The STA had a stand at the annual 'Futures and Options World'

Derivatives and Securities exhibition at the Barbican on 29 and 30 June.

The show attracted some 1500 delegates and also included a seminar
programme. Such was the level of interest in the STAs activities that we
actually ran out of application forms, despite taking many more than for
last year's exhibition. All the people involved in manning the stand felt
that we had scored a success in raising the profile of the STA.Clive
Lambert,Robin Griffiths and Shaun Downey gave presentations covering
the short,medium and long term approaches to market trading.
Our seminar programme was aimed at Prop traders who are prevalent
in London these days. Many of these traders are often very well versed
in the day-to-day mechanics of their own particular market but
sometimes miss out on the "bigger picture". Robin Griffiths (head of
asset allocation, Rathbones Group) attempted to fill this gap by
explaining his unique "Road Map" theory. According to his maps, the
end of the bull market in European equities is not far away (and we may
well already have seen the top in the US). He also warned that 2006
could be a difficult year for investors.
Clive Lambert (FuturesTechs) followed with a look at Japanese
Candlestick analysis with particular reference to the recent "Hanging
Man" and "Hammer" patterns seen in the Bund Futures. He also
discussed the prevalence of Marabuzo linesrecently and their ability to
provide a powerful confirmation signal.
Shaun Downey (Head of Customer Support for Europe and Asia, CQG
and Partner, Oasis Research) finished the afternoon with a look at Market
Profile (CBOT), a method much used in the Futures markets,
particularly in Chicago where the technique was first conceived.
Amongst the interesting snippets from this talk was the Initial Balancing
PeriodsShaun attributes to different markets. One thing that all the
speakers seemed to agree on was that oil was due a correction from the
current heady $60 level.
The Societys joint meeting with the ACI on the 8th June was also very
well attended.The theme was the outlook for the global markets.
Shamik Dhar of Fathom UK and Steven Saywell, Citigroups currency
strategist represented the ACI while Nicole Elliott (Mizuho Corporate
Bank) and Phil Roberts (Barclays Capital) represented the STA.
Shamik Dhar explained how their firm arrived at a central forecast and
then looked at the probability of other outcomes occurring. He
expected bond yields to rise except in the UK where the vulnerability of
the housing market is an important risk factor. But when it comes to
equities, he thinks the UK market offers the best upside potential,
followed by Japan and the US, with Europe bringing up the rear in his
preference rankings.
Citigroup employs a three-pillared approach by combining economic
fundamentals, technicals and client flows to arrive at a three-month
forecast.Their central forecast was for the dollar to strengthen.They
were also bullish on sterling where they believe the yield spread favours
the UK, especially against the euro. Inevitability some of the speakers
over-ran their allotted time and the last speaker Phil Roberts of Barclays
Capital reassured the audience that he would take the Julie Andrews
approach and just concentrate on a few of my favourite things. He drew
attention to the fact that we have seen the biggest correction in the
euro/dollar rate for four years and thought the situation bore an
uncanny resemblance to that of 1988.There are no trend-ending signals
in evidence at the moment and his target for euro/dollar was $1.1590.
Nicole Elliotts views appear on page six.
Sixty-one candidates sat the Societys Diploma examination in London
on 22nd April and the results appear on page 2. Candidates also sat the
exam in Jeddah, Mumbai and New Delhi.
IN THIS ISSUE
STAExam Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Bill Adlard Dow Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Nicole Elliott Global Market Outlook . . . . . . . . . . . . . . . . . 6
Peter Goodburn Sterling/Dollar
An Elliott Wave Perspective. . . . . . . . . . . . . 8
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Wednesday 7th December Christmas Party
N.B.Unless otherwise stated,the monthly meetings will take
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July 2005 The Journal of the STA
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MARKETTECHNICIAN Issue 53 July 2005 2
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Issue 53 July 2005 MARKETTECHNICIAN 3
Charles Dow was born in 1851,in Sterling,Connecticut,the son of a farmer.
He became a journalist,and in the late 1870s began specializing in
financial reporting,particularly as a mining expert.He moved to Wall Street
