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Chartered

FortrendSecuritiesWealthManagement

EditionNo.1
16thMarch2010

BottomLine:Theinternalstrengthofglobalstockmarketsappearstobeweakeningoverrecentmonths.
Whilehigher prices are stillpossible,evidenceismountingthatwecouldbeclosetotheendofwhatwe
currentlylabelaWave2countertrendrallyfortheS&P500,whichhastakenplacewithinthecontextof
whatappearstobealargersecularbearmarketElliottWavepattern.Investorsshouldbeconsideringways
inwhichtomanagethisrisk.

Chart1USS&P500

According to Elliott Wave International (The Worlds most notable Elliott Wave Technicians) the
S&P500isintheprocessofetchingoutaWave2countertrendrallywithinthecontextofalarger
degreeWaveCPrimaryDegreebearmarketwavestructure.
Bottomline isthat iftheyareright,wecanexpecttosee materially lower share prices overthe
comingtwoyears.
Factorswhichappeartobesupportingthisviewincludethenoticeabledeclineinthestrengthof
theoscillator(divergence)whilethemarketralliedfromMarch2009tocurrentlevels.
ThenegativestrengthoftheoscillatorduringWave3(betweenMay2008andNovember2008)is
also a solid confirmatory signal, providing confidence that the labelling of Wave 1 from October
2007toMarch2009ofalargerWaveCmoveiscorrect.
ImportantnotetorememberwhenconsideringElliottWaveanalysisisthatWave3isalwaysthe
strongestpricemoveasitreflectsinstitutionalactivity.Andwhileitisnotnecessarilythelongest
pricemove,itisnevertheshortest.
Giventhat,thenextmoveforecastfromElliottWaveInternational,whichwecurrentlyviewatthis
stage as the most probable, is the commencement of a Wave 3 decline in prices upon the
completionofthecurrentWave2PrimaryDegreecountertrendrally.

Chart2USS&P500CloserLook

The noticeable decline in volume from March 2009 till now, as indicated by the green 20 day
movingaverageline,alsosuggeststhatinstitutionalsupportforthisrallyiswaning.
Ofparticularnoteisthedivergenceoccurringwithvolumeandpriceinthemostrecentrallyfrom
earlyFebruary2010towheretheS&P500hasjustrecentlymadeanewhigh.Thisdivergenceis
consistent with a Wave 5 move, the last Impulse Wave in a 5 wave trend, where institutions
typicallyselltoretailinvestorswhoarebuyingintothemarketatornearthepeak.

Chart3S&PASX200
TheASX200srallyfromMarch2009hasbrokenbelowtheuptrendsupportline(asrepresented
bythegreenlineonthechart)whichconnectswiththeendofWave5ofWave1(orWaveA)ofa
largerdegreeandWaveBofWave2(orWaveB)ofalargerdegree.
While prices remain below the January 2010 peak, I am inclined to label the retracement from
January2010toFebruary2010asthefirstWaveofWave1ofeitheraWave3ofCorsimplyaC
Wave.Eitherwaybothwavesarebearish.
Inshort,whilepricesremainbelowtheJanuarypeak,Iamthereforeinclinedtoviewrecentmoves
astheinitialstagesofthenextlegdowninwhatappearstobeasecularbearmarket.
The ASX 200s weakening oscillator also indicates the internal strength of our market is also
declining.

Chart4S&PASX200CloserLook

Whilefurtherpricerisescouldoccur,theweakeningoftheoscillatorfromAugust2009throughto
March2010suggests,atthisstage,anystrengtheningofpricesislikelytobeshortlived.
Since September 2009 to date, the market has been largely range bound between 4,500 and
approximately4,800.Thisisalsoaninterestingpatternwhichhasformedasrangeboundtrading
suchasthistypicallytendstooccurduringwhatiscommonlyreferredtoasadistributionphase.
Distributionisreferredtointechnicalcircleswheninstitutions whoholdlargeamountsof stock,
tendtograduallyfeedthatstockintothemarketinacontrolledmanneranddistributethatstock
totypicallyunsuspectingretailinvestors.
Institutions will support stock prices at a particular level to encourage buying so that they can
unwindtheirpositionsinanorderlymannerwithoutputtingpressureonstockprices.Thistendsto
bereflectedinachartwhichdisplayssidewayspricemovements,orchanneltradingsuchasthat
demonstratedintheabovechart.
Ontheflipsidehowever,thiscouldalsobeviewedasconsolidationbeforepricesrisetonewhighs.
Onefactorweighingagainstthisscenario,however,isthatconsolidationusuallyoccurswithinthe
contextofanupwardtrend.Inthisinstancehere,thetrendsupportlinehasnowbeenbroken.
Chart5S&P500VsMutualFundCashtoAssetsRatio

