artin ring’s InterMarket Review - Pring · PDF fileInterMarket Review / Volume 28, ......

InterMarket Review / Volume 28, No. 6 1

InterMarket ReviewMartin Pring’s

Commodities: CRB Spot RM – Monthly close above 586 for a positive 12-month MA crossover or above 562 for a positive 65-week EMA crossover.

Currencies: Dollar Index - Month-end close below 76.15 for a negative 12-month MA crossover; above 77 for a positive 65-week EMA crossover.

Credit Markets: iShares Lehman 20-year Trust - Friday close below $101.5 for a negative 65-week EMA crossover; below $99.8 for a negative 12-month MA crossover.

Global Equities: MSCI World ETF - below $46.4 for a positive 12-month crossover and $43.5 for a positive 65-week EMA.

Precious Metals: Gold - 65-week EMA at $1503; 12-month MA $1531.

US Equities: S&P Composite - Estimated month-end close above 1275 for a positive 12-month MA crossover; a Friday close above 1221 for a positive 65-week EMA crossover.

Publishing a synopsis of the world’s Intermarket Analysis for over 20 years.

1. Majority of long-term technical evidence continues to point to a primary bear market in equities.

2. Yen may be starting a major bear market against the

dollar.

3. The bond bull market still alive and well.

4. Stocks are starting to break out against the CRB Spot Raw Industrials and are close to a breakout against the DJP (Chart 1).

5. Commodities are likely to fall much further before their bear market runs its course.

Markets approaching important benchmarks.(These are not predictions, merely important chart points.)

Market Summary Markets Requiring Action

4830 Sweetmeadow Circle, Sarasota, FL 34238941-926-9664

Chart of the Month ..............................................................2Guidelines for IMR Asset Allocations .................................2U.S. Dollar-Based Asset Allocation.....................................4Overview and Global Financial Markets .............................6U.S. Stock Market.............................................................10Martin’s Stock Picks .........................................................16U.S. Credit Markets ..........................................................19Commodity Markets..........................................................22International Markets ........................................................25Currencies ........................................................................28Precious Metals ................................................................33

Contents

November, 2011 VOL. 28, NO. 6

Data Sources and Reuters Symbols

Amex Brokers Index .XBDCRB Spot Raw Material Index - Gold Bugs Index .HUIJOC-ECRI IP Index (Barron’s Market Lab).Goldman Sachs Indust Metal Index .GYXGoldman Sachs Energy Index .GJXGoldman Sachs precious Metal Index .GPXEurotop Index .AEURPhiladelphia Gold and Silver Share Index .XAUDow Jones World Stock Index .WIDOW

~ IMR Data Links ~You can now access links for data (economic and mar-

ket) referenced in the InterMarket Review. They can be accessed for free at www.pring.com/imrlinks.htm.

Please note our web site (pring.com) now allows you to plot the daily KST and smoothed RSI or the short, intermedi-ate and long-term KST’s, as well as the Special K for all stocks and a variety of key indexes. By Googling other sites such as “Yahoo Finance India” “Yahoo Finance Canada”, etc. Non US subscribers can also chart local stocks.

2 InterMarket Review / November, 2011

CHART OF THE MONTH: Stocks vs. Commodities

Chart 1

This chart features the ratio between stocks (S&P Composite ETF) and Commodities (Dow Jones UBS ETN). At the end of October this series was just below the neckline of a potential 9-year inverse head and shoulders pattern. The KST is still bearish but it has started to reverse to the upside and is close to a positive MA crossover. The ratio therefore stands a good chance of breaking to the upside with a decisive month-end close above the potential neck-line; say to 3.0. It is calculated by dividing the month-end close of the SPY by that of the DJP.