in 1880,and met Edward D.Jones while working for the Kiernan News
Agency.In 1882 they set up Dow Jones and Company as a financial news
agency.In 1885 Dow became a member of the New York Stock Exchange.
From 1885 to 1901 he was a partner in a firm of stockbrokers,and was for
several years the firms floor broker.In 1889 Dow Jones & Co founded the
Wall Street Journal and Dow became its first editor.He died in 1902.
The general perception in those days was that bonds were a better bet
than common stocks,i.e.equities.There was,in fact,very little information
available to the public about common stocks and the companies behind
them.Daily tables of stock prices did not exist.Information about a
companys balance sheet was rarely published and,if it was,the
management would attempt to obscure the full value of their company
for fear of a takeover.There was a recognition that you could make a lot of
money from stocks,but a feeling that they were volatile and
unpredictable,and you could easily lose your shirt.
Bonds had the great advantage that they were secured by the assets of the
business,there was a fixed and regular coupon,and they were redeemable
at a fixed point in time.You did not need to know a great deal about the
business,only what its assets were.The challenge,and opportunity,
therefore,for Dow Jones & Co was to find a way of making information
about companies and stock prices more widely available and predictable.
Dow Jones and Co was based near the New York Stock Exchange,and its
original product was a handwritten newssheet called the Customers
Afternoon Letter which was distributed around Wall Street daily by
messengers.The Letter was revolutionary in that it not only contained
daily stock price tables,but also made public quarterly and annual
financial information regarding companies information that only
insiders had available to them before this.The Letter evolved into the Wall
Street Journal when the first issue of the WSJ appeared on July 8th 1889.
For many years this remained one of the most important,and only,
sources of financial information for investors.It would not be until the
Securities Act of 1934 that companies would be required to file quarterly
and annual reports that all investors could look at.
Dows analytical techniques probably arose,therefore,from the need to
find a way to forecast the economy,and therefore stock prices,in an era
when important data was only available to a small number of insiders,
who would keep it secret and use it to manipulate the market to their
own advantage.The market was unregulated,and there was nothing,
short of outright fraud,to prevent them doing so.
Dow had experimented with averages since the 1870s,and probably
invented the Dow Jones Average in 1884,as an average of 11 companies,
mainly railroads.Not many industrial companies were then publicly
quoted.The big growth businesses of the day were the railroads.In 1896
he split it into two separate averages,one consisting only of railroad
companies and the other only of industrial companies.These are still with
us today as the Dow Jones Transportation Average and the Dow Jones
Industrial Average.
The thinking behind this was that if knowledgeable insiders were
enthusiastic about prospects for goods production,stock prices of goods
production companies would rise.But if that was not matched by similar
rises,caused by similar buying by insiders,in the prices of railroad
companies (then the main means of distribution),it would warn of an
impending change in economic conditions.He only used closing prices,
probably because of fear of manipulation in intraday dealings.
Dow discovered that the trends in the market averages did indeed lead
the economy.He put it thus:The price trend is not saying what the
condition of business is today,but what it will be months from now. This
is still as true today as it ever was. We should not let the plethora of
fundamental information we have today blind us to this simple truth.
As editor of the newly founded Wall Street Journal,Dow wrote a series of
editorials between 1899 and his death in 1902 interpreting the
movements of his averages and forecasting the economy.His writings
were widely studied after his death,and Dow theory emerged.
A couple of historical footnotes:Dow Jones & Co.employed Clarence W.
Barron,from Boston,as an out-of-town correspondent.In 1902,on Dows
death,he bought the company,and later launched the monthly Barrons
magazine,which,like the WSJ,is still with us.Dow Jones & Co was also
responsible for the invention and introduction of the tape for a more
instantaneous read-out of intraday stock prices.
Dow thought that the reason the averages lead the economy was
