Edition 23 - Chartered 2nd February 2011

8/7/2019 Edition 23 - Chartered 2nd February 2011

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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. 23

2nd February 2011

Bottom Line: Be fearful when people are greedy and greedy when people are fearful (Source: Warren

Buffett). With investor sentiment surveys moving to off-the-charts bullish over the past month and equity

markets now in, what appears to be, the last subdivisions of their corrective Elliott Wave patterns, whileeveryone else is complacent, now is the time to reassess your investment asset exposure. Major equity

markets now appear to be in the last stages of the global equity market recovery since March 2009 and a

significant market top shouldn’t be too far away. Investors should use the price strength from the lows in

May/June 2010 as an opportunity to reduce risk and position their portfolios to profit from this

opportunity!!

Chart 1 – US S&P 500

• Welcome to the first edition of Chartered for 2011. I hope everyone is refreshed and ready to see

in a year in which anything is possible. I also hope that you have taken the time to assess where

your portfolios are currently positioned and how you can protect yourself and profit from the

expected future volatility likely to unfold over the coming 12 to 24 months.

• The first chart that needs to be discussed for the New Year is the chart shown above of the S&P

500. The first thing I want you to do is cover the chart with your hand or a piece of paper from

February 2010 and onwards.



• What you will see is the S&P 500 with the results of the American Association of Individual Investor

Sentiment Surveys since late 2006. Notice how this survey has recorded an extreme bullish reading

of approximately 25% bears or lower just before the onset of a decline of some significance.

• Now remove your hand or the piece of paper from the right side of the chart and look at the

frequency of extreme readings which have been associated with the price rise out of the lows of

May 2010, in particular the frequency of ultra extreme bullish readings such as 16.4% on 23

December 2010, 20.1% on 30 December 2010 and 18.25% on 6 January 2011.

• When viewing the S&P 500’s Elliott Wave price pattern in conjunction with the extreme bullishsentiment survey, any subsequent correction, decline, sell-off or bear market will likely be of high

significance.

• From an Elliott Wave perspective, the S&P 500 is now very close to completing, if it hasn’t already,

a text book ABC corrective pattern out of the March 2009 lows. Should this pattern begin to

rollover in the near term, the highest probability outcome suggests a new 5 wave move to the

downside to complete either a Wave C or Wave 3 of a very large degree.

• Should this scenario eventuate, the potential for a decline similar to or worse than the GFC

between 2007 and 2009 is very significant.

• To highlight further reasons to be cautious, there is a confirmed Hindenburg Omen on the clock

which has until the end of March 2011 before it expires (see Edition 22 for an explanation of this),

a Dow Theory non-confirmation between the Industrials and Transportations, which suggests weshould be on alert, and the S&P 500 is at the top of its significant resistance zone which it has only

just penetrated last night after a couple of failed attempts.

Chart 2 – US S&P 500 – A closer look

• Corrective Elliott Wave patterns tend to occur in 3 waves labelled A, B and C (as outlined in blue

above). Waves A and C subdivide into 5 Waves (as outlined in green in Charts 1 and 2) while Wave

B subdivides into 3 waves (as outline in green on Chart 2). The S&P 500 appears to be in the final

5th Wave advance of what looks like a text book ABC correction.

• Effectively labelling an Elliott Wave pattern can sometimes be tricky, but if you know the

characteristics of each pattern, then you can significantly improve your accuracy.

• In Chart 2 above, we now have the necessary ingredients to label the above pattern with a fair

degree of conviction based simply on the strength of the price moves as registered by the



Oscillator. Because we know that Wave 3 should be the strongest price move, we would expect a

higher peak in the Oscillator than in a Wave 1 or Wave 5, even though the length of the price

moves in Wave 1 or 5, but not both, can be larger than Wave 3.

• In Chart 2 above, this is exactly what we have. Wave 3’s Oscillator reading, as labelled above, peaks

out at approximately 45, while Wave 1 and Wave 5 peak out below 40. In the case of Wave 5, we

should see the Oscillator diverge in strength from the price rise, which we are, as this divergence

between price and the strength of the Oscillator confirms the weakening internal strength of a

tiring market.