Bullmarketsrequirefueltoreachnewhighswhilebearmarketsoftenreflecttheabsenceofthat
samefuel.Thatfueliscashfrominstitutionalinvestorswhohavethebuyingpowertopushprices
higherandsellingpowertomovepriceslower.
Courtesy of Elliott Wave Internationals March 2010 edition of Financial Forecast, the above
graphshowsthepercentageofUSmutualfundscashholdingsasapercentageoftotalassets.
ThisgraphshowsastrongrelationshipwithUSmutualfundcashholdingsandtheperformanceof
theUSstockmarket.
When cash holdings peak, the subsequent draw down after that peak tends to coincide with a
risingstockmarketasthesecashholdingsareprogressivelyinvestedintothesharemarket.
Whencashholdingsarelow,thesubsequentoutcometendstocoincidewiththeonsetofUSshare
marketweakness,astheretendsnottobeenoughfueltosustainincreasingprices.
WithUS mutual fund cashholdings close to alltime lows,this tendstoprovidefurtherevidence
that key internal indicators of market strength are not supportive of material further price
increases,butratherquestionsthesustainabilityoftherallyfromMarch2009.
Chart6AUD/USDperformancesinceAUDfloated8December1983

TheabovechartshowstheAustraliandollarversustheUSdollarsince8December1983,whenthe
Australiandollarwasfirstfloated.
ItisevidentsincethatperiodthatwhentheAUDtradesatoraboveapproximatelyUSD$0.88the
currency does not tend to remain above this level for too long before weakening and often
weakeningquiterapidly.
AsimilarstorycanbesaidwhentheAUDfallstoaroundUSD$0.60cents.Subsequentmovestend
tobequitestrongtotheupside.
Itisalsoevidentthatintimesofglobaleconomicuncertainty,theUSDistheinvestorschoiceof
currency as they seek the protection of the currency which is perceived to be the strongest and
moveawayfromcommodityinfluencedcurrenciessuchastheAUD.
ExamplesofsuchtimesincludetheAsianfinancialcrisisfrom1997to1998,againin2000to2002
when the technology bubble was bursting and again in mid 2008 to early 2009 as the global
financialcrisiswasreachingitspeak.
Onceagain,theevidenceofhistorydoesnotappeartosupportfurthermaterialincreasesinthe
AUD.
Chart7USMortgageRateResets

Wearehere

TheabovegraphshowsthevalueofUSmortgageswhichareduetohavetheirinterestratesreset
tohigherinterestratesoverthecoming2years.Italsoshowsthevalueofsubprimeloanswhich
hadtheirloansresettohigherinterestratesduring2007and2008.
Evident above is the increasing value of mortgages which begin to reset to higher interest rates
fromthismonth.
Whilethenextwaveofmortgageresetsarebasedonloanswhichareconsiderhigherqualityloans
thantheSubprimeloanswhichcausedsomuchdamageduring2007toearly2009,theUSnowhas
a much higher level of unemployment when compared to the beginning of the financial crisis
(9.7%),indicatingthatmanymorehouseholdsarenowsurvivingonreducedlevelsofincomethan
wouldhavepreviouslybeenfactoredinwhentheseloanswerefirstmade.
Couldthisbethecatalystformarketstobegintomovelowerovertherestoftheyear?
ItisalsoimportanttorememberthatalargenumberofmortgagesissuedintheUnitedStatesare
donesoonfixedinterestrates.Therefore,unlikehereinAustralia,borrowersintheUStendnotto
receivethesamerelieffromlowercentralbankinterestratesaswouldoccurhereinAustralia.
For the moment markets tend to be treading water waiting for the next catalyst to provide a break out
from the recent consolidation patterns that have formed. While higher prices cant be ruled out, it now
appearstheriskstoinvestorsappeartobebuildingmoresotothedownside.Severalkeymarketinternal
strengthindictors,suchastheoscillatorandvolumearenowdisplayingwaningstrengthwhiletheElliott
Wavesstructurescontinuetosupporttheviewthatalongertermbearmarketisstillinplay.Withevidence
now mounting in favour of market weakness over the coming 1 to 2 year period, it is our view that
investorsshouldbeconsideringwaysinwhichtomanagethisrisk.

WehopeyouhaveenjoyedthefirsteditionofCharteredandfoundthecontentofinterest.Ifyouwould
likemetoanalyseaparticularmarketorchartfromatechnicalpointofview,pleaseemailyourrequeststo
jhewish@fortrend.com.auandwewillendeavourtolookatanyrequestsinupcomingeditions.

Inthemeantime,ifyouwouldliketoarrangeatimetodiscussyourportfolioandsomeofthestrategies
whichcanbeusedtohelpyounavigatetheprevailingmarketconditions,pleasedonothesitatetocontact
me.

Untiltillnexttime,haveagreatfortnight!!!

JOELHEWISHB.Bus(Bank&Fin),GDipAppFin,GCertFinPlan,SAFin
Investment/FinancialAdviser
FORTRENDSECURITIESWEALTHMANAGEMENT
AustralianFinancialServicesLicenceNo.247261

Chartered is a fortnightly publication from Fortrend Securities Wealth Management and is provided for the
purpose of general information only. The views and opinions expressed in the publication are those of Joel
Hewish and do not necessarily match those views of Fortrend Securities International Advisory. This
publication is provided as general information only and does not take into account your personal
circumstances, aims and objectives and should not be considered personal advice. You should first consult
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