because people with price sensitive knowledge would act in their own
interest and cause the market to be priced accordingly well before that
information become public,and that was undoubtedly true in his time.
However,the underlying emotional state,or mood of people generally,is
also a very influential component,from short to ultra long time-frames.
Mood and market prices are very closely related.Rising prices mean
optimism.Euphoria and full commitment to the market means topping
prices.Falling prices mean pessimism.Despair and capitulation mean
bottoming prices.Prices are the first thing to respond to changes in mood.
The fundamentals always take longer.If a negative mood influences an
investor,he can reach for his telephone or his computer and sell shares.
However,if the same mood influences the CEO of a multinational,he may
make decisions accordingly,but it will take months or years for the effects
those decisions to be reflected in fundamental data.This is another reason
that the markets always lead the economy.
In fact, I think the reason that the fundamentals do so badly in predicting
major tops or bottoms in stock markets is because the inherent optimism
or pessimism of the markets becomes embedded in the fundamentals.
Then that optimism or pessimism becomes the basis for comparison.
Thus comparing optimism with optimism at market highs leads to
perceiving optimism as normality.Comparing pessimism with pessimism
at market lows leads to perceiving pessimism as normality.Therefore, if
this is right, at major tops we should in fact see analysts fully bullish, and
at major bottoms, we should see analysts fully bearish.The data actually
bears this out.Investors Intelligence (www.investorsintelligence.com)
have been polling investment advisors since 1963, and plot the results
against the market.Advisorssentiment rises and falls with the market,
but always lagging.
Dows first principle in interpreting the market averages,and perhaps his
way of explaining this phenomenon,was that the market averages
discount everything.The value of the average at any point in time
represents the sum total of all the knowledge,and of all the hopes,fears
and expectations based thereon,of all market participants at that time
including those all important knowledgeable but selfish insiders.
Dows next great observation was that the market averages move in
trends.An up trend is in being when the market continues to make higher
highs and higher lows.A down trend is in being when the market
continues to make lower highs and lower lows.The trend should be
assumed to be continuing until the contrary is signalled by the price.This
observation is applicable to any chart of any instrument in any market,
and should be the starting point of any attempt at technical analysis.
Dow theory
Summary of a presentation given to the STA on 9th March,2005 By Bill Adlard
MARKETTECHNICIAN Issue 53 July 2005 4
Dow classified trends into three types:the primary trend,the secondary
trend and the minor trend.In Dows time,the markets were unregulated,
and as we have already seen,it was widely believed,and probably true,that
large operators combined together to manipulate the market to their own
advantage.Dow held that the primary trend was not capable of
manipulation,and that the primary trend was in fact the most reliable
leading indicator of the economy.The primary trend would last for a year at
least,or possibly several years.The chart above shows that the market
always begins to rise in anticipation of the end of a recession,bearing out
Charles Dows canny observation 100 years later.It refutes completely any
notion that the economy picks up,and then the stock market reacts to that.
The secondary trend was a partial retracement of the primary trend which
would occur from time to time,and would retrace between one third and
two thirds of the preceding movement in the direction of the primary
trend,and last several months.
The minor trend was the
fluctuations in both primary and
secondary trends,which would
last weeks.
William Peter Hamiltons 1922
book The Stock Market
Barometer,is still in print.It was
so called not,as one might think
today,because he had found
some profitable means of
predicting the stock market,but
to show that the stock market
was a barometer,i.e.an
advance warning signal for the
economy.Hamilton
demonstrates that by reviewing
the trends in the economy and
in the averages from 1900 to
1921.This includes,of course,the
upheavals of the First World War.
Dow held that the two market
averages should confirm each
other.Therefore one can re-state
the earlier rules more fully.An
up trend is in being when the
market continues to make
higher highs and higher lows
and both averages confirm each
othershigher highs and lows.