• This divergence and wedge pattern was the same divergence which helped me identify that a peak

in the S&P 500 was close in March and April 2010 and it is providing me with significant confidence

in my assessment that another market peak is likely not too far away.

• Since identifying this pattern in early November 2010, the unfolding of this pattern has come so

close to expectations it has been scary.

Chart 3 – S&P ASX 200

• While the S&P 500 threw up a low probability outcome, given the evidence that presented in mid

2010, the S&P ASX 200 has been right on target with expectations.

• To date, the S&P ASX 200 has held up in what appears to be a Wave 2 countertrend rally upward,

which has extended for the best part of 8 months. But believe it or not, the S&P ASX 200 is actually in a

downtrend which is confirmed by the downward slopping 200 day moving average (not shown here).

• The decline from April 2010 to May 2010 occurred in 5 clear waves to the downside, while the rally

from May 2010 to date has been a mishmash of overlapping waves within the context of a rising wedge

pattern, a traditional corrective technical pattern. • Unless something changes dramatically, which appears highly unlikely, the S&P ASX 200 is likely leading

most markets lower at this stage.

• During the whole countertrend rally between April 2010 to date, the Oscillator has continually declined

in strength and now appears to be moving towards a more consistently negative reading.

• This is not a healthy market!!



Chart 4 – S&P ASX 200 – A closer look

• The S&P ASX 200 now appears to be testing the lower rising trend line of the rising wedge pattern

again. A convincing break below would likely signal the onset of Wave 3 down, which should prove

to be one of the more destructive waves to the downside we can expect over the coming years.

Chart 5 – USD/EURO Cross Rate

(Sentiment Source: trade-futures.com)

• The USD versus the Euro looks a little tough to clearly define at the moment. The price pattern

from December 2010 to date looks okay as a 335 flat correction, in which instance the USD shouldbe close to a Wave 3 rally, but the rise from November 2010 to December 2010 doesn’t look all

that great as a 5 wave move on the daily. It is, however, possible to count it as 5 waves on smaller

time frames.

• More time is needed to determine the wave structure with confidence.

• The decline of the USD from June 2010 to November 2010 counts very well as an ABC correction,

as labelled in the above chart, so my expectation of a USD rally over the coming 12 to 24 months

still remains in place, but the short term count of the past 3 months is a little less clear and further

time is needed to ensure that the above wave count is correct.



• To ensure that the above wave count is correct, the current correction taking place in the USD

can’t fall below the low recorded in Wave C of approximately USD$0.70. If this occurs, then the

Elliott Wave pattern must be something else. But at this stage, the above labelling provides the

best explanation.

Chart 6 – AUD/USD Cross Rate

• It is possible to count the wave structure of the AUD’s rally from May 2010 as complete and the

AUD to have peaked on 31 December 2010.

• The AUD has made slow progress over the past month until last night.

• It is too early to say with conviction whether the AUD has peaked or has one more push to the

upside, but it does look like it is forming a top.

• At this stage the Euro and AUD appear to be confirming the wave counts of the S&P 500 and S&P

ASX 200 nicely.

• Should the AUD have peaked or be in the process of topping, the next leg down is likely to be a

Wave C decline which has the potential to see the AUD decline into the USD$0.60 and even

USD$0.50 region over the coming years.



Chart 7 – USD Spot Gold – Weekly

• The weekly chart of gold counts well as a 5 Wave advance since the lows in October of 2008. The

high seen in December 2010 could be the peak in gold prices and signify the commencement of an

ABC correction in gold which could test the lows of Wave 4 of 2008 around USD$680 and possibly

lower.

• There is divergence in the Oscillator strength between Wave 3 and Wave 5 and the weakness since

the start of January appears to be gaining momentum to the downside in what should be a Wave 3

decline of small degree, if the above labelling is correct.