If it does break to the upside, it is not telling us that stocks will rally and commodities decline; merely that stocks are likely to out-perform commodities. However, when stocks are doing better than commodities it normally means that equities are in a buoyant mode. Between 1995 and 1999 when the ratio was rising, stocks were quite strong. Since 2000 they have been in a secular bear market. The implication is that if a valid upside breakout does material-ize, it would be a positive sign for equities. Moreover, since the potential base is such a large one the signal would be long-term in its signifi cance. Finally, it would imply superior performance in defl ation sensitive sectors over their resource based conterparts. Remember though, that this outcome is dependent on a month-end break above 3.0.


Recommended U.S. Sector ETF’sDow Jones Pharmaceuticals (IHE)**$63Dow Jones Select Dividend (DVY)**$46.40Dow Jones Utilities (IDU)**$78.75Holders Telecom (TTH)**$26.40KBW Regional Banks (KRE)****$26Spider Consumer Staples (XLP)**$29Spider Homebuilders (XHB)****$20Vanguard Utilities (VPU)** $68.00

Cross Sector Spreads

10%

Asset Allocation Recommendations

* Dependent on market action. ** Stop is based on Friday close. **** Buy on Friday close above.

US Equities20%

Livestock ETN (COW)

3%Cash 17%

The portfolio allocations presented above for the Inter-market Review (IMR) have two functions. First, they are intended as a guide for a neutral investor; i.e., one who lies between conservative and aggressive. For example, we may recommend a 40% allocation to US stocks. An older more conservative subscriber looking for income and safety may conclude that such an allotment may be too aggressive. On the other hand, a younger investor, who has time and cash fl ow on their side, could fi nd the 40% overly conservative. The basic point is that these allocations should only be taken at face value if you consider yourself to be a neutral investor.

The second purpose of our allocations is to summarize our thinking about the markets in a practical, executable way. For example, we might conclude from the position of our indicators that infl ation hedge stocks and commodities are headed higher. In that instance, the allocation page would be used to emphasize those views by recommending infl ation driven sectors, resource based country ETF’s, such as Canada and Australia, as well as commodity index ETFs or individual commodity ETF’s. We might even include an inverse bond ETF to undermine our infl ationary expecta-tions. By the same token, if our indicators suggest a global bear market for equities, that portion of the portfolio would be greatly reduced. This equity exposure would most likely comprise defensive sectors such as utilities and consumer staples. Greater exposure to long-term bonds and cash would round out the picture.

Guidelines for IMR Asset Allocations

Various asset classes and sectors perform differently in different parts of the business cycle. Our recommendations are usually consistent with the prevailing stage as fl agged by our models. Technical factors that we take into consideration are long-term moving averages, such as the 12- month or 65-week time span, the absolute long-term KST, relative action and the long-term KST for relative action. Individual US equity sectors are compared to the S&P Composite and country ETF’s to the MSCI World Stock ETF (ACWI).

Since there is always a bull market somewhere and some investors have an insatiable appetite to be constantly active, we do, from time-to-time, recommend spreads where it’s possible to take advantage of a trend in a relationship that can benefi t regardless of the market’s direction. For example, transports tend to be an early cycle leader and energy a laggard. If the technicals were consistent, a long transports/short energy ETF trade might be appropriate.

In most instances, risk management stop losses are rec-ommended. The stop will typically be placed below a previous short-term low or more commonly under a 65-week EMA. Each month the stop levels are reviewed and where possible are raised. When a market or sector is considered vulner-able, stops will be tightened aggressively. Because markets can move strongly between issues, new subscribers should always assess the risk between current prices and stop levels to make sure that the difference is manageable. If it is not, it probably means the security in question is overstretched and you are better advised to wait for a correction.

