Chartered

Fortrend Securities - Wealth Management

Joel Hewish is an Investment/Financial Adviser at Fortrend Securities and manages the Wealth
Management division. The opinions expressed are his own and do not represent those of Joe Forster or
the International Advisory division.

Edition No. 20
24th November 2010

Bottom Line: The rise of the S&P 500 above the April 2010 high has now opened up several possible wave
counts. While in the short term this provides a level of uncertainty as to how long the market will continue
to rise before topping, the longer term cautious and bearish view still remains well in place. While the rally
from March 2009 has carried further than first anticipated, it still remains comfortably within the bounds of
the bear market rally thesis. While it remains too early to clearly determine whether or not the
countertrend rally from March 2009 is over, investors should be aware that sufficient evidence exists to
suggest that this could very well be the case. Investors should continue to use the recent price strength
from June 2010 as an opportunity to reduce risk and position their portfolios to profit from this
opportunity!!

Chart 1 – US S&P 500

• Most global financial markets have come under a fair degree of selling pressure over the past two
weeks, with the S&P 500 being no exception. A renewed focus on Ireland’s and the Euro region’s
debt and deficit problems have lead to yet another bailout of a European Union nation, with
Ireland being the latest country in the Euro block being forced to accept a bailout from the
European Central Bank and International Monetary Fund.
• One by one the financially weak begin to falter under the duress of their own excess. First it was
Iceland, then Dubai, followed by Greece and now Ireland. It is the smaller economies that are
 faltering first, as their access to capital is less than that available to larger countries, but slowly and
surely their fate is catching up with them.
• It was only two weeks ago that Ireland’s government was rejecting claims that they wouldn’t
require bailout funds as they were supposedly “fully funded until 2011”. Given the events over the
past fortnight, I wonder whether that constitutes as providing false and misleading statements to
the market to artificially influence the price of its own securities (bonds)? But these comments and
the eventual outcome are not the exception, but rather have become the norm since the start of
the GFC, with central banks and government authorities providing a deceitful trail of such
nonsense throughout the whole saga. My advice, do not believe the governments and central
banks, they have a vested interest in trying to maintain confidence, but eventually the market
always gets it right. Successful investing involves having the courage to go against the crowd and
seeing the truth through the bull...t.
• Given the S&P 500’s rise above its April 2010 high, a number of possibilities have now arisen with
regards to the interpretation of the waves. Today I provide you with 3 preferred alternatives which
I am watching closely. The market action over the coming weeks and months will gradually reduce
the number of possible alternatives, but until then we must wait and observe and make the
necessary adjustments to our portfolios to suit the conditions.
• The wave counts presented in Charts 1 and 2 are the same wave count, while the wave count
presented in Chart 3 is another preferred alternative. At this stage, I view these 2 alternatives as
the most likely wave counts to prevail, however, it will be the market action which will eventually
show the correct wave count.
• Charts 1 and 2 suggest that if this is the count which proves correct, then we can expect that the
decline probably has a few more days or weeks left before bottoming just above the August 2010
high and then turning up again for one last push to a new countertrend rally high.
• For this wave count to become invalidated, a decline through the Wave 1 high in August 2010 will
be necessary.
• If this decline eventuates, my preferred count will switch to the count provided in Chart 3,
signifying that the beginning of the down leg has likely begun.
• The other alternative, which I view as being the least likely at this stage, is that presented in Chart
4. This count provides the possibility that a larger decline has commenced, before another multi-
month and potentially multi-year push to a new countertrend high commences. But should this
scenario play out, it will only delay the onset of the next leg down of the larger degree bear
market. It doesn’t change the longer term bear market outlook.
• At this stage my preferred interpretation remains finely balanced between the wave count
provided in Charts 1 and 2 and the alternate provided in Chart 3. I have doubts as to whether
another large decline could be weathered by investors and a new multi-month to multi-year rally
could ensue, as depicted in Chart 4, given the challenges to be faced over the coming two years.
Chart 2 – US S&P 500 – A closer look

• The S&P 500 has broken out of the rising wedge pattern that I highlighted was developing over a
month ago, with the completion of a 5 wave move that ended in a small throwover.
• It now appears that we have completed at least the first 2 waves down with the third unfolding. If
this develops into 5 waves down, rather than 3, and a decline below the August 2010 Wave B high,
the probability that we have seen the highs of the countertrend rally increase significantly.

