Forecast. Morning Futures

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1 T T Telephone: richard@rhodes-capital.com Web Address: FAY 212 US 3-Year Bond Yield (Weekly) Hard Upon the -WMA Y TSY YLD NDX Major support at 2.% has held once again, with prices now testing the - wma for the 3rd time since March. And with it bottoming, the potential trade is for sharply higher yields forthcoming. -WMA O FORECAST STOCKS: The European debt contagion has been kicked down the road a bit further as Spanish and Italian short-and-long term bond yields have moderated recently given the ECB plan to buy bonds of up to 3-years in maturity...but only if asked; and only if conditionality is imposed upon those asking. This has supported stocks in the short-term, but won t solve the overriding debt and fiscal problems. So enjoy it while it lasts; it s now it is in the polititian s hands and that scares the bejebes out of us. STRATEGY: The S&P remains above long-term support at the 16- wma at 122; which delineates bull/bear markets. However, the 2-dma support level at 1 remains the bulls Maginot Line. We ve noted this is perhaps one of the weirdest rallies we ve ever seen, and it causes us a great deal of consternation. We re looking for a selling inflection point Today, as we move into final trading day of the week, we find the S&P futures higher by +4 points; we find gold prices down modestly after having been up +$9/oz we find this rather surprising given inflation-fighting has been thrown under the bus; crude oil prices are higher to just under $1/barrel on Middle East concerns some are saying and we ll take part of that at face value. The US dollar is sharply lower once again. Also, we should point out that bond yields are moving sharply higher across the yield curve And it is this latter point that has us interested, for QE-3 s unintended consequences could very well be a wholesale move out of the Treasury market and into cash and/or other assets. Higher rates are in and of themselves worrisome at this point, but they run counter to what CAPITAL MARKET COMMENTARY! WORLD MARKETS ARE UNIVERSALLY HIGR as yesterday s Fed decision to institute QE-3 has everyone euphoric. To get to the simple details, the Fed decided to purchase $4 billion in mortgage-back agency debt for as long as they see fit; and they shall roll-over their shortterm debt into long-term debt the extension of Operation Twist ; and they pushed out their forecast for holding ZIRP through mid-21 rather than late-214. This now effectively takes the Fed out of the equation of a number of months; no more speculation about further QE moves unless unemployment doesn t start to show signs of improving. We think the Fed was rather smart in that they didn t address the treasury market, but the mortgage agency market which keeps them out of the political discussion in theory, although not in practice. OVERNIGHT PRICES Quotes at: 7:3am EST INDEX Morning Futures LAST DAILY CHG S&P up 1, Nasdaq 1 up 2, year Note Yield up 1.82% 1.1 bps Crude Oil up $ $ 1. Euro up Yen down Gold up $ 1,773.8 $ 1. Foreign Indices CHG % YTD YTD % FTSE 1 Index up, % % German DAX up 7, % 1,2 2.77% French CAC up 3, % 4 14.% Japan Nikkei 22 up 9, % 74 8.% SSE China Composite up 2, % % Spain Madrid General up % % Italy FTSE MIB up 16, % 1,23 1.9% US Indices Dow Industrials up 13, % 1,1 1.81% Nasdaq 1 up 3,16. 1.% % S&P Large-Cap up 1, % % S&P 4 Mid-Cap up 1,1..% % S&P 6 Small-Cap up 481..% % RCM T 1 F 212

