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Dow Theory Challenges Fibonacci Once Again.

|Includes: DIA, DUG, GLD, GOOG, iShares 20+ Year Treasury Bond ETF (TLT)
A weekly close cheaper than my annual value level at 2.999 for the 10-Year yield would be a blow for QE2. Gold nearly tested my weekly risky level at $1401.6 on Wednesday. Crude oil is above my semiannual and weekly pivots at $83.94 and $84.89 as QE2 adversely affects inflation expectations. For the euro my monthly value level is 1.2500 with my quarterly pivot at 1.3318. A new closing high for 2010 for Dow Transports puts the focus on a Dow Industrial Average close above its November 5th high at 11,444.08 for another Dow Theory Buy Signal. This signal challenges the S&P 500 61.8% Fibonacci Retracement of the decline from October 2007 into March 2009 at 1228.74. My “Buy and Trade” Strategy using Google (NASDAQ:GOOG) as the prime example. The Beige Book questions the need for QE2.
10-Year Note – (2.966) My annual value level is 2.999 with daily, annual and weekly pivots at 2.825, 2.813 and 2.816, and quarterly, semiannual and monthly risky levels at 2.265, 2.249 and 1.949.
Courtesy of Thomson / Reuters
Comex Gold – ($1388.3) Quarterly, semiannual and annual value levels are $1306.4, $1260.8, $1218.7 and $1115.2 with a daily pivot at $1392.8, and weekly and monthly risky levels at $1401.6 and $1443.5.
Courtesy of Thomson / Reuters
Nymex Crude Oil ($86.75) Annual and monthly value levels are $77.05 and $75.50 with daily, semiannual and weekly pivots at $85.79, $83.94 and $84.89, and semiannual and annual risky levels at $96.53 and $97.29.  
Courtesy of Thomson / Reuters
The Euro – (1.3137) Daily and monthly value levels are 1.2939 and 1.2500 with a quarterly pivot at 1.3318, and weekly and semiannual risky levels at 1.3688 and 1.4733.
Courtesy of Thomson / Reuters
Daily Dow: (11,256) Daily, semiannual, annual, monthly and quarterly value levels are 11,101, 10,558, 10,379, 10,325 and 8,523 with annual and semiannual pivots at 11,235 and 11,296, and weekly risky level at 11,469.
Courtesy of Thomson / Reuters
Dow Theory is challenging Fibonacci once again
Dow Transports (4971.57) have been holding up well – and Tuesday’s price action took out my annual risky level, now a pivot at 4955, and this level was tested at the November 5th high. Wednesday’s close above the November 4th closing high at 4923.79 sets up another Dow Theory Buy Signal if the Dow Industrials follow with a closing high above the November 5th high at 11,444.08. This week’s risky level on Transports is 5090. The Dow returned to its annual pivot at 11,235 on Wednesday with my semiannual pivot at 11,296 and this week’s risky level at 11,469.
Courtesy of Thomson / Reuters
The S&P 500 continued to hold key levels on weakness – SPX has held my annual and semiannual pivots at 1179.0 / 1175.8 on a closing basis since November 16th, which has keyed market stability. The resistance of the 61.8% Fibonacci Retracement of the S&P 500 decline from October 2007 into March 2009 at 1228.74 has been trumping Dow Theory. The high was 1227.08 on November 5th.
Courtesy of Thomson / Reuters
The Russell 2000 – has failed between my annual levels at 723.54 and 748.99 at both its April 26th high and November 9th high, and again on Wednesday. The NASDAQ – shows a weekly risky level at 2639, and 405.41 is the weekly risky level for the SOX.
“Buy and Trade” counters Wall Street Hype - If you are in the habit of trading off tidbits on the financial news networks you are buying the hype from Wall Street, and from the money managers that are paid to “Buy and Hold” with your money. With a “Buy and Trade” strategy you are buying low and selling high. Following the herd is buying high and selling low, as sentiment shifts from hope to despair. To be consistently profitable it’s best to leave some money on the table!
Look at Google Inc (GOOG) ($564.35) for example. The stock is rated a BUY according to ValuEngine with fair value at $596.80, which makes the stock 5.4% undervalued. Analysis – The daily chart for Google shows oversold MOJO with the stock below its 21-day and 50-day simple moving averages at $599.60 and $579.38 and the 200-day simple moving average as support at $525.58. When I profiled this stock following earnings I indicated that strength to my quarterly risky level at $622.96 was a place to book profits and that the stock had a high probability of returning to semiannual pivots at $566.16 and 567.38. The price gap at the October 13th high is $547.49, and gaps tend to be filled.
At the highs Wall Street was upgrading the stock and raising price targets. When following my “Buy and Trade” strategy you were booking profits at $622.96 to buy back at $567.38 to $566.16.
Courtesy of Thomson / Reuters
The Beige Book Suggests QE2 Is Unnecessary
Reports from the twelve Fed Districts indicate that economic conditions have generally improved, so why did the FOMC downgrade the economy and call for QE2?
  • Consumer spending picked up moderately for both general merchandise and vehicles.
  • Manufacturing conditions were steady to moderately improving.
  • Residential real estate is somewhat improved from very low levels, but this antidote does not jive with weaker than expected existing and new home sales for November. The Beige Book reported some pickup in home sales with flat or modestly lower prices.
  • Commercial real estate and construction activity continued to be very weak, and this is the lifeline to the Main Street USA economy.
  • Loan demand was reported as steady to weaker with continued tight credit standards. Loan quality was steady to deteriorating.
  • Despite improved readings for jobless claims and ADP with its estimate of 93,000 private sector jobs being created in November, the Beige Book reports that labor market conditions remained weak since the last Beige Book.
  • You can’t have a sustained economic recovery without the real estate markets and without healthy community banks helping Main Street USA recover and we simply do not have that backdrop.
QE2 is not working as intended - The Purpose of QE2 is to bring down US Treasury yields and that has not happened. The yield on the 10-Year US Treasury was 2.334 on October 8 at the height of the QE2 Chatter. Today it hit 2.987 up 65.3 basis points, which is a huge indication that QE2 is failing.
That’s today’s Four in Four. Have a great day.
Richard Suttmeier
Chief Market Strategist
(800) 381-5576
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