• If financial markets turn down in the near term and continue to decline over the coming years as

expected, gold will find it extremely difficult to maintain its value under the weight of significant

forced selling and deleveraging.

• If you missed the dramatic rise in gold over the past 10 years, the next few years should provide an

attractive opportunity to accumulate this precious metal and other assets, if you can manage the

risks effectively.

An update of events over the past couple of months

In December 2010, Ben Bernanke went on TV to defend his QEII program. You can review the 60 Minutes

interview for yourself at the link provided. Make of it what you will, but for my mind, his performance

doesn’t exactly instil confidence in him or the QEII program. You can access the interview at

http://www.youtube.com/watch?v=QPmmWe5iulQ .

I published this link http://www.youtube.com/watch?v=6kAfuFGi7bY to another US 60 Minutes report on

Option ARM and Alt A loans early last year and I think it is timely to once again review the clear message

given. In particular, consider the timing of the largest wave of US mortgage interest rate resets as outlined

in the graph provided by Credit Suisse approximately 3 minutes and 30 seconds into the report. Nowconsider the timing of when the number of resets began to pick up significantly in 2010. Is it any surprise

that the most recent S&P/Case Shiller home price index for the US market is once again declining? It

appears that QEII has gone into the share market and is helping Wall Street, but it is not helping Main

Street and the average United States homeowner from having to sell their house or default on their loan,

even with low interest rates. A link to the most recent announcement regarding the S&P/Case Shiller home

price index is provided here at http://www.standardandpoors.com/indices/sp-case-shiller-home-price-

indices/en/us/?indexId=spusa-cashpidff--p-us---- .



To finish off the trio of 60 Minutes reports for the first edition of Chartered in 2011, this report on the

health of US state and municipal finances also provides a less than flattering outlook for the coming several

years. You can view this report which was released 19 December 2010 at this link

http://www.cbsnews.com/video/watch/?id=7166293n.

I note that in January, Japan’s central bank had entered into the European debt market to buy the PIIGS

countries sovereign debt issuances. Given Japan’s large export sector and the heavy reliance on Europe’s

consumer markets to sell goods into, I can’t help but think that this is perhaps vendor financing on a very

large scale, rather than a show of confidence in the ability of those countries to repay their debts.

I would also caution against believing the Federal Reserve can continue to print money at will without any

repercussions. Already we are starting to hear reports of food shortages and concerns about high food and

energy prices in developing markets, as the Federal Reserve exports inflation to every market around the

world except the market which it is targeting. Why is this such a concern? Because in emerging markets,

food costs make up a much larger proportion of household expenditure than that in developed markets.

Higher food prices mean people can’t afford to eat and this leads to political and social unrest. The recent

social unrest in Tunisia and Egypt could be the start of a chain of events which prevent further rounds of

Quantitative Easing and pulls the rug from underneath the Fed’s easy money policy. Add to that higher

energy costs (oil has recently breached USD$100 a barrel) to fragile US and European economies and all of

a sudden you can begin to see limits to this policies effectiveness. You simply cannot conduct such a

reckless program without some unexpected consequences.

As such I strongly encourage you to review this material and consider the timing of these events within

the context of the above bullish sentiment extremes and bearish technical patterns. If you are interested

to know how you can protect your wealth and also profit from this opportunity, I strongly encourage you

to contact me today!!

Interested to know more about Elliott Wave Analysis and the science of

Socionomics?

For those people new to Elliott Wave Analysis and wanting to understand the principals behind it and the

development of the new study of Socionomics, the Institute of Socionomics, in conjunction with Elliott

Wave International, have just released this new introductory video

http://www.socionomics.net/hhe/video/stream/flash/default.aspx?page=1to help newcomers to this new

way of thinking and analysis. It is recommended viewing for anyone even slightly intrigued, whether you

are a believer or a sceptic. It provides for some very interesting viewing.

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

[email protected] 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.

Kind regards,

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.

Edition 23 - Chartered 2nd February 2011

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