Short Double Euro (EUO)

10% International Bonds/Spread

5%

Advisor Shares Active Bear (HDGE)

5%

US Credit Market25%

Long Japan (EWJ)Short China (FXI)

5%


U.S. Dollar-Based Asset Allocation

Stage 1

Stage 2

Stage 3

Stage 4

Stage 5

Stage 6

Bonds BullishStocks/Infl ation BearishBonds/Stocks BullishInfl ation Bearish

All Bullish

Bonds BearishStocks/Infl ation Bullish

Stocks/Bonds BearishInfl ation Bullish

All Bearish

Barometer Signals and the Six Stages of the Business Cycle

Our barometers continue to signal a Stage I environ-ment, which is bullish for bonds and bearish for stocks and commodities. The big question on the minds of in-vestors as we enter the month of November is whether the rally dating from early October will extend and take prices to a post 2009 recovery high, or whether it’s a bear market rally? Our belief is that it will depend on progress or lack thereof in the economy. Here, the data are mixed with many series being on the edge of a cliff but few having yet fallen off. Most observers are in the recession or recovery camp but the actual outcome may lie in between; i.e., a trading range economy with nega-tive quarters being interspersed with positive ones, but no clear trend emerging. Changing investor perceptions concerning external problems from Europe (sovereign debt) and China (real estate and banking loans) will continue to stoke volatility. We also suspect that this week’s massive currency intervention by the BOJ may have its roots in problems that have yet to emerge in the Japanese economy.

This is probably a time to step back and consider the very long-term picture. We have been stating in these pages and in separate articles that the US stock market began a secular bear market in the year 2000. These trends normally last for a couple of decades; end with the Shiller Price Earnings ratio at or below 7.5, the Tobin Q Ratio at around .30 and dividend yields in the 6-7% range. So far, the secular bear has only encompassed 11 years and the P/E, Q ratio and dividend yield have “corrected” to 19, 1.00 and 2%, respectively. The word

“corrected’ is in quotes because these series are far closer to traditional secular highs than lows. It is also important to remember that secular trends determine the charac-teristics of primary ones. In a secular bear that means truncated bull markets and extended bear trends. The length of the previous counter-secular bull (2002-2007) was an exception and markets rarely repeat exceptions back on back. Consequently, it is far more likely that prices will retreat from here or continue their range bound activity than rally to post 2009 highs.

When it comes to the technical position of US equities the S&P remains below its 12-month MA and the KST has just triggered a bear market signal from an overstretched reading. As long as these conditions hold and our Stock Barometer mains on its sell signal a cautious stance is the order of the day. That does not mean that we should not stay vigilant, for if the models are signaling Stage I, the next phase, Stage II, is next and that has tradition-ally been associated with the strongest and broadest of stock market rallies.

AllocationsThe Bond Barometer remains bullish and we continue

to recommend last month’s exploratory position of 15% in the Barclay’s Aggregate Bond ETF, the AGG with a Friday close stop at $105.50. We would like to recom-mend more but the overextended nature of the market precludes such exposure. On the other hand, the Iboxx

98 99 01 02 03 04 05 06 07 08 1009 11


Corporate Bond ETF, the LQD, has broken above an 8-year consolidation trendline and has just gone bullish on a short- and intermediate KST basis. Consequently, we are recommending a 10% allocation with a Friday close protective stop at $110.

Our allocation for US equities remains extremely defensive with the bulk of a 20% position being confi ned to early cycle leaders. We are continuing to recommend, by way of a hedge, a 5% position in the Advisor Shares Active bear (HDGE), a relatively new actively managed bear fund. A daily close protective stop is being placed at $23.75.

We also continue to recommend some hedge posi-tions with a 10% allocation to the following spreads all of which are plotted at the end of the US Equity section. They are all iShares Dow Jones sector ETF’s: Utilities (IDU)/Technology (IYW); Health Care (IYH)/Oil Equipment (IEZ); and Consumer Staples (IYK)/Con Cyclicals (IYC). Daily close protective stops are at 1.25, 1.22, and .94, respectively. We were stopped out of the Telecom/Technology spread. We are substituting a long Dow Jones Financial Services (IYG) and short Dow Jones Materials (IYM) instead. The Friday close stop is at .63. A 5% allocation is also being endorsed

for a long Japan (EWJ) short China (FXI) spread with a Friday close stop at .25 (see Chart 37).