2 CAPITAL MARKET COMMENTARY Fed Chair Bernanke said yesterday this QE-3 policy would accomplish which is lower long-term rates. Perhaps this is the unintended consequences we ve always talked about. Regardless, we re watching this carefully for a watershed trade. US 1-Year Note Yields (Daily) How Important is that Trendline?? day BLI (1.9181) 1 Y TSY YLD NDX 6-DMA That said, today we shall exit all of our long gold share positions on the opening. Gold prices couldn t hold their gains this morning; and our profits are nice and need to be taken given NEM and GG are back into long-term overhead resistance. Make no mistake about it; we want to buy them back, but we want to buy them back at lower prices when everything is not so euphoric and one-sided. There is an old axe in this regards, and it goes like this: When their yellin, you should be sellin, and that is exactly what we are doing today. Lastly, we want to buy a 2% short position in the Russell 2 Small Caps via TWM;, which will put us a small net short position given we are long China - 3 (FXI) and Natural Gas (UNG). Hence, there is a spot of a relative trade in this move as we expect FXI and UNG to outperform TWM, but one that also isn t as correlated to the overall broader market trade. We like the thought behind this for the time being; but we ll not hesitate to correct ourselves if we find ourselves in error. We used this chart yesterday, and we think it terribly important. Note 22 that prices broke out above trendline resistance, but 2 then failed to hold above it. 18 Today, yields are higher by 11 bps. Perhaps 16 the note/bond bubble is busting now DEMA M A M J J A S O N D 212 M A M J J A S O N D! TRADING STRATEGY: Finally, with this out of the way, we can step back and watch the dominos fall where they may. Market participants expected QE-3, whereas we did not expect it to the same degree. Therefore, the probability is that these very same participants have nice profits as we do on our gold shares and they ll want to lock those in given this is still September, which is anywhere and always a very bad month for stock returns. Hence, we believe this rally shall turn out to be a sell on the news type rally, and we would not be surprised to see prices close lower today in the start of a larger correction back to major support levels. And it is this very test of support that will allow us to determine hopefully whether this rally has legs, or whether a major cyclical inflection point has developed. It is too early to determine obviously, but certainly given the major overhead resistance levels that are in place the risk-reward favors probing the short side of the trade on a number of levels. RCM T 2 F 212

3 PORTFOLIO: RHODES AGGRESSIVE DISCRETIONARY No.! Trade Date Long/ Short Share No. Name Ticker Beta Port % Invest Entry Price Current Price Unrealized P/L Percent P/L Stop Loss Point 1 8/8/212 L 448 Newmont Mining NEM % $ 21,22 $ 46.9 $.4 $ 3,8 18.2% $ - EXIT < $. N/A 2 8/17/212 L 48 Goldcorp GG % $ 21,8 $.4 $ 4. $ 3, % $ - EXIT < $ 48. N/A 3 8/27/212 L 971 Gold Miner's Juniors GDXJ.2 1.7% $ 21,2 $ $. $ 2,118 1.% $ - EXIT < $. N/A 4 9/1/212 L 6 China ETF FXI.9 1.2% $ 21,4 $.2 $.8 $ % $.2 TRADE < $. N/A 9/12/212 L 1,6 Natural Gas ETF UNG 9.9% $ 21,9 $ 2.2 $ 2. $ 9.4% $ 18. TRADE < $ 3. N/A 6 N/A.% $ - $ - $ - $ -.% $ - 7 N/A.% $ - $ - $ - $ -.% $ - 8 N/A.% $ - $ - $ - $ -.% $ - 9 N/A.% $ - $ - $ - $ -.% $ - 1 N/A.% $ - $ - $ - $ -.% $ - 11 N/A.% $ - $ - $ - $ -.% $ - 12 N/A.% $ - $ - $ - $ -.% $ - TOTAL % $ 16,77 $ 1,73 "<" Denotes Change Model Portfolio Inception ($1k): January 1, RECAP Starting Balance $ 4, 2 Performance: +2.% Closed Positions $ (,467) Performance: +47.7% Open Positions $ 1,73 27 Performance: +2.84% Dividends $ Performance: -3.7% PORTFOLIO YTD (Gain/Loss) $ 218,22 $ (,9) -1.81% Performance: +7.4% S&P YTD 16.9% 21 Performance: +1.22% Over/(Under) Performance -.9% 211 Performance: -.8% TARGET Earnings Release TRADE PRICE NOTE: All entry and exit prices for stocks are the average of the high and low prices for the trading day as provided for byyahoo! s website at DISCLAIMER: "The performance data shown represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors' securities, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. The illustrations and charts in this report are educational only and do not take into consideration your personal circumstances or other factors that may be important in making investment decisions. This report is not a recommendation to buy or sell a particular security. Trade Orders: 1. Newmont Mining (NEM); Goldcorp (GG) and Gold Miners Juniors (GDXJ) exit long positon on the opening. 2. Russell 2 Small Caps 2x Short (TWM) buy a 2% long position on the opening. Trade Executions: 1. None. The Rhodes Report is published by Rhodes Capital Management, Inc. Mailing address: 111 Presidential Blvd. Suite 13; Bala Cynwyd, Pennsylvania 194. All contents copyright Rhodes Capital Management, Inc. Reproduction, retransmission or redistribution in any form is illegal and strictly forbidden, as is regular dissemination of specific forecasts and strategies. Otherwise, feel free to quote, cite or review if full credit is given. The Rhodes Report is published daily, including special reports as market conditions warrant. Correspondence is welcome, but volume of often precludes a reply. Subscription rates are: $279/ annually or $19/six-months. Visa, MasterCard and American Express accepted. Delivery is available via Internet download and . This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. The report is published for informational purposes and is not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without any notice and The Rhodes Report is not under any obligation to update or keep current the information contained herein. Past performance is not necessarily indicative of future results. The Rhodes Report accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. RCM T 3 F 212

