NYSE McClellan Summation Index,Transportation Average Index (IYT

US Dollar Index (DX)
Although the Fed's QE2 announcement was larger than expected the 76 support held and then it rebounded back to the 77-78 area for a net change of just .19 since our last review two weeks ago. Since there is a seasonal tendency for the dollar to gain strength going into year-end there is good chance it will remain within the 76 -78 range.

CurrencyShares Euro Trust (FXE)
After breaking out above 140 on the QE2 announcement it declined back to the lower end of the 136-140 range on more debt default news from Ireland. Now that the current bondholders have been assured they will not suffer a haircut it should rally back up to the top of the range once again and should continue supporting equities, commodities and precious metals.

iShares Barclays 20+ Year Treasury Bond (TLT)
From a high of 109.34 and a yield of 3.46% on August 25, longs bonds have made a substantial move in a short time and are now yielding 4.26%.

With QE2 specifically targeted at 1 year to less than 10-year maturities, the decline in long Treasury prices and even Treasuries at the 10-year maturity seems curious. Could it be bond market vigilantes selling positions acquired when there was fear of deflation? If so, that means they believe QE2 will have its desired stimulus effect. Another plausible explanation is bond traders and short-term hedge funds are selling Treasuries and investing the proceeds in "risk on" assets, including equities, commodities and precious metals. Since the Seoul G20 meeting resolved very little relating to the fundamental issues there is no reason to believe the current trends will be reversed anytime soon.

NYSE McClellan Summation Index
Since our last review, the NYSE Composite Index breadth indicator increased 8.70 points, but is now declining once again. As the NYSE Composite Index and the S&P 500 Index broke out above their April highs, the McClellan Summation Index turned lower creating a noticeable divergence. A further divergence was created when the 9 week Relative Strength Index (RSI) failed to make a new high on the breakout creating a bearish failure swing. Both divergences suggest the current correction is not finished.

iShares Dow Jones Transportation Average Index (IYT)
As a confirming indicator, IYT also broke out above its April high and up to 89.57 on November 5 before retreating last week. On a weekly chart, with the breakout to the new high, a new three point upward sloping trendline from the March 2009 low was created. It would now take a close back down below 80 to change this uptrend. Perhaps this is more evidence of positive QE2 expectations.




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