Since the US market is in a strong relative up trend against the rest of the world we are continuing to avoid non US equity markets. In the bond area, we continue to recommend a 5% defl ation spread position based on a long Lehman International Treasury Bond Index (BWX) and short DB International Infl ation Pro-tected Bond (WIP).The rationale is based on a recent breakout in this relationship combined with the fact that global bonds remain in a bullish mode while com-modities have begun a negative one. The protective Friday close stop has been placed at 1.01.

We continue to recommend a 3% position in the Livestock ETN (COW) where the Friday close stop at $28 has been raised.

Finally, we are recommending the Double Short Euro (EUO) to the tune of a 10% allocation. The daily close stop is being raised to $16.85.

November 2, 2011

Martin J. Pring

The INTERMARKET REVIEW is published monthly by Pring Re-search, Inc., at 4830 Sweetmeadow Circle, Sarasota, FL 34238. First class postage paid at Sarasota, FL. © INTERMARKET REVIEW. Address all subscription mail orders, change of ad-dress, etc. to Circulation Dept., INTERMARKET REVIEW, 4830 Sweetmeadow Circle, Sarasota, FL 34238; phone 941-926-9664, Monday - Friday, 9:00 A.M. to 4:30 P.M. EST. The current mailing label or a facsimile should accompany subscription or change of address. SUBSCRIPTION RATES: E-mail - $75.00 introductory quarter, $100.00 quarterly renewal, (12 issues). All payments in U.S. currency only, please. Cancelations MUST be made in writing via fax or email to 941-870-0642 or [email protected], respectively. Unused months will not be refunded unless requested.

Published and all rights reserved by Pring Research. In addition to publishing the InterMarket Review, the International Institute for Economic Research, d/b/a Pring Research, also acts as a consultant on fi nancial markets and operates as an investment advisor.

Before making specifi c investments, further investiga-tion is recommended. Although information contained in this publication has been derived from sources which are believed to be reliable, they are not always necessarily complete and cannot be guaranteed. Neither Pring Research, Inc. nor any of its employees, or any person(s) or fi rm who is represented within this publication shall have any liability for any loss sus-tained by anyone who has relied on the information contained in this publication. Employees of this company may at times have positions in the securities referred to in this publication and may make purchases or sales of these securities while the publication is in circulation.


World Overview &Global Financial Markets

Chart 2

World Bond ETF Index (3x BWX plus 1x AGG) and Two KSTs

The trend favoring defl ation sensitive assets that began several months ago continues to operate. Chart 2, for example, shows that our World Bond Index is still above its 2001/11 up trendline as well as the 12-month MA. The KST also remains in a positive mode. In the last week, the Index has also managed to fi nd support at the 2008/11 up trendline. Since the short-term KST has started to turn up there is a good possibility that we might see a new bull market high. The trendline will eventually be penetrated on the downside and that will represent important evidence that a primary bear market is underway. Until then, we are assuming that the bull is still king of the roost.

When economies soften, commodities typically suf-fer and that is the message being given by the OECD Leading Indicator derivative in Chart 4. Note also that this is being confi rmed by our Global Commodity Index, which is decisively below its 12-month MA. One sign of primary trend weakness develops when a short-term KST reverses to the upside and fails to trigger much of an advance and that’s exactly what we see in Chart 5. The Index itself is now below its 65-week EMA and the long-term KST is in a negative and overbought condition. To add insult to injury the Index has also completed a head and shoulders top.


Chart 3

World Bond ETF Index (3x BWX plus 1x AGG) and Two Indicators

Chart 4

Global Commodity Index and Global Economic Momentum


Global equities also look weak because the KST for the MSCI World Stock Index is now bearish and overbought. The vertical lines in Chart 6 indicate that upside moving average crossovers by the OECD Leading Indicator de-rivative have consistently signaled good equity rallies with the notable exception of the 2001 experience. However, at the present time the indicator is below its average and therefore remains in its bear market trajectory. The price ($43.55) is also below its 12-month MA ($46.1). Until the price and LEI derivative can move into a more positive mode we will continue to maintain an overall bearish stance.