Chart 3 – S&P 500 Alternative Wave Count

• Should this recent decline fall below the August 2010 Wave B high, as highlighted above, then I would
be inclined to adopt the wave count displayed above, which suggests that Primary Wave 3 down has
commenced and a test of the March 2009 lows would be on the cards over the coming years.
• The market has once again rallied into the significant resistance zone that I first highlighted in March
2010, and yet again the market has failed to find the strength to push through it significantly. While
this sell-off could be the pullback needed for the market to muster one last rally to a new recovery
high, the technical significance of this zone now must be truly respected.
• The early November 2010 price peak could also be the second peak in a double top. This is a traditional
technical topping pattern and should be respected.
• Looking at Chart 3, there seems to be some similarities between the double top created in July and
October 2007 and that which could be forming between April and November 2010.
• It should be noted that based on technical and sentiment indicators across numerous markets
including currencies and commodities, the above wave count is very much a strong possibility.

Chart 4 – S&P 500 Alternative Wave Count

• There remains yet another wave count which sits on my radar, but my level of conviction with this
wave count is relatively low for now. This wave count suggests that the S&P 500 could now be
commencing a Wave C decline to finish off an ABC correction, before engaging again in one last 5
wave move to complete Wave C of Intermediate Degree and complete Primary Degree Wave 2.
• The problem that I have with this wave count is that it would require a significant rally or the
maintenance of price strength in the face of fundamental, macroeconomic, sentiment and
technical evidence which suggests this is highly unlikely. But nevertheless, it remains an alternative
count worth considering.
Chart 5 – S&P ASX 200

• The S&P ASX 200 index has displayed weakness far greater than that displayed in the S&P 500
throughout the whole rally since May 2010. The recent price action suggests to me that Wave 2 of
Intermediate Degree down has likely completed and Wave 3 of Intermediate Degree has now likely
commenced.

Chart 6 – ASX 200 Alternative Wave Count

• Chart 6 shows yet another wave which has overlapped on the S&P ASX 200, as highlighted with the
circle. The slightly rising wedge pattern which I first highlighted over a month ago appears to have
also concluded with a throwover. However, unlike the S&P 500, the S&P ASX 200 has not followed
through with a new recovery high and has remained well below the April 2010 high.
• It is interesting that this is the case as much of the fuss in the financial press to date has focused on
Australia’s exposure to emerging markets and China, but the resultant strength of the Australian
dollar and the recent interest rate rises appears to be having some impact on Australian company
valuations and the broader market’s performance.
• Given the waves which have unfolded, the highest probability wave count suggests that the S&P
ASX 200 has already commenced its next leg down in the larger degree bear market.
 • Like the S&P 500, the S&P ASX 200 now remains open to an alternative wave count similar to that
shown in Chart 4 for the S&P 500, however, a break, first below the rising wedge’s lower support
line and then below the May 2010 lows would first have me leaning towards a Wave 3 decline of
intermediate degree.
• Only time will tell, but do not be surprised if the declines gather pace shortly.
• As one Elliott Wave constituent described recently, “Do you really want to try and surf the last
small waves when a potential tsunami could be coming”?