4 S&P INDEX/ BROAD MKT INDICATORS Overhead resistance is rather strong, and proved its resistance yesterday. A break of the recent lows at 1 would suggest lower prices. S&P INDEX 18-DMA DMA 6-DEMA DEMA day 11 Model 11-4-day Model % Above - 1-DMA Possible divergence Sideways topping Overbought - - % Above 2-DMA -dma/1-dma -DMA resistance was regained in bullish fashion 1-DMA Intermediate-Term Model Topping 1-DMA p Oct Nov Dec 212 Feb Mar Apr May Jun Jul Aug Sep Oct Nov S&P TECHNICAL COMMENTS # OVERAD TRENDLINE RESISTANCE WAS POKED ABOVE DURING YESTERDAY S EUPHORIC TRADE: The question now becomes whether prices can extend higher and render resistance to the dust bin of breakout levels. The S&P has now reached into our upside resistance zone between 14-to-146 zone. In our opinion, we don t believe sufficient demand is available to push prices through this zone without having a correction first given the short-term overbought conditions. This, coupled with the complacency and sell the news tyep trading environment should allow for a test of lower support levels. Then and there we shall find out whether much higher prices are ahead or not. We won t find out from this level; hence we are willing to be short-sellers today in lieu of a correction. The risk-reward demands it at this point. RCM T TECHNICAL INDICATOR REVIEW: $ The 2-day and 4-day model have now turned lower in bearish fashion. $ The % of stocks above their 1-day moving average is at overbought levels. $ The % of stocks above their 2-day moving average stands at 74%...up +4% from the prior day s close. The 1-dma has been regained. If it were to fail, then it would be bearish. $ The Intermediate-term Model remains higher in bullish fashion; but is showing signs of topping out. With the 4-day model lower, then a turn lower would confirm a larger correction is underway. 4 F 212