Chart 5

Global Commodity Index and Three KSTs

The shaded areas on Chart 7 show primary bear markets and the black vertical lines indicate when the KST crosses above zero. If you look to the right of those lines you will see that the price experienced very little in the way of upside potential after the indicator has managed to move above its equilibrium point. The red horizontal line fl ags the highest bear market short-term KST reading in the last 30 years. Were it to move above that zone the indicator would be acting in a manner that was more characteristic of a primary bull market. In that event, it would suggest that last summer’s downside price beak was a whipsaw. Since the longer-term evi-dence right now points to a bear market that remains our expectation.


Chart 6

MSCI World Stock ETF (ACWI) and Two Indicators

Chart 7

MSCI World ETF (ACWI) and Two KSTs


U.S. Stock Market

S&P Composite and the New Stock Barometer

Chart 8

Our Stock Barometer remains bearish for equities so we are continuing to assume that the primary trend is negative. Having said that, it is also apparent that if the market could build on its October strength, several long-term indicators would tip to the bullish side. Bearing in mind the very strong negative sentiment that was present early in October, it would not be diffi cult to build a bullish case in the event of additional near-term strength. Our reading on the decline was that investors were selling equities in the belief that the economy would experience a recession, and indeed, many of the leading indicators, as we pointed out last week, were at tipping points or had just tipped. Europe’s woes provided the psychologi-cal catalyst on the downside and it remains to be seen whether last week’s agreement has staying power or not. The market’s future course is therefore likely to rest on the recession/recovery outlook.

In that department, we are faced with confl icting evidence. The most leading of non-fi nancial leading

economic indicator is housing starts. Chart 9 shows that peaks in starts usually develop ahead of recessionary periods with a fairly long lead. However, starts themselves have violated two trendlines and look like they are headed higher, not lower. This action is also supported by the Wells Fargo Housing Index, a composite measure of real-tor sentiment. Finally, the ratio between new home sales and housing starts typically leads starts. The momentum of these two series is featured in the bottom panel; the arrows fl agging its leading characteristics. At present, the (brown) Sales/Starts KST is rising and is not therefore giving any indication of a downside reversal from which it would be possible to predict a lower starts number.

On the other hand, the ECRI weekly Leading Indica-tor has fallen to a level below its 18-month MA that has consistently been followed by a recession, but the break is not yet a decisive one. Indeed, in the latest report-ing period the indicator has started to turn up slightly. Since the equity market almost invariably trades off the


Chart 9

Housing Starts and Three Indicators

ECRI Weekly Leading Economic Indicator

Chart 10


S&P Composite and Two Indicators

Chart 11

economy, the outcome of whether a recession is avoided or not is crucial.

The technical picture is not helping much. For ex-ample, our Total Return Model compares the total return of stocks to cash. It was negative in September and has just gone bullish again. Our Tech Eco Indicator, which combines a momentum with an economic series, has done the same thing. Perhaps the most positive devel-opment comes from Chart 13, which features the ratio between stocks and commodities. This relationship has been in a secular bear market for 10 years but has now succeeded in breaking above its secular down trendline and 36-month MA. Also bullish is the fact that the KST has gone positive. Chart 14 shows that this ratio is also very close to a quadruple trend breakout; a concept that was discussed at length in last month’s issue. All that remains for a full- fl edged signal is a violation of the

18-month ROC. This is a highly signifi cant development and may well point to a new up leg in the 2009-201? advance. Stocks typically out- perform commodities in a Stage II environment and with several indicators having switched from a bearish September to a bullish October primary trend reading a quick transition to Stage II can by no means be ruled out.

The main obstacle to forming such a conclusion is the overbought and bearish long-term KST, which reminds us that the market is still in a very overstretched long-term technical position and has only just gone bearish. Nevertheless, trend trumps everything and at this point, the S&P at 1253 remains below its 12-month MA at 1275. Were it to rally decisively above this important bench-mark, it would support the Stage II hypothesis.