They may not do so at exactly
the same time.A down trend is
in being when the market
continues to make lower highs
and lower lows and both
averages confirm each others
lower highs and lows.They
may not do so at exactly the
same time.The trend should
be assumed to be continuing
until the contrary is signalled
by the price and that is
confirmed in both averages.
When one average makes a
new high or low and that is
not confirmed by the other
average,it is a warning that
the continuation of the trend
is not confirmed,and therefore
a warning of possible trend
change.In my opinion,this still
holds good today.There have
been two major non-
confirmations in recent times
which heralded major trend
change,marked 1 and 2 in my
chart.There is another one
potentially forming marked 3,
which requires the Dow Industrials to make a new all time high for a
major non-confirmation to be avoided.
Trend change
A change in the primary trend should not,however,be inferred until the
final phase of a bull or bear market has been reached (see below),and until
valuations are cheap,for a bear market low,or high,for a bull market top.
Lines
A change from primary trend to secondary reaction would often be
signalled by the formation of a line,i.e.a sideways consolidation within a
range of about 5% above and below a mean figure,followed by a
breakout,which had to be confirmed by both averages.If the breakout
Issue 53 July 2005 MARKETTECHNICIAN 5
was in the direction of the primary trend,that trend was continuing.If the
breakout was in the opposite direction,a secondary reaction had started.
This is another observation of general usefulness trading ranges are very
common,and the direction of the breakout generally determines whether
the trend is continuing or correcting.
Volume
Dow also noticed that volume tends to increase in the direction of the trend.
Therefore in an up trend,the volume will increase as the price rises and
diminish as the price falls.In a down trend,the volume will increase as the
price falls and diminish as the price rises.In my view,since 2000 the volume
pattern has continued to show falling volume under a rising market and
rising volume under a falling market which is not good news for the bulls.
Dow identified three phases to a primary bull market.
First,accumulation.Prior to this phase,the general public has capitulated
and is extremely bearish.The financial news is at its worst.Distressed
sellers are in the market,but knowledgeable and strong buyers are
buying,and are prepared to raise their bid to acquire stock.
Next,public participation.During this phase,the fundamentals improve,
the public begins to join in,and a strong broad rally results.
Finally,distribution.During this phase,the publics enthusiasm for stocks
knows no bounds,but knowledgeable strong investors Dows insiders
are selling,effectively offloading their stock.Speculation reaches a height,
and there is the opposite of a flight to quality:an aversion to boring solid
stocks,and an indiscriminate willingness to accept greater and greater risk.
In the distribution phase,indicators will show bearish divergence.
The same three phases apply in reverse to a primary bear market.First,
distribution.This overlaps with the final phase of the bull market.As the
market trend rolls over from bull to bear,volume begins to diminish on
rallies,and rise on down moves.
Next,panic.Prices may drop vertically,and volume mounts to climactic
proportions.
Finally,capitulation.In this last stage,even top quality stocks decline,and
cause distress to those who have held through the panic stage,forcing
sales.By the time all the bad news and pessimism is fully priced in,the
market will bottom.It may do so on a day of climactic volume and huge
negative breadth,ending,or followed very soon after,by a strong
rebound.Before the bottom there may be several days of 90% plus
negative breadth.During the capitulation phase,indicators will begin to
show bullish divergence.
Strength of Dow theory
It is the ultimate fallback technique.If all else fails,look to see whether you
have a pattern of rising highs and lows,or falling highs and lows.Check
the volume to see whether it rises with the up moves or the down moves.
Look for sideways consolidations and look for a breakout to establish the
direction of next move.
Limitations of Dow Theory
There are two principal limitations.
First,because you have to wait for an out of sequence high and low for a
signal of trend change,you may miss the highest high or lowest low by a
considerable amount.Dow theory signals late but reliably.
Second,there is no telling how long a new trend may last it may only
last one high and one low before the previous trend continues.As
Edwards and Magee put it: A reversal in trend can occur any time after
