Peak

September 10, 2010

Theories
Abigail F. Doolittle Research
abigail@peaktheories.com
518-391-9313 LLC
www.peaktheories.com

Current Commentary on the Primary Financial Market Trend

The Weekly Peak

The “Less Bad” Rally Is Looking for Something Good
I’ve been writing about a possibility for three weeks now that I could not have imagined writing about five weeks ago: a near-term rally in the
S&P 500.

The reason I couldn’t have dreamt of writing about the S&P 500 rallying is because my work starts with the long-term chart of the S&P 500 and
the trend of that chart is very clearly down as is shown in the second section of this note.

However, a little more than four weeks ago, I spotted what appeared to be a potentially bullish technical pattern in the S&P 500. If it had
looked like the beginning of the rally we saw in July and what turned out to be a bearish Rising Wedge, I would have noted it as such and
labeled this time period as another selling opportunity. But this one looked as though it had the potential to be bigger and longer. Specifically,
the index appeared to be setting up for a somewhat significant move higher.

Enter the unconfirmed and bullish Head and Shoulders pattern. At that point, it was still without a right shoulder, and thus it was unclear
whether the index would continue in August’s rout down or perhaps carve out an upward path as suggested by the still-forming pattern.

Well since that time, the pattern put in its right shoulder and has climbed as much as much as 6.8% from it and toward its confirmation point at
1,131. Although this past Tuesday’s decline has caused it to take on a slightly different aesthetic from the charts of many other confirmed IHS
patterns that I’ve studied, it continues to look more like those patterns than not prior to confirmation.

What it’s lacking at this point is increasing volume from last week’s spikes higher. This volume is necessary to indicate real buying interest.

Without strong volume, it’s difficult to believe that the index’s near-term trend is going to reverse to up from sideways as would be suggested
by the confirmation of this bullish pattern.

Partially this lack of volume reflects the fact that the move up over the last week has been driven by lots of “less bad” data.

- ISM manufacturing index came in at 56.3 in August versus 55.5 in July

- Weekly jobless claims fell by 27,000 to 451,000 last week after a small decline in the previous week
- Nonfarm payrolls came in with 54,000 jobs lost and private sector job adds of 67,000
- Trade deficit for July came out at $42.8 billion from June’s $49 billion
- Pending homes sales index rose 5.2% in July

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on the
financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
September 10, 2010
Theories
The Weekly Peak Research
LLC
www.peaktheories.com

Looking ahead, if this Inverse Head and Shoulders is to confirm itself and on better volume, there needs to be at least a continued steady
stream of “less bad” data that might convince investors of Bernanke’s message in Jackson Hole: the second of half of 2010 will be slow but
2011 will gear up.

Interestingly though, if the bullish Inverse Head and Shoulders confirms, it suggests something is coming that’s actually good because this
pattern’s target is a solid 10% above its point of confirmation and I have a hard time believing “less bad” can do it. That sort of rise will have to
come on volume and real buying. What this something might be I have not a clue but that’s what this pattern would suggest at this point. It
suggests that something fundamental is coming that will inspire real buying by investors.

Ultimately, however, whether this possible rally peters out or after it takes place and the discovery of what that something good might be,
investors will need to accept that dismally bad data is likely to get worse if the engine of the economy – employment – is not repaired soon.

Regardless of what the Obama administration may promise, those promises are likely to go unfulfilled considering that 125,000 jobs need to be
added each month to keep pace with work force population growth as compared to the 37,000 private sector jobs created on average over the
last 6 months. More daunting is the fact that 400,000 jobs need to be added each month for 2 years to replace the 8.4 million jobs lost in the
recession.

In addition, it seems unlikely that the Fed can do much to get the fuel for the economy – money and credit – flowing despite having flooded the
system with it back in 2008 and 2009. All of that liquidity is stagnating on the balance sheets of banks, corporations and even individuals.

Without employment revving up and without money and credit circulating, it’s difficult to see how the economy can start moving again. This is
especially true considering all of the debt – 30 years of unsustainable debt – that it’s being forced to tow.

And so maybe investors will be thrown something fundamental that’s actually good in the coming weeks and the S&P 500 will be bid up as a
result, but it’s unlikely to be good enough to reverse the repercussions of that debt and the worst bear market of our collective lifetime.

Sam’s Stash, Gold, and the S&P

Last week, in the context of the S&P 500 moving up, I wrote:

Treasurys will back off a bit during that rally as risk is bid up and safety backed away from to some degree. While it’s impossible to know
what that might look like I’d take an initial stab in saying the 10-year will move back above 3% and maybe move closer to 3.5%. This
precise level will depend on how convincing the rally is and how long Europe holds up.

Sure enough this has occurred with the 10-Year at 2.761% relative to last Thursday’s close of 2.628% and in comparison to the recent low made
on August 31 of 2.477%.