The intermediate indicators are also a mixed bag. For example, our Momsen indicator in Chart 15 combines


Chart 12

S&P Composite and a Tech-Eco Indicator

S&P Composite and Two Indicators

Chart 13


Stock (S&P) Commodity (CRB Spot) Ratio and Three ROCs

Chart 14

a sentiment with a momentum series; it goes bullish when it moves below the 95 level. Such periods have been highlighted with the green plot and either indicate major buying opportunities or bear market rallies. Unfor-tunately, there is no way of fi guring out at the time which outcome will take place. Thus, the latest signal could be supportive of either a Stage II new up leg thesis or the idea that the bear market is still in force argument.

ConclusionWith so many indicators in a confl icting mode, it is

diffi cult to come down on either the bullish or bearish side with any degree of decisiveness. In this regard, it is important to remember that the secular bear market is still in force and that secular price movements dominate the characteristics of the primary trend. That normally means a truncated bull market and the development of

the reality of a greater number of recessions than is the case in a secular bull market. For more on this please refer to our Secular Bear market article on the web site.

Since the balance of evidence for the current primary trend continues to point in a bearish direction, that is our assumption. This conclusion would be reinforced were quality spreads such as that between the HYG (IBoxx Cor-porate High Yield Bond ETF) and the TLT (Lehman 20-year Government Trust) to deteriorate in favor of governments (TLT). Other bearish signs to look for would be renewed strength in the US Dollar Index and Government Bond Prices, as well as weaker commodity prices.

On the bullish side we would look for building on the October gains that took the S&P decisively above its 12-month MA, (currently at 1275), a break to new highs in the NYSE A/D Line and a change in global leadership to emerging markets, especially China.


Chart 15

S&P Composite and the Momesen Indicator


Martin’s Potential Buy Candidates

Each month we introduce several technically attractive looking stocks. The basis for the selection is that the long-term KSTs are usually below, or close to, zero and above the their EMA’s. Some times the stock will have broken out and is an immedi-ate buy, while others will need to be stalked for a short-term correction. Finally, some may appear to be form-ing bases, but have not broken out. These situations will usually have a short-term KST buy, just requiring the price to confi rm. Such stocks are recommended in anticipation of a breakout.

Conservative investors may wish to wait for the long-term chart entry point to be achieved, and traders can use the lower numbers on the short-term charts. Some stocks may already be owned by the editors or their clients.

Chart a-2

Fidelity National Financial Incorporated and Two Indicators - Symbol: FNF

Fidelity National Financial Inc. and Three Indicators - FNF

Chart a-1


Chart b-2

First Business Financial Services, Incorporated and Two Indicators - Symbol: FBIZ

Chart b-1

First Business Financial Services, Incorporated and Three Indicators - Symbol: FBIZ


Chart c-2

North Valley Bancorp and Two Indicators - Symbol: NOVB

Chart c-1

North Valley Bancorp and Three Indicators - Symbol: NOVB


Chart 16

U.S. Credit Markets

Our Bond Barometer continues to fl ash a bullish environment for bonds and has now been tentatively joined by the Growth Indicator; a composite economic momentum series. That’s because the latest plot (Chart 17) is below its zero reference line. The red highlights on the Commercial Paper Yield plot indicate recessions and the vertical lines fl ag when they begin. In most cases, these economic contractions have started either as the Growth Indicator crosses below zero or a bit before it has reached negative territory. Crossing zero is not a guarantee that a recession will develop, as the 1995, 1997 and 2002 experiences testify. Nevertheless, anytime this indicator trades in negative territory the possibility of an economic contraction should be taken seriously.

