OUTLOOK FOR MARKETS – 2010 21 December 2009

The US DOLLAR – Trend has changed

The big picture

Let’s start with what we believe to be the most important development in Q4 that carries a huge bearing on how 2010 is
likely to shape up. The position of the US Dollar. Judging by the ferocity of the recent drop in the Euro, it is pretty clear that
the market was massively short the Dollar. Bearish sentiment was also at record extremes, super charged by the near
vertical rise in the price of Gold. However, what is fascinating is that whilst the drum beats of the Dollar bears were growing
louder and louder through the quarter, in actual price terms, it changed very little. In Oct the EUR was at 1.50 and by early
Dec it had barely made a new high to 1.51. So basically, all that was going on was a massive period of Distribution
through which every Dollar bull got chopped and stopped out. If we have to guess, we suspect that most Dollar bulls would
have given up before this beautiful trending move came and erased inside 3 weeks an ascent of around 8 weeks (isn’t
that the norm of the markets though – it has to give the maximum pain to maximum number of people with every major
move).

Highest probability scenario

Judging by what we see on the Weekly charts now, there is a very high probability that a multi month top in the EUR has
been established at 1.5145, which is unlikely to be exceeded anytime in the first half of next year. If we have to guess, our
call would be that it takes support around here (200 DMA is around 1.4180) and starts a retracement rally to about
1.4700-1.4800 but this rally is likely to be lethargic.
In fact, given how sharp the recent decline has been, the highest probability is now for a 3-6 months period of
creating a trading range between 1.4200-1.4900. Should be a great market for traders from here. We are
confident about this.

Where are we wrong

The recent high of 1.5145 delineates the trend. It should not be exceeded now, at least in the first half of 2010.

Ashwani Mathur: T:+44 (0) 207 199 3008 M:+44 (0) 7932 034830 ashwani@deydun.com
GOLD – The bull trend should start again

The big picture

During this range trading period for the Euro, it is equally probable that Gold continues within its uptrend and even gets
back to its recent highs. The correction looks like a typical bull market correction – sharp and within a short space of time.
The up trend for Gold has likely been reset around current levels. We are buyers at this level with a view that new highs will
come in Q1 2010.

Notice on the chart above how the Weekly RSI has merely corrected the extremely overbought condition that the chart
had gotten itself into recently. In fact, if you glance to the left of this chart, you will see that in Q4 2007, the RSI had a
similar reset before price continued another surge to new highs.

Highest probability scenario

We take the view that the recent pullback from the highs is a correction within an on going bull market and that price
has now reached both trend line and momentum support.

This is a level to get bullish on Gold for a surge back to the highs and possibly even new highs.

Where are we wrong

The blue line just above 1025 delineates this trend for us. It represents the previous tops which were exceeded
after almost two years. Only a move through that level sets up the probability of a prolonged bear market in Gold.
We do not see that happening just now.
BOND MARKETS – Stuck in a bear trend

The big picture

This is truly a fascinating chart. The long bond topped last Dec after a spiky move in Q4 2008 that set record low interest
rates. The retracement was equally sharp in the early part of 2009, strongly suggesting that a multi-month (possibly multi
year) bear market had begun. 18th Mar 2009 saw the first announcement of its kind for modern day traders and investors –
Quantitative Easing by the Fed. With the Fed monetising its debt and becoming the largest buyer of Treasuries, what more
could be a dead certainty for investors but to just follow the Fed in the purchase of bonds. But hang on a second…isn’t that
an obvious trade? And isn’t what’s obvious, obviously wrong? You did not have to wait for the answer for long. Bonds
topped exactly on the same day. On the day of the announcement.

If you followed the Fed in its purchase of bonds, not only are you still sitting on huge losses, but you never saw that top tick
of 18th Mar 2009 for the rest of the year ! What does this tell us? To our simple mind, it tells us that there are no buyers of
Treasuries left in the market place apart from the Fed. Owning bonds has been a pathetic trade through 2009 and if recent
price action is any indication, owning them through 2010 is likely to be even worse.