In my view, this is nothing more than investors backing away from safety and its rather low return as they consider exploring risk and its greater
return. I believe this dynamic will continue as long as risk is embraced and the S&P 500 is bid up and if this turns out to be a significant move by
the S&P 500 as suggested by the Inverse Head and Shoulders, I fully expect to see the 10-year close to 3.5% or even a bit above. I would be
surprised, however, to see the 10-year move above 4% because even if investors get caught up in a rally of risk, there will be many who will be
mindful of the broader picture of the debt storm of the last 30 years and will buy Treasurys right once they’ve moved up or hold them as a
hedge against a blow up.

For when that blow up comes and, again, I suspect this will be in Europe, there will be a flight to safety that is so fast and so furious that the 10-
year will move through the 3% mark almost overnight and narrow in on 2% and below rather quickly. This sort of a depression in yield is
pointed to in the long-term chart of the 10-year that is not shown this week.

Until that fateful time, however, Treasurys will soften as yields which trade inverse to price rise. Some of this may occur rather organically as
well as investors may come to realize that safety may have been pounced on a little too quickly in August in the grand scheme of things.

Ultimately, however, after the 10-year moves back up to 3.5% or higher and then back down to 2% or lower, Treasurys will weaken significantly
if not collapse outright as investors demand a significantly higher rate of return to hold the debt of a country that is on a fiscally unsustainable

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on the
financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
September 10, 2010
Theories
The Weekly Peak Research
LLC
www.peaktheories.com

path. This will likely involve the shift away from the dollar as the world’s reserve currency after oil is no longer denominated in dollars.

Speaking of the dollar, I read about something today that I’ve not read about in a while or the old Death Cross. Apparently the US Dollar Index
Bullish Fund ETF (UUP) is close to seeing one with the 200 DMA at 23.85 and the 50 DMA at 24.02.

Well the Death Cross that we saw come to pass in early July in the S&P 500 brought on a rally and then a rout and soon we shall see what next
and statistically the back-testing is rather mixed on how ominous such a cross of moving averages is for the index/security in question, but as I
also wrote last week, my best guess is that the dollar, or safety, does move down if risk, and the S&P 500, move up.

After the dollar index’s recent move down, the 1-year chart looks damaged and the 3-year chart looks bad as shown below. I threw in the 50
and 200 DMAs for the sake of it even thought that cross won’t occur for a bit unless there’s a sudden decline.

Specifically, it appears the dollar index is headed to about 80 and if it can hold absolute support at that level of 79.507, it’s likely it’ll hang out
there supported. If it breaks 79.507, I would have to guess it’s going to drop to somewhere between 72 and 75. Before dissecting that
possibility too much more, let’s wait for the dollar index to hit that 80 level first.

Turning toward gold, I will tell you this, at this moment, I may like silver more. Putting silver aside for now, however, the chart below is a great
chart but gold has got to get above $1,275 or even $1,300 to set the stage for another convincing leg up.

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on the
financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
September 10, 2010
Theories
The Weekly Peak Research
LLC
www.peaktheories.com

Without it, it’s hard to believe it’s not going to fall on itself again as it did in late June and July. Perhaps such a move would be a part of an
investor movement toward risk and away from safety as may happen with Treasurys and the dollar.

In addition, investors who are seeking some of the safety of a precious metal against eventual inflation or just fear can find that in silver while
also being able to take some comfort in silver’s solid industrial use. More on silver in another note though.

So while gold’s staged a nice move up from the near-term low it hit in July, its strong and primary upward trend needs to kick in now more than
ever to carry it through the apparently strong resistance found right below $1,270 per ounce.

And now, a quick return to the S&P 500 and a reminder on its primary trend. It is down and overwhelmingly so.

If the index does rally this fall, it will need to move above 1,300 to provide us with any reason at all whatsoever to believe that its primary trend
could be anything but down. And if that unlikely event did occur, the S&P 500 would be merely moving up toward a third peak to match its
other two found at the roughly 1,550 level and this would make for a severe triple top structure that would not erase the index’s current
primary trend but confirm it with a technical target of about 425.

It is this primary trend that must be kept in mind at all times because regardless of the near- and mid-term trends of the S&P 500, the S&P
500’s primary trend will prevail and take the index down with it.

As always, thank you for taking the time to read this week’s piece.

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on the
financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
September 10, 2010
Theories
The Weekly Peak Research
LLC
www.peaktheories.com

DISCLAIMER
Opinions expressed herein are strictly that of the author and are subject to change without notice and may differ or be
contrary to the opinions or recommendations of any professional associations held by the author including the author’s
employer. The opinions contained herein should not be taken as specific recommendations to be acted upon. Any
prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at
any given price. No representation or warranty, either express or implied, is provided in relation to the accuracy,
completeness, reliability or appropriateness of the information, methodology and any derived price contained within
this material. The securities and related financial instruments described herein may not be eligible for sale in all
jurisdictions or to certain categories of investors. The author may have or have had interests long or short positions in
the securities or related financial instruments referred to herein, and may at any time make purchase and/or sales in
them. Neither the author or any person or entity related to the author nor the author’s professional associations,
including the author’s employer, accept any liability for any loss or damage arising out of the use of all or any part of
these materials.

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on the
financial markets and the economy. Please see important disclosure statements at the end of this document.