Lower yields are also being suggested by Chart 18, which shows that the monthly average of the 20-year constant maturity series recently touched a new secular low. Note that its KST is declining, as is a similar mo-mentum measurement for the ratio between infl ation and defl ation sensitive stocks. When the current secular trend is reversed, the signal will be a very powerful and unmistakable one. That’s because of the conver-gence between the three trendlines and the 96-month MA around the 4.60% area. Together, they represent a formidable area of resistance that when bettered, probably in the next cycle, will unleash an explosive rally in yields consistent with the start of a new secular bull market.

iShares Lehman 20-year Trust (TLT) vs. The Bond Barometer


Chart 18

Commercial Paper Yield and Two Indicators

Chart 17

CRB Spot Raw Industrials and Two Indicators


Barclay’s Aggregate Bond Fund (AGG) and Three KSTs

Chart 19

The trend of Barclay’s Aggregate Bond ETF is still positive since the price is above its 65-week EMA and the long-term KST is bullish. Indeed, the latest plot indicates a slight upward kink in its trajectory. How-ever, the correction that started last month may be over because the daily short-term KST (not shown) has started to reverse to the upside. The only negative is the rolling over action of the intermediate KST, which is close to a sell signal and is overstretched. Even so, a bullish stance is recommended because of the positive Barometer and due to the fact that the price remains above its 65-week EMA.


Chart 20

iShares GS Corp (LQD) and Three KSTs

Finally the Iboxx Corporate Bond ETF, the LQD, has just experienced a breakout above an 8-year trendline and this is supported by both the short- and intermedi-ate KSTs. The KST action should support the validity of the breakout, so we are expecting higher prices in this sector of the credit markets.


Commodity Markets

Chart 21

CRB Spot Raw Industrials and The New Commodity Barometer

The Commodity Barometer continued along its bear-ish path in October and the CRB Spot Raw Industrial Index is decisively below its 12-month MA. Moreover, the diffusion indicator in Chart 22 is still at an overstretched position on the upside, all of which suggests that the bear market is in its infancy.

Weakness appears to be fairly general as the more broadly based Dow Jones UBS Commodity ETF has completed and broken down from a head and shoulders top. That suggests the short-term KST reversal to the upside is merely an indication that a retracement move and nothing more is in the cards. Additional evidence in

this direction comes from the declining intermediate and long-term KSTs. What would cause us to revert to the bullish side would be a rally that could really take the price above the red and green trendlines because that would indicate that the top had “failed”.

Chart 24 shows that the oil price is just below re-sistance in the form of its 2009/11 up trendline and the moving average. The Special K has also violated an up trendline and since this was confi rmed by the price we are expecting to see lower levels in the period ahead.


Chart 22

Chart 23

JOC ECRI Industrial Products Index vs. The Commodity Diffusion (24/9) Index

iPath DJ UBS ETN (DJP) and Three KSTs


Chart 24

Light Crude Continuous and Three KSTs


International Markets

Chart 25

S&P (SPY) vs. the EAFE (EFA) and Three KSTs

US vs. The Rest of the WorldThe US market has been correcting against the

Europe Asia Far East Australian ETF but remains in a bull trend above its EMA and green breakout trendline. More corrective activity is likely in the immediate future because the short-term KST is still a bit overstretched. However, once that is over we expect the US to extend its out performance against the rest of the world because the primary trend of this relationship is an upward one favoring the US.

EuropeEurope, in the form of the S&P Europe 350, is at

a critical juncture because both the price and relative strength relationship are trying to move through impor-tant resistance trendlines. Both momentum indicators have started to stabilize, so if these two lines are violated on the upside, it would probably mean that long-term momentum would go bullish. Consequently, if the price and RS are able to jointly move above their respective 65-week EMA’s, the long-term technical position of this ETF will turn positive.


Chart 26

Europe 350 (IEV) and Three Indicators

Chart 27

MSCI Asia Ex Japan (EPP) and Three Indicators


Chart 28

iShares MSCI Japan (EWJ) vs. China ETF (FXI) and Three KSTs

Asia Ex JapanThe MSCI Asia Ex Japan ETF, the EEP, has managed

to rally back to a small down trendline and its 65-week EMA. Since the short-term KST is positive, there is a chance it can break through. However, this is problem-atic because the negative long-term KST is casting an overall shadow on the technical position. Were it at a lower level and showing signs of reversing, we could be much more optimistic about the situation but the fact is that it is not.