Highest probability scenario

The risk is that the market puts in roadblocks for governments to continue to borrow cheaply. It is hard for us to see any
other scenario and we hope that we are wrong about this. If you wait for the Fed to guide you through what it deems as the
“ideal” rate of interest, then you are likely to be disappointed. We strongly believe that the market’s confidence in
Governments will largely dictate what interest rates are likely to be and in our opinion, these rates are likely to be much
higher through 2010.
All surprises in the movement of interest rates across longer dated maturities, should be to the upside.

The probabilities are heavily stacked in favour of rising interest rates through most of 2010.

Where are we wrong

Only a move back above through the lower top red arrow marked on the above chart will have us re consider our
bear stance in 2010
EQUITY MARKETS – Holding their trends, but what needs to happen from here?

Highest probability scenario for the S&P 500 (implying same for Europe)

A sideways Dollar, rising Gold and Crude Oil prices and gently rising interest rates in the first couple of quarters
of 2010 could continue to be a favourable period for equity markets. Unless a dramatic move takes place in
long-term interest rates right off the bat in January 2010, our highest probability scenario is that the equity
market breaks to the upside from this massive period of consolidation in early January.

However, we are compelled to put a couple of red flags besides this call as two things need to happen almost immediately
for this call to work.

Firstly, and most importantly, European and US Bank stocks need to stop making new relative lows.

Financials have been a huge drag on the markets in Q4 and without the financials leading the charge, it is hard to see a
sustained equity market rally. We are optimistic that the Banks are pretty close to making attractive lows here. The relative
chart of SX7P against SXXP is hovering near its 200 DMA. We think it is pretty close to turning back up from current levels.
All we need is a couple of strong up days anytime soon and that could set the stage for a more durable advance. We are
watching the chart on the next page develop with interest. There are strong bullish divergences on our advanced
momentum oscillators suggesting that a turn up might be imminent.
Banks relative to the market

And secondly, in a completely un-related development to the US and European equity markets, we need to see Japan
continue to build upon its strong move of Dec. Looking back at the Nikkei over the past few years, we notice that Dec 2003
was a strong month for the Index (just like this time) which kick-started a rally into April 2004. See the chart below. The set
up on our momentum indicators is very similar and suggests that Japan could be a major source of upside surprise for
investors in Q1 2010. We thus, need the Nikkei to stay strong and with the 200 DMA now around 9500, probability
supports a sustained advance for this (dead for most people) market.

NIKKEI – Monthly chart

JAPANESE YEN – Daily

A short comment on the JPY is useful here. The recent breakdown in the JPY below the lows of Q4 2008, with a print at
84.83, has the look of a “false break” written all over it. The technical meltdown to that level looks exhaustive and we say
this because of the very strong rebound after that break down.

Probability has to be on the side of a weakening JPY through the next couple of quarters. If this is to be the case,
you want to own Japanese exporters – which is where the rally in the Nikkei is eventually going to come from.
NASDAQ COMPOSITE – Weekly...and important levels for the DAX and VGA Index

Amongst all major Anglo Saxon Indices, it is the NASDAQ that is showing the strongest relative strength. So, given that we
believe that the surprise in the market is likely to be to the upside, we do not want to see this Index (CCMP Index) trade
beneath 2000 now. For more aggressive traders, the level to monitor is the 45 EMA which is around 2150. We are bullish
against that level. Take a look at the chart above.

The two blue horizontal lines mark the levels that should be used by aggressive traders and medium term
Investors as the stops to the bullish scenarios.

We show the most pertinent trend line on the weekly chart and interestingly, the recent mini sell-off did not even make it
to the trend line. This is bullish action and suggests that the trend could get stronger from here.

For European investors, the DAX is in the strongest position. We do not want this to trade beneath 5500 to keep
the Q1 rally prospect alive. For more aggressive traders, the 45 EMA is just above 5700. We are bullish against
that level.

And finally, for the liquid Eurostoxx futures, we are bullish against the low of 2796. We do not want the market
to be breaking that level.
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Ashwani Mathur: T:+44 (0) 207 199 3008 M:+44 (0) 7932 034830 ashwani@deydun.com