that trend has been confirmed.
The answer to this conundrum lies in Elliott wave theory.Ralph Nelson
Elliott studied the work of Robert Rhea on Dow theory after the 1929
crash,and developed his wave theories on the foundations so ably laid by
Charles Dow.
MARKETTECHNICIAN Issue 53 July 2005 6
The framework for my technical analysis of the markets is Classic Dow
theory. To this I add the usual: trendlines;moving averages;Fibonacci
retracements and projections;the odd wave count,an occasional
oscillator;and of course,my Japanese Ichimoku clouds. The following
charts have been deliberately kept as simple as possible in order to focus
on the big picture and provide the basis for my long term views (one year
plus) on major equity indices and fixed income yields
Stock markets
The Dow Jones Industrial Average has been the best-performing G7
index. At 10,000 and change we are basically where we were six/seven
years ago and in the upper half of a very broad rectangular pattern. On a
long term view this is not a particularly stellar performance.The index is
still well above the long term uptrend that has been running since 1980
but,in my view,it is looking top-heavy and expensive. At best,the index
may remain trapped between 8,000 and 12,000 for another few years and,
with commissions and expenses chewing up gains,profits are likely to be
negligible. At worst,we may see another good clear-out where a drop to
6,500 cannot be ruled out.
European investors are currently a lot further under water,as can be seen
from Chart 2,which shows the Dow divided by Euro/$ exchange rate. The
US dollars approximately 40 per cent depreciation since January 2001 is
responsible for much of the damage on this chart.The rally since April this
year is due mainly to movements in the exchange rate. Try and think how
foreign exchange moves hit business,the value of things,and their future
value. A weak currency lends an underlying bid to the price of decent
companies. One must learn to factor this in to investment views. Just the
same idea as what you are willing to pay for the villa in Spain,or the price
of a Big Mac in Switzerland.As far as I am concerned the Dow Jones does
not offer much upward potential for investors.
How long does it take for a bubble to burst? In Japans case,rather than a
sudden pop it has been a very,very slow deflation - like one of those
nasty flabby balloons found lurking in the corner three days after a kids
birthday party. This deflation has gone on now for fifteen years,which is a
long time,especially when one is awash with cheap cash! Part of the
problem is that the Japanese never really took the bull by the horns.
Japans experience is important because I think something similar could
be happening in other G7 countries. The Nikkei 225 index may be
forming a very long term base against the 8000 area,but with other
markets more likely to slip lower over the next year,I shant be holding my
breath for this one. Like the Dow,it is currently struggling with cloud
resistance. A monthly close above pivotal resistance at 12,000 would be
very significant but,until then,another market to avoid.
Turning to Europe,the FTSE 100 can be used as a proxy for a whole range
of other European indices,all of which have roughly the same pattern.The
UK is one of the best performers in this region and one of the less neurotic
and jumpy. It is still in retracement mode,a rather nasty creeping,crawling
counter-trend move that has gone on further and for a lot longer than I
had expected.Although not a technical term,I liken the UKs performance
to that of a funicular railway where the cogs are ratcheting it up but it
could slip back at any moment. When moves grind on for so long,and for
not insignificant amounts,one begins to feel it must be a bull market. But,
again,a market to be avoided for the time being.
Are there any indices that I might consider buying at the moment? The
answer is yes but these markets should only represent a tiny speculative
part of a portfolio.
Indias Mumbai index looks very positive.Another constructive-looking
chart is the Jakartas composite index although it is important to note that
some of the move here is due to the exchange rate (a 12% foreign
exchange loss since June 2003).These chart patterns and those of
Global Market Outlook
This article is a summary of the presentation given at the joint STA/ACI meeting on June 8th 2005 by Nicole Elliott
Reuters ones.
Dow monthly
.DJI, Last Trade [Candle] Monthly
22Dec93 - 16Aug05
Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Pr
USD
3500
4000
4500
5000
5500
6000
6500
7000
7500
8000
8500
9000
9500
10000
10500
11000
.DJI , Last Trade, Candle
30Jun05 10462.86 10656.29 10430.97 10564.45

