Patterns Profits & Peace of Mind - Page 1-01/18/11

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1 Published by TFNN, Corp. ~ 601 Cleveland Street, Ste 618 Clearwater, FL ~ ~ ~ Copyright 2010 ~ All Rights Reserved In last week's letter, I mentioned how I thought it would be a relatively simple case of pattern recognition with nearly all markets poised to move lower. Unfortunately, the people at the New York Stock Exchange and the Nasdaq did not appear to receive my memo. Instead prices have moved higher, surpassing the 8060 level in the Dow Jones industrials. The only way that this scenario could turn bullish is if prices reversed below the 8000 level again. In other words it would amount to a bull trap. In the words of W.D. Gann: "the bigger the bull, the bigger the bear." Neither Isaac Newton's law of gravity or law of action and reaction have been repealed, as yet. At the top in the stock market back on October 11, 2007, we had a new moon. The next full moon is due shortly on Wednesday, January 19 and whether this will be enough of an event to spark a correction remains to be seen. As for our Trade of the Year which we announced for the New Year, our long position in SH (short ETF for the S&P 500) should have a stop operating at Recall that this year s Trade is not related to either cycles or astroharmonics, but fully based on pattern recognition. These long term trades have worked out very well in the past, but that is no guarantee for the future. Enclosed is the chart for the Shanghai composite, which is used as a comparison to the S&P 500. Typically, there is a high degree of correlation between the two but as you can clearly see, for the past few months or so the S&P 500 has risen dramatically while Shanghai has dropped. Both the divergence and the spread (i.e. the difference) are rather unusual. On Monday, January 17 this trend continued and the Shanghai market was down over 4%, before rallying back to finish down 3% for the day. This would be the equivalent of about 400 Dow points. The news of Steve Job s temporary absence from Apple due to health reasons caused the Nasdaq futures to drop 30 points in Monday Globex trading. While Apple likely has the sufficient talent to navigate without an icon known the world over (I consider him the Alexander Graham Bell of 21 st century), this could be a potential precipitating factor for a further correction this week. Patterns Profits & Peace of Mind - Page 1-01/18/11

2 Precious metals As is illustrated by the enclosed chart, gold has passed the $1,350 per ounce level once again. This is a very important price level as it marks the retracement off of the previous lows. In my opinion, any significant move below 1,350 would start off a longer term bear market because of the AB=CD pattern target leading at $1,425 per ounce. Meanwhile, silver touched $28 per ounce in Sunday night trading, which also represents a key level of support. Treasury bonds and notes Treasury bonds held the major retracement at 119 while Treasury notes also held at the (118.25) on the daily charts. Both have jumped slightly off of these levels this past week. However, the key development in the interest markets this week was the continued collapse in municipal bonds again. As reflected in the ETF for muni-bonds, there has been a literal meltdown as municipalities struggle to raise money at lower interest rates. Tax revenues continue to be depressed as the overall economy remains anemic. Not only are US cities and states under extreme cost pressures, they are also increasingly unable to borrow money at reasonable rates. This will in turn ultimately lead to the US government itself having to pay higher interest rates and may be the tipping point that determines whether Ben Bernanke s QE1 and QE2 programs will be a success or a flop. Foreign Currencies The big surprise this week in the Forex arena was the 600 basis-point rally in the Euro that occurred over a matter of just a few days. Several weeks ago, we talked about this level as the completion of an AB=CD pattern and I have enclosed the hourly chart showing the culmination of this pattern exactly at the low at As of Monday morning here in the US, the British pound has completed a retracement of the last swing down at This should offer good resistance. However above would signal a potential major trend change. The Australian dollar still has a double top in place on the long term weekly charts while the Canadian dollar is retesting the retracement levels on its weekly chart. The USD/Japanese yen also reached the same retracement at before bouncing back, but we believe there will be strong support near Crude Oil Heating oil has completed a major butterfly pattern whereas gasoline and crude futures have missed targets by a small amount. This means we are sitting at very important resistance levels from the 2007 highs. In order to increase bullish enthusiasm for this market, crude oil must get above $94 per barrel. Patterns Profits & Peace of Mind - Page 2-01/18/11

3 Technical Corner This week s Technical Corner concerns island reversal patterns. These patterns are characterized by a peak or trough that is surrounded by two unfilled gaps. They are exceedingly rare, occurring only at major tops and bottoms. This week s example comes from the cotton market. Cotton has more than tripled in price in the past 18 months, which should at least make clothing much more expensive and put a mark on the inflation index. An island reversal occurred in cotton back in 2008 and now in 2011, we are looking at a very similar pattern. What is interesting about the pattern this time is that it formed a retracement but was unable to fill the gap. This should mean sharply lower prices in cotton and probably very quickly. Final Thoughts Over the weekend, I watched CNBC economist Steve Liesman as he interviewed Fed chairman Ben Bernanke. As expected, he questioned Bernanke on the ability (or rather inability) of quantitative easing (of which we are enduring a second major round of) to improve the economy, and in particular the employment situation. Bernanke s comment startled me. His answer was that we have witnessed tremendous moves in the stock market, and especially the small caps. Moreover, he explained that this essentially created a wealth effect and that the resulting increased expenditure would eventually lead to an increase in employment. This of course, opens up a few disturbing possibilities, namely what might happen if it does not achieve this? Would we have simply increased inflation risk without helping employment, and debasing the dollar all in one stroke? With interest rates creeping up, it may be a sign that the market thinks otherwise. Patterns Profits & Peace of Mind - Page 3-01/18/11

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13 Disclaimer: Trading in securities such as stocks, options, indices, currencies and futures involve risk and should not be undertaken without due diligence and serious independent study. Subscribers may carry out their own trading based on what they learn from Patterns Profits & Peace of Mind, but all risks of potential financial losses are the subscribers responsibility. TFNN will be in no way liable for financial losses resulting from trading decisions based on this newsletter. Past performance is no guarantee of future results. Reproduction in whole or in part is not permitted without prior written consent. All rights reserved. Patterns Profits & Peace of Mind - Page 13-01/18/11