5 MODEL PORTFOLIO POSITIONS I Newmont Mining NEM Last: $.4 TGT: $. Entr y: $ 46.9 STP: $ - TRADE EXIT LONG Goldcorp GG Last: $ 4. TGT: $ 48. Entr y: $.4 STP: $ - TRADE EXIT LONG 4-day BLI (4.77) 4-day BLI (6.41) day BLI (7.6644) 2-day BLI (7.6) Newmont Mining Corp. (Hldg. Co.) DMA 6 GOLDCORP ORD 6 4-DMA 6 -DMA DMA 4 The 4-dma resistance level has been reached; 4 and now is the time to take our profits. Exit. 4 The -dma resistance level has been reached; 3 and now is the time to take our profits. Exit. 3 Oct Nov Dec 212 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Oct Nov Dec 212 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Gold Miner's Junio GDXJ Last: $. TGT: $ - Entr y: $ STP: $ - TRADE EXIT LONG China ETF FXI Last: $.8 TGT: $. Entry: $.2 STP: $.2 4-day BLI (.9719) 4-day BLI day BLI (-2.98) 2-day BLI (7.271) MARKET VECTOR JUNIOR GOLD MINERS ETF 12-DMA 4-DMA FTSE China 2 -DMA 4 2 Prices have regained the 12-dma 2 and trendline resistance; but into overhead resistance. We ll exit our long position. Oct Nov Dec 212 Feb Mar Apr May Jun Jul Aug Sep Oct Nov DMA Recent support has held, and we can view this pattern as a bullish falling wedge; a -dma breakout would confirm higher prices. ep Oct Nov Dec 212 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 3 3 RCM T F 212

6 MODEL PORTFOLIO POSITIONS II Natural Gas ETF UNG Last: $ 2. TGT: $ 3. Entr y: $ 2.2 STP: $ 18. N/A Last: $ - TGT: $ - Entr y: $ - STP: $ - 4-day BLI day BLI (1.13) US Natural Gas Fund Two higher lows coupled with the bottoming 1- dma suggest 2 thigher the trend has changed to higher. Look for a breakout and sharp 1 move higher. 3-DMA 1-DMA ep Oct Nov Dec 212 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec N/A Last: $ - TGT: $ - Entr y: $ - STP: $ - N/A Last: $ - TGT: $ - Entr y: $ - STP: $ - RCM T 6 F 212

7 The Blue-Line Indicator or BLI Explained The BLI is our simple momentum oscillator used for timing and trend decisions; we rarely if ever use other momentum indicators for we prefer to focus and understand one indicator really well rather than a basket of indicators that can at times be contradictory. Furthermore, we prefer to use the BLI in conjunction with basic chart patterns; it is our experience that this combination works rather well for type of trading style. Basically, the BLI it is a full stochastic indicator derivative of our own undertaking; our changes have been several, but primarily relate to smoothing the indicator in order to provide for better signals once it does in fact change directions. We use varying time periods dependent upon whether we are working with weekly or daily charts. We have found that a 14- period BLI works well with the weekly charts, whereas both a 2-period and 4-period work well with daily charts. Obviously, the 4-period BLI catches longer and more tidal changes in direction. We normally don t use these in our Daily Bulletin given its shorter-term time frame, but behind the scenes it plays a big part. When using the BLI with price charts; we look upon the following 3-factors as set-ups upon which the probability is highest to trade: 1. BLI Extremes: Oversold (-6 to -8)/Overbought (+6 to +8) When the BLI trades into either extreme, our reversal ears go up as a change in trend becomes a higher probability. This puts the risk/reward dynamic in our favor generally, but we won t take a position without well defined stop losses and perhaps prices are trading into support or resistance as the case may be. However, we must note that extreme conditions can and will become more extreme in a powerfully trending market; hence this is the caveat to trading with the BLI in isolation. 2. BLI Divergences: Positive/Negative A divergence is said to have occurred when the price and BLI do not make new lows/highs together. They in effect diverge, with the BLI not confirming the prevailing trend. If the BLI turns higher/lower from below a previous BLI low/high then a divergence is said to have occurred, of which the probability is increased that the trend is changing in favor of the BLI direction. 3. BLI Reversals from Positive/Negative Levels Another very good BLI trading pattern which denotes a strongly stock is when the BLI turn higher from already positive levels this suggests a strong upwards acceleration is underway. Conversely, a turn lower from already negative numbers suggests a strong downward acceleration is underway. RCM T 7 F 212