Chart 1 Dow Jones Monthly
.N225, Last Trade [Candle] Monthly
11Dec89 - 03Oct05
Jan90 Jan91 Jul Jan92 Jul Jan93 Jul Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Pr
JPY
8000
10000
12000
14000
16000
18000
20000
22000
24000
26000
28000
30000
32000
34000
36000
.N225 , Last Trade, Candle
30Jun05 11220.94 11539.18 11148.36 11483.35

Chart 3 Nikkei 225, Monthly

Then Dow in Euros
DOW*EUR [Line] Daily
02Mar96 - 26Aug05
Jul96 Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Pr
USD
4500
5000
5500
6000
6500
7000
7500
8000
8500
9000
9500
10000
10500
11000
11500
12000
12500
Dow/EUR
DOW*EUR, Line
20Jun05 8703.65

Chart 2 Dow Jones in Euros

Then monthly FTSE 100
.FTSE, Last Trade [Candle] Monthly
21Jun96 - 21Aug05
Jul96 Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Pr
3400
3600
3800
4000
4200
4400
4600
4800
5000
5200
5400
5600
5800
6000
6200
6400
6600
6800
.FTSE , Last Trade, Candle
30Jun05 4964.0 5098.5 4964.0 5066.1

Chart 4 FTSE 100,Monthly
Issue 53 July 2005 MARKETTECHNICIAN 7
Argentinas Merval and Mexicos IPC look very different from those of the
G7 indices
The fixed income markets are not constrained by the rather arbitrary
levels of interest set by central bankers.In this globalworld they are more
linked to each other than to any repo rate.
Mr.Greenspan may be facing his conundrum,but it is interesting to see
what has happened to UK 30-year gilt yields.They have been stuck
between 4% and 5% since 1998,despite numerous Base Rate changes
over this period. The long term trend is still to lower yields in other areas
of the yield curve,but something that has been stuck sideways for this
long cannot be ignored. In the short term it is likely that the yield will dip
lower here too,dragged along by other maturities and general euphoria,
but I would be very careful indeed. A final probe lower and then back into
this range is the most likely scenario.
Core Europe has been a sick man for sometime and,after the French and
Dutch referendums,we are not too sure about the currency either.A clear
downtrend can be seen in the yield on the benchmark German ten-year
Bund since Unification in 1991.It has broken below the triangle formation
to a new record all-time low. How low can this go? A move to 3.00%
seems very achievable and it could extend down to 2.60/2.75%,or maybe
even 2.25%.These projections are based on the size of the triangle,the
previous waves and channel,plus the shape of the yield curve.
The very long term trend since 1981 suggests that the yield on the
benchmark US ten-year Treasury notes will move decidedly lower.The
2003 and 2004 rallies are just another in a series of counter-trend moves
over this period. Lower yields (30-year bonds are very close to their all-
time lows) are the result of convexity hedging,worries about the outlook
for the global economy and too much cheap money seeking a safe-haven.
We are on our way down to scarily low yields. I see no reason why we
should not move down to the 2003 low at 3.07% and probably more -
perhaps 2.75%? Those who say yields this low are unnatural or that the
yield curve is too flat obviously have memories that do not stretch back
beyond the 1960s.
Japanese Government bonds have been at or below 2.00% for the best
part of eight years! Hovering above 1.20% most of the time, plus the
odd collapse to a record low of 0.45% (for ten year paper). Most of the
world thinks that the Japanese investor is mad to accept such a paltry
return from such an indebted borrower. Why? Desperate times, call for
desperate measures - extreme prices for risk-aversion and a lack of
viable alternatives. Just as they have had to endure a sliding stock
market, crumbling property prices and low, low yields, so probably we
too in the West will have to get our heads round this novelway of
seeing things.
One final thing to consider is the effect on charts,and on everything else,
as prices move towards zero. Rules are not the same;price swings and
percentage moves behave differently. Your mortgage interest costs can
double or halve very easily. Normalequity returns of 7-10% look massive
by comparison to these low yields.The elasticity of market swings is
compressed,and if they break out of a range it feels like a very big move.
Long term bases can take an absolute age to complete,as happened to
the commodities markets for much of the 1990s.
Above all,the moves that I am expecting are likely to be very slow and
drawn out,not a true market collapse or a sudden pop of a bubble. Just a
slow grind.

Jakarta, Indonesia
.JKSE, Last Trade [Candle][MA 200] Monthly
27Mar95 - 16Oct05
Jul95 Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Pr
IDR
250
300
350
400
450
500
550
600
650
700
750
800
850
900
950
1000
1050
1100
.JKSE , Last Trade, Candle
30Jun05 1087.559 1148.798 1079.136 1147.710


Chart 5 Jakarta Composite Index
US10YT=RR, Yield_1 [Candle][MA 200] Monthly
05Jan95 - 09Sep05
Jul95 Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Yield
3
3.2
3.4
3.6
3.8
4
4.2
4.4
4.6
4.8
5
5.2
5.4
5.6
5.8
6
6.2
6.4
6.6
6.8
7
7.2
7.4
7.6
US10YT=RR , Yield_1, Candle
30Jun05 3.98700 4.15800 3.80700 4.12700


Chart 8 US10-year Treasury Notes
JP10YT=RR, Yield_1 [Candle][MA 200] Monthly
08May97 - 09Aug05
Jul97 Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Yield
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2.2
2.4
2.6
2.8 JP10YT=RR , Yield_1, Candle
30Jun05 1.249 1.328 1.205 1.300

Chart 9 10-year Japanese Government bond
GB30YT=RR, Yield_1 [Candle][MA 200] Monthly
07Sep98 - 09Aug05
Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Yield
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
5
5.1
GB30YT=RR , Yield_1, Candle
30Jun05 4.329 4.405 4.183 4.370

Chart 6 UK 30-year gilt

Then 10 year German bund yields.
DE10YT=RR, Yield_1 [Candle][MA 200] Monthly
12Oct94 - 30Aug05
Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Yield
3.2
3.4
3.6
3.8
4
4.2
4.4
4.6
4.8
5
5.2
5.4
5.6
5.8
6
6.2
6.4
6.6
6.8
7
7.2
7.4
DE10YT=RR , Yield_1, Candle
30Jun05 3.281 3.365 3.110 3.306


