Doing the Right Thing

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1 Published by TFNN, Corp. ~ 601 Cleveland Street, Ste 618 Clearwater, FL ~ ~ ~ Copyright 2010 ~ All Rights Reserved Doing the Right Thing Trading is a relatively simple process, but not necessarily an easy one. Moreover, trading and going against the crowd carries with it the additional burden of the masses when wrong. And even when one is right, there are not many rewards that come with it, except the monetary ones. Several weeks ago, I suggested being on the short side of the S&P 500 if it were to gap down at the open the following Monday. Instead, the markets have in fact opened higher Sunday evenings, a trend which has continued for two consecutive weeks before this. As we entered this past week, I again assumed the possibility of another top, but this did not materialize either. When we put all of these developments together, we find ourselves looking at a Dow Jones Industrials index which has been up for ten weeks on its AB leg and another ten weeks in its CD leg. Both of these stretches can easily be classified as outlier events. In fact, this has happened only a handful of times in history. Indeed this most recent move since the August 27 low is now the longest upward swing of this type since As for the other indices, we are now faced with a situation where there is a potentially low risk trade in the Nasdaq futures (and also the SH Proshares). The Nasdaq has completed two butterfly patterns on the hourly charts, suggesting it could be topping at the 2,381 level. The recommended buy stop would be at the 2,391 level. Treasury Bonds Enclosed here is a chart of 10-year Treasury bond yields over the past 30 years produced by the folks at Morgan Stanley. It shows that interest rates have been low (and getting progressively lower) since the late 1980s, which was the last time the U.S. faced significant inflationary pressures. The chart indicates that rates cannot realistically decrease much further from current levels and that the recent uptick may be a prelude of things to come. Indeed, it will be increasingly interesting to see how the Federal Reserve tries to juggle between protecting its bond interests while facing pressure from rising interest rates. We could be seeing Patterns Profits & Peace of Mind - Page 1 02/14/11

2 the Fed forced into a corner in the not so distant future. While printing even more money might be an alternative for getting out of this bind (once more), this is certainly going to have further detrimental, if not catastrophic, effects on the U.S. dollar. Furthermore, the erosion in Treasury bond prices has resumed its pace. For now, there should be resistance for Treasury bonds at the 120 level, however based on longer term cycles and targets, 100 in bond prices might not be far off. Foreign Currencies Last week, we focused on the Euro currency and the importance of the level which it broke and subsequently dropped several hundred pips the following week to the 1.35 level. There should be some support within the range, but below that would portend much lower levels for the currency. The counterpart to that trade is U.S. dollar which was able to hold strongly at the.618 retracement level at As long as it continues to hold, it remains in a position to rally. The same is true for the Japanese Yen which broke out to upside as we expected. The next objective is now at around 85 and possibly above. Precious Metals Both gold and silver managed to make perfect Fibonacci retracements this week. Gold completed a 61% retracement from its previous high (note that it is still in a downtrend). Silver was the stronger of the two, retracing to the level and still appears to be leading gold in terms of momentum. Copper was also able to make a slightly higher high, but basically finished unchanged for the week. If gold were to break below $1,310 per ounce, it would signal a possible further drop of at least $150 based on longer term cycles, including a three-drive top pattern at the 1,435 level that we mentioned previously. Crude Oil Crude oil has now fallen almost 10% from its high. It must maintain the $85 per barrel price or we could expect further and significant drop. As we went to press on Sunday night, oil was sitting $85.50, so it is close to this major support. If it does breach 85 with any strength, it could easily fall to the 82 level. The weather in the U.S. is forecasted to start to warming up these next two weeks which should alleviate the pressure on heating oil, and likely leading to increased crude oil inventories. Trade of the Week Our Trade for this week was essentially described in the first part of this letter, and relates to the hourly chart for the Nasdaq. I encourage you to examine this chart in detail as it outlines our rationale for taking the short position and illustrates both butterfly patterns. The risk works out to be about 200 dollars per Patterns Profits & Peace of Mind - Page 2 02/14/11

3 position and the reward ratio should be between 4-10 to one, depending on how this coming week takes shape. Technical Corner Also enclosed within this week s letter are the chart overlays for two experimental cycles that we have been working on in recent months. One represents trends predicted using lunar cycles while the other one corresponds to solar cycles. We do not have a sufficient sample size as of yet to validate the efficacy of each method, but early tests have been very encouraging. If they are correct, it would represent a giant step towards demonstrating the usefulness of astro-cycles in short term trading. Note that these cycles are trend cycles, and not just trading dates. As always, however, these should be used with caution. A stop loss is absolutely a requisite in these markets, especially with current trends being so strongly biased and essentially the whole world of investors being on the bullish side. Final Thoughts Last week, we discussed the trends and developments in the commodity markets and how they were forming significant patterns, such as the large AB=CD on the Commodities Research Board index chart. A handful of commodities managed to finish higher this past week, e.g. cotton, corn and coffee, but have still not violated any of the patterns. Another extremely important theme is that the BRIC countries (Brazil, Russia, India, China) are still in downtrends, forming markedly lower highs and lower lows. There are no signs of this abating and the charts for their major indices look distinctively bearish. Although I don t trade stocks or indices in BRIC, I watch them closely because they are followed widely and also have a lot of traction with hedge funds. Unless they begin to turn around quickly, they are likely headed lower. This would be in direct contrast to what was predicted at the Davos summit where there was near unanimous consensus (with a few minor exceptions) that the BRICs would pull the global economy out of recession. All of this is bearish for equities, although any unexpected changes in inflation and currencies could complicate this outlook. Patterns Profits & Peace of Mind - Page 3 02/14/11

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5 Nasdaq hourly (also Trade of the Week) Patterns Profits & Peace of Mind - Page 5 02/14/11

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13 Technical Corner Lunar cycle chart Solar cycle chart 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 02/14/11