Chart 7 – USD/EURO Cross Rate

(Source: Elliott Wave International, trade-futures.com)

• The USD has continued its advance against most major currencies over the past fortnight, even
though QE2 was supposed to prevent such a rally from occurring.
• However, when looking at the wave structure and the sentiment indicators, we knew that
something wasn’t right with this argument. There is now a strong likelihood that the USD has now
bottomed against the Euro and a Wave 3 of 3 advance is now beginning. A break above the Wave A
low of $0.75 will rule out the potential for this recent strength to be a Wave 4 countertrend rally.
Such an advance nicely aligns with the thesis that Chart 3 and the top in the S&P 500 has now been
put in place.
• Of notice also is that the USD now appears to be making higher highs and higher lows since 2008,
further evidence that the USD will likely continue to rally over the medium term.
• Caution in getting too bullish is still warranted for the very moment. If we don’t get a rise above
the Wave A low, which is now only pips away, there could be the small chance that the USD’s price
rise since 2008, could be a large scale ABC correction. A break above Wave A, however, would
almost completely rule out this interpretation.
• It should be noted that given the sentiment and technical evidence, the odds significantly favour
the onset of a new bull market in the USD.
Chart 8 – AUD/USD Cross Rate

(Source: Elliott Wave International, trade-futures.com)

• The AUD’s wave count appears as though it may have one more move to the upside before it
completes its run. However this can’t be guaranteed. If the USD continues to advance against the
Euro the way it has been, then the chance that the AUD still has one last leg up lessens
significantly.
• Should the AUD find a top over the coming couple of months, or should it have found a top
already, we should expect to see the AUD’s next move to be a long and deep decline, perhaps to
levels most find difficult to fathom.

Chart 9 – Chicago Board of Options Exchange Volatility Index (VIX)

• I showed several weeks ago that the VIX, a measure of market volatility for S&P 500 stocks, had
once again declined into the 16 – 20 range, a range that had typically preceded significant declines
over the past 3 years.
• Despite the recent declines over the past couple of weeks the VIX has not yet provided much of a
spike. As such the cost of protecting your portfolio, in the US at least, is still relatively cheap. So far
 the market makers have yet to seriously influence the general implied volatility of the US market
and the cost of protection.
• Therefore, if you have some concern about the future direction of the market, the cost of buying
insurance to protect your portfolio, at least in the US, does not appear to be too onerous.
• While not shown here, the cost of protection for the Australian market also appears relatively
inexpensive.
• You should be aware that while the VIX remains very much in complacent territory, according to
Elliott Wave theory, this should be the case for the final stages of a Wave 2 countertrend rally.
According to EW theory, the purpose of a Wave 2 countertrend rally is to convince investors that
the old bull market has returned, despite the significant structural weakness that is evident, so as
to ensure that Wave 3 down inflicts the maximum damage by fooling as many people as possible
that the old bull market has returned.
Many of you may have received these funny little parodies regarding the Federal Reserve’s QE2 program
already, as they seem to be making their way quickly around the net, but nevertheless, it is worthwhile
watching for entertainment purposes and some educational benefit.
http://www.youtube.com/watch?feature=player_embedded&v=PTUY16CkS-k#!
http://www.youtube.com/watch?v=wpmlHTeVG9A&NR=1
We live in interesting times!!
As such I strongly encourage you to contact us to discuss your portfolio, how it is positioned, how you
can manage the risks and prosper during these uncertain economic times.

I hope you have enjoyed this edition of Chartered and found the content of interest. If you would like me
to analyse a particular market or chart from a technical point of view, please email your requests to
jhewish@fortrend.com.au and I will endeavour to look at any requests in upcoming editions.

In the meantime, if you would like to arrange a time to discuss your portfolio and some of the strategies
which can be used to help you navigate the prevailing market conditions and profit from this opportunity,
please do not hesitate to contact me on 03 9650 8400 or 0401 826 096.

Until next time, have a great fortnight!!!

JOEL HEWISH B.Bus (Bank & Fin), GDipAppFin, GCertFinPlan, SA Fin

Investment / Financial Adviser
FORTREND SECURITIES - WEALTH MANAGEMENT
Australian Financial Services Licence No. 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 Joe Forster and 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 a licensed Investment or Financial Adviser before acting on any of the information provided in this
publication.