Chart 7 10 year German bund yields
MARKETTECHNICIAN Issue 53 July 2005 8
Sterlings decline against the dollar has been following an Elliott Wave
pattern,namely an expanding flat. Extracts from our Currency Reports
shows how the progression has unfolded over this year.
In January 2004 we had identified a 144 month,12 year cycle high for
sterling with the next event due in August-September 2004.At the time
we noted in our report,"...Whenever this cycle begins,sterling seems to
decline rapidly,causing comments like 'Crisis' to appear again."
Twelve months later in January of this year the effects of this
cycle were evident,although the exact month of the reversal
arrived late - 16th December 2004 to be exact but the
deviation was only 3 months,or 2%,which is acceptable.
Furthermore,the decline from the high had been accompanied
by concern related to a bubble in the UK property market.
Although in January there were no Sterling Crisisheadlines,
the beginnings of an Elliott Wave pattern were clearly
discernible.
In our Currency Service on the 19th January, 2005 we made
the following observations:
A five wave impulse sequence has declined from the
December high at 19550.The low recorded yesterday at 18527
completes minor wave i.within an ongoing,larger decline.
Minor wave ii.is now in progress,with upside targets towards
fib.61.8% resistance at 19153.
Minor waves iii,iv.and v.to follow in succession to complete
Intermediate wave (C) of the larger expanding flat pattern -
targets towards 17112 see fig 1. It will probably be during
this phase that the 'Crisis' comments will emerge but,like any
extreme,this usually marks the point where a reversal occurs.
Basis the Primary degree trends,the 17112/99 level becomes the fib.50%
support level for the completion of Primary wave 4 within the longer-term
uptrend.Ultimately,wave 5 targets towards 2.0829.
The 73 month cycle suggests a high developing in Nov/Dec '04 - this is
actually a derivative of the 144 month cycle.The 49 month cycle that is
attributed to reversal lows is next scheduled for July/Aug '05.From this
date,the next advance can begin.This describes the advance from 10463
in 1985 as unfolding into a double zig-zag pattern in cycle degree,A-B-X-
X-A-B-C.If each zig-zag measures equally,a final target is calculated
towards 26284 by Nov/Dec 2010.Cutting this advance to create a golden
section provides a target for cycle wave A towards 20482.
With reference to the 144 month cycle shown last year,it was originally
thought that such a phenomenon would cause a dramatic sell-off for the
cable.Now that a three wave zig zag sequence has since unfolded from
17482 to the current high at 19550,this somewhat limits the decline as
part of the expanding flat pattern described earlier in fig #1.
On 12th July 2005 our analysis of sterling/dollar is as follows:
Minute wave 5 targets towards 17658 were met then exceeded as last
week's sell-off extended to complete this sequence at 17319.This low also
completes minor wave iii.that originally began from 19325 back in March
- see fig 2.Minor wave iv.has already begun a strong rebound and is
expected to unfold into a complex corrective pattern,i.e.a
contracting/symmetrical triangle.Minute wave a will set the price
extremity of this pattern - there are three targets that are expected to
conclude this counter-trend advance,all converging within a narrow price
band...
...the first is towards 18074 - calculated to allow wave v.to unfold
to a fib.100% ratio to wave i.and still conclude at original wave
(C) targets at 17112.The next is towards 18059 which is a simple
fib.38.2% ratio retracement of minor wave iii.'s decline based
upon a log scale calculation.The final target is towards 18085
using an arithmatic scaling.
In order to get there,the advance must subdivide into an [a]-[b]-
[c] zig-zag sequence of minuette degree.The conclusion of wave
[a] can be estimated by cutting the 18085 target into a 'golden
section' and this pinpoints a probable target at 17790.
The overall triangle pattern unfolding as minor wave iv.is forecast
to consume fib.161.8% more time than minor wave ii.estimating
a conclusion into late September,early October.A final thrust
lower as minor wave v.should be swift,ending before year-end.
Peter Goodburn is Senior Consultant to WaveTrack International.
The company produces regular Elliott Wave price forecasts on Fixed
Income,Stock Index,FX & Commodity products
info@wavenetonline.com
Sterling/dollar an Elliott Wave Perspective
By Peter Goodburn
Fig.1
Fig.2