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January 4, 2010 – The Risk / Reward for Twenty-Ten

The risk is for higher US Treasury yields in 2010, unless risk aversion returns quickly in
January. Re-inflating the Gold Bubble will be difficult in 2010. Crude oil is on the rise on
geopolitical risks and fidget weather. The dollar begins 2010 as the wild card in the global
capital markets. The risk / reward for the Dow are not favorable in 2010.
The weekly chart for the 10-Year yield favors higher yields in 2010.
The down trend for the 10-Year yield that goes back to June 2007, has been broken towards higher
yields. Notice the formation of the inverse “Head and Shoulders” bottom for 10-Year yields.

Chart Courtesy of Thomson / Reuters

The low yield 2.02 was set in December 2008 and the high yield since than was 4.00% set in June
2009. With these low yields in place for the past two years, my “Mortgage Mulligan” idea presented in
February 2008 would have resulted in a 30-Year fixed rate mortgage range of 3% to 5%. Instead the
low yield for mortgages was 4.5%, if you were lucky.
My plan would have liquidated Fannie Mae and Freddie Mac putting the burden on Wall Street and
investors. Instead, homeowners and buyers of homes have difficulty with mortgage modifications, as
defaults and foreclosures increase despite program after program promising help fail.
Now taxpayers face an unlimited bailout of Fannie Mae and Freddie Mac right through 2012.
If the yield on the 10-Year can end the first two weeks of January below my semiannual pivot at 3.675,
another round of risk aversion can delay the rise in yields. If my monthly pivot at 3.868 gives way to
higher yields, the 200-week simple moving average at 4.06 comes into play and then the 120-month
simple moving average after that at 4.40.
The resulting rise in mortgage yields will become “The Nightmare on Main Street.”
The Parabolic Bubble popped for Gold after reaching $1227.50 on December 3rd.
I have always warned that when a parabolic bubble breaks the downside is painful and the low on
December 22nd was $1075.20. The re-inflation of the bubble depends upon the strength of the dollar,
as a weak dollar correlates to gold becoming the currency of last resort.
My annual support is $938.70 with quarterly and annual pivots at $1084.90 and $1115.20, and
semiannual resistance at $1186.50. Gold thus needs to have a weekly close above $1186.50 to begin
to re-inflate.

Chart Courtesy of Thomson / Reuters

Crude oil had its Parabolic Bubble burst in mid-2008 and faces a prolonged trading range.
Crude oil is in a huge trading range between the July 2008 high of $147.27 and the January 2009 low
of $33.20. The 200-week simple moving average, now at $75.89 has been a magnet since June 2009.
If you recall, I timed the bottom for crude oil to be $50 in January 2007, and in mid-2008 predicted $75
before $200. Most recently I predicted that my annual pivot for 2009 at $68.81 would hold and that was
the case on December 14th.
In 2010 I have an annual pivot at $77.05 to be a trading range magnet as weak demand for energy
battles with geopolitical risks and the weather. My quarterly support is $67.22 with annual resistance at
$97.29.

Chart Courtesy of Thomson / Reuters

The Dollar Index shows a Thanksgiving bottom at $74.21, but there are upside barriers.
After setting the low on Thanksgiving the dollar rebounded to my Q4 2009 resistance at $78.64 on
December 22nd. The wild card in the longer term bottoming process is that semiannual supports are at
new lows at $73.54 and $68.74. This is the risk if my quarterly resistance at $80.23 is not taken out by
a weekly close in January. The 200-day simple moving average is a tighter barrier at $79.25.
 Chart Courtesy of Thomson / Reuters

The Dow ended December below its 120-month simple moving average at 10,466 after breaking
above the down trend that goes back to October 2007.
With the multi-year bear market arguably over, I will be tracking the risk / reward, which shows limited
upside in 2010. I show an annual pivot at 10,379 as a tight support as 2010 begins.
Weekly closes below 10,379 indicate risk to quarterly support at 6,705. Weekly closes above 10,379
indicate strength to weekly resistance this week at 10,746. The best case for 2010 is my rolling six
month risky area refined between annual resistance at 11,235 and semiannual resistance at 11,442.

Chart Courtesy of Thomson / Reuters

Send me your comments and questions to Rsuttmeier@Gmail.com. For more information on our
products and services visit www.ValuEngine.com
That’s today’s Four in Four. Have a great day.

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Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I
have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as
well as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as the
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“I Hold No Positions in the Stocks I Cover.”