our Fibonacci projections and were seeing even more resistance now atthe 124 level we mentioned last week. Our Fibonacci trendline model is showing a possible topfor this move at 124.273 on May 20th (Thursday). The 38.2% retracement (minimum expected)of the Dec08 decline is at 124.50 so this target is close enough for us to start thinking this maybe more than an intermediate correction in US Treasuries. Dont forget that big, bearish head-and-shoulders pattern!

Figure 7: 30-year US Treasury

Figure 7: 30-year US Treasury


7/9

CommoditiesContinuous Commodity Index, CCIDespite the bounce last week, the CCM is still in a sell-mode and 3-day RSI has been unable tobreak above 80. It wont take much of a drop to trigger a new sell signal. 107-day cycle tops aredue this Wednesday and June 12. Fib zones at 463 and 455 but we dont expect much supportthere. We still think we could see 395 prior to a bottom in commodities.

Figure 8: CCI, Continuous Commodity Index

Crude OilCrude is in a confirmed sell-mode and blew through the Fib zone at 73 on Friday. There is somesupport near Fridays low but better support at 69.50 and 66.50. The September 25th advancing

trendline was broken on Thursday. Nothing good here. Were starting to think, long-term; weshould be thinking $43bbl. Implications for the economy? Thats going to leave a mark, too!

Figure 9: Crude Oil


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GoldGold pulled back on Thursday and Friday after Wednesdays high poked into the Fib zonesurrounding 1,250. Gold is still in a buy-mode but its bandwidth indicator has started curlingdownward. Again, we write May 28th is the next full moon and full moons are often associatedwith tops in gold; using that date and the 1,250 fib level, our Fibonacci trendline model lines upfor a possible top in gold on May 27th at 1,247. That will be our new target for now.A 107-daycycle top due this Thursday (is the world coming to an end this Thursday?) so gold may not wait

for the full-moon.

Figure 10: Gold

Figure 11: Gold


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CurrenciesUS DollarAt this point were targeting 90. Not only is there a Fibonacci zone there but it also is the 38.2%retracement of the 2001 bear market. Theres no question at this point that the Dollar is goingup.

Figure 12: US Dollar

Japanese YenThe Yen looks a lot like the Dollar the sky is the limit. Fib zones at 112.50, 121, and 129.A triangle which formed between 1999 and 2008 points to 127, so well make that our target.

Figure 13: Japanese Yen

STA MarketUpdate 5-17-10

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