The ratio between the Japanese (EWJ) and Chinese (FXI) ETF’s continues to correct. However, this relation-ship has fallen to support in the area of the 65-week EMA and horizontal trendline. Since the long-term KST is positive we are expecting it to hold at the support, though with the intermediate series being currently overbought, such a holding pattern is going to present quite a chal-lenge. If the bull trend is to remain intact, it is important for support in the area of the line and EMA to hold. Only if the red trendline at around 2.2 is violated would we change our bullish long-term view favoring Japan.


Chart 29

US Dollar Index and Three KSTs

Dollar IndexThe US Dollar Index fell below its 65-week EMA in

October but did experience a positive long-term KST crossover. Its intermediate KST also started to accelerate to the upside; suggesting that it stands a good chance of moving above the 65-week EMA at 77 again. Indeed, as we go to press it is trading above this level but the chart is based on a Friday close and this is only Wednesday.

Currencies

EuroThe euro broke down from a head and shoulders top

in early 2010 but quickly pulled back above the neckline. In the meantime, the currency looks like it may be form-ing a smaller head and shoulders top using the extended former neckline as the base of this potential formation. The key level to monitor for a downside breakout is a monthly close below 133. The KST is not yet bearish, but its rolling over action suggests that a downside breakout will eventually take place.


Japanese Yen and Three KSTs

Chart 30

Chart 31

Euro and a Long-term KST


Chart 32

Japanese Yen and Two KSTs

JapanMonday’s intervention by the Bank of Japan has

done nothing yet to disturb the strong uptrend in the currency or even the up trendline in its Special K. We look upon 12,500 as the crucial chart point since a break below that level will violate the up trendline. However, since the short- and intermediate KSTs in Chart 30 have triggered sell signals, it is very likely that the yen has begun a decline of at last intermediate –term proportion. Arguably, even more signifi cant is the fact that the yen experienced a false upside break earlier in October and closed the month with a quadruple trendline break as shown in Chart 32.

Australia & CanadaThe Aussie dollar has experienced major trendline

breaks for both the price and the Special K. Last month’s rally has taken the currency back to resistance, where we expect the rally to reverse.

The Canadian dollar has also experienced a double trendline break. In addition, the recent rally has run into resistance at the extended neckline for the 2011 head and shoulders pattern. Since the Special K is also experiencing a series of declining peaks and troughs, we are expecting the currency to move lower in the period ahead.


Japanese Yen and Three ROCs

Chart 33


Chart 34

Australian Dollar and Two Indicators

Chart 35

Canadian Dollar and Two Indicators


Precious Metals

Chart 36

Gold and Two Indicators

Gold & Gold Shares

A daily close below $1600 would take the gold price below the 2009/11 up trendline in Chart 36 and most probably the line for the Special K as well. However, the short-term KST has just gone bullish and the price has broken out from a small base. Consequently, as long as the price can remain above $1600, we should assume a positive trend. Violation of that support would probably usher in a major correction.

Gold vs. the S&P

The ratio between gold and the S&P has reached an interesting juncture since it has been experiencing a normal retracement move following a major upside breakout. Now it looks as though the KST is reversing to the upside and that would imply a rally that can take the ratio back above the small green corrective

down trendline. If so, it would probably result in the completion of the 2010/11 base in the Special K. The lines on the chart demonstrate that joint Special K and price trendlines have consistently resulted in solid and reliable trend reversal signals.

Gold vs. Bonds

One of the key infl ation/defl ation relationships is that between gold and bonds. This ratio, in Chart 38, violated a major up trendline earlier in the year and now looks as though it may be in the process of com-pleting a head and shoulders top. That would happen with a Friday close break below the 1.30 level. The ratio is calculated by dividing the GLD by the TLT. A break would be highly signifi cant because it would not only indicate the likely out performance of bonds on a primary trend basis, but because trends in the price of gold discounts future infl ation the implication would be very defl ationary.


Chart 37

Gold/Stock Ratio and Two Indicators

Chart 38

Gold/Bond (GLD/TLT) and Two Indicators

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