Stock Market Tops Out, the Yen Surges From Our Buy-Point, and T-Bonds Go Critical

U.S.

and World equity markets are in multi-year downtrends. For now, the recent rally pushed up to precisely the lower end of our expected 930-945 resistance range for the S&P 500 index. Many individual stocks and indices also reached significant resistance, and we closed most of our long positions with large profits a bit early rather than risk holding on too long. For anyone still long the S&P 500, we think this is a very risky proposition at this point. We shorted the S&P 500 at 923 with a stop above 940. We are also short REITs via a long position in SRS.

When the current bounce ends - as it looks increasingly as though it already has - the most plausible target range for the next intermediate bottom for the S&P 500 remains around 620-580 and 5900-5500 for the Dow Jones Industrial Average.

For the S&P 500 (chart below), note the significance of the 200 day (43 week) moving average. It tends to offer stiff resistance during major downtrends (a good example of which can be seen during the 2000-2003 bear market), and is currently located near 950, rapidly declining deeper into the 930-980 resistance range. The plausibility of breaking 980 any time in the next several months has significantly diminished now that the 200 day (43 week) moving average has fallen so far.

Bear Market Rally Hits the Ceiling Precisely Where We Anticipated:

We previously stated that we expected the Japanese Yen to find significant support around the 99-98 level (meaning 99-98 U.S. Cents per 100 Japanese Yen, the inverse of the usual USDJPY Forex market quote which is given as the number of Yen per U.S. Dollar).

Additionally, the long-term 300 day (65 week) moving average that often acts as significant support in uptrends had been rising through the area between 98 and 99, and the Slow Stochastic oscillator at the bottom of the chart moved into oversold territory, suggesting that - at the very least - a significant bounce was likely to begin in the next few weeks. The Stochastic oscillator has now also triggered to the upside (the black K-line crossing the red D-line) for the second time since reaching oversold levels.

We recommended going long the Yen around the 99-98 level with a stop loss order at 95.5, and it appears the Yen is turning up strongly after reaching our buy point. The target is a test of the recent high near 115, and we would recommend closing the position at 113 for a potential 14-15 percent profit. We have now moved our stop loss order up to 97.5, a bit over a percent below the recent low.

For those trading through the U.S. equity market, there is a Japanese Yen ETF with ticker symbol FXY. For anyone placing trades through the FOREX currency market, the support level of 99-98 corresponds to a resistance level of about 101-102 since the chart is inverted, and one would need to sell USDJPY in order to go long the Japanese Yen vs. the U.S. Dollar.

Below is a ratio chart of the gold price versus the S&P 500 Index - broadly representing the overall U.S. stock market. Most equity markets worldwide also fall or rise roughly in line with the S&P 500 index. The higher the ratio, the more gold is worth compared to the equity market. The ratio appears to be in a very strong, long-term bull market.

The anticipated correction in the ratio back to 1.00 has taken place. This indicates that we have either already arrived at or are close to a likely good opportunity to exit and/or short the general equity market and once again go long gold (or add to existing positions). As can be seen from the chart, even a more severe correction back to 0.85-0.80 would leave the bull market fully intact.

After nearing the record high from March 2008, gold entered a correction. As previously stated, we expected that gold would meet significant resistance at this level, and a correction back to support around $855 down to the weekly record close from 1980 at $823 appeared likely before a final breakout above $1000 / $1033.90 potentially took place. This would constitute a normal correction of about 50% of gold's move up from its October 2008 low.

Gold may have hit bottom within 1% of our anticipated support range when it came down to $860. A weekly close at $1050 or higher would indicate that it is very likely the larger uptrend is continuing to significantly higher levels.

We preciously stated that "if crude can break the $56 level, a rally up to test the 200 day (43 week) moving average and resistance in the $68-$70 or even $78-$80 range is likely."

Crude oil finally broke out of its $37-$56 range, and has rallied past $60. We went long oil when it corrected to around $47 (the level around which we previously noted that we expected short term support), and have moved our stop up to about $49.50, locking in a moderate profit with and the potential for significantly larger profits to come. A further move to somewhere between $68 and $80 over the next few months appears plausible.

Long-term U.S. Treasury Bongs have now declined back to the very significant level they broke through in late 2008. For the uptrend to remain in force, a bottom needs to be forming right near present levels. The two orange lines mark what we consider the critical support area, and the lower end of that range is being severely tested.

So this is it - either the long bond breaks right here and long-term rates go significantly higher (and, as a result, mortgage rates too), or we get at least temporary relief with bonds rallying and long-term rates falling. If the 121-119 support range does hold for now, a significant rally to potentially test the recent high will likely get underway. If this takes place, money is likely to flow out of general equities (which have already experienced a tremendous rally - likely of the bear market variety) and into both Treasury bonds and gold.

Have a very good week in the markets. Always remember that proper risk management is essential - and even more so during volatile markets.

Christian Normann
dr.normann@post.harvard.edu
www.normannfinancial.com

For the complete version of our weekly analysis including many additional and significantly larger charts (as well as potential setups in commodities, currencies, stocks and ETFs) please click here

Dr. Normann is a graduate of both Harvard University and Florida Atlantic University, with one of his degrees in Finance (summa cum laude and 4.0 GPA).

Previously, he was a financial advisor with Morgan Stanley Dean Witter, but left ten years ago because he wanted the freedom to do completely independent research and focus on perfecting his own trading style and investment skills.

He first entered the financial markets in 1995, trading currencies for his own and his family's accounts. Later, he expanded into equity, commodity, futures, and bond investment and trading, and has extensively studied the history of financial markets going back to their origin centuries ago (covering multiple extraordinary mania periods and subsequent busts).

Please visit the About Normann Financial page for important information about risk management and position sizing. We provide analysis in good faith and to the best of our ability, but all information on the Normann Financial website is provided solely for educational purposes and does not constitute investment advice. Learning to operate successfully in the financial markets is not easy - it takes a substantial amount of time, effort, and discipline. Your trading and investment decisions are exclusively your own responsibility. Proper risk management is crucial.


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