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Edition 22 - Chartered 22nd December 2010

Edition 22 - Chartered 22nd December 2010

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Published by Joel Hewish
Chartered is a free fortnightly publication from Fortrend Securities investment/financial adviser Joel Hewish.
Chartered is a free fortnightly publication from Fortrend Securities investment/financial adviser Joel Hewish.

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Published by: Joel Hewish on Jan 03, 2011
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06/02/2014

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Chartered
Fortrend Securities - Wealth Management 
 Joel Hewish is an Investment/Financial Adviser at Fortrend Securities and manages the WealthManagement division. The opinions expressed are his own and do not represent those of Joe Forster or the International Advisory division.
Edition No. 2222nd December 2010
Bottom Line
:
Global equity markets appear to be tracing out the final upward move of what I view as beinga countertrend rally since March 2009. At the conclusion of this final upward move, the highest probability outcome argues for the resumption of the secular bear market.
Investors should continue to use the recent  price strength from May/June 2010 as an opportunity to reduce risk and position their portfolios to profit  from this opportunity!! 
Chart 1 – US S&P 500
 
The S&P 500 has continued to etch its way higher over the past fortnight, but yet again momentumis declining.
 
 
Since the rise above the April 2010 recovery high, the S&P 500 appears to have put in a 4
th
wavedecline and is now subdividing out the final 5
th
wave upwards. If this wave count is correct, themarket shouldn’t have too much further to go until we see the high of the recovery rally whichcommenced in March 2009 and the resumption of the larger secular bear market.
 
Over the past 8 weeks the American Association of Individual Investors’ Sentiment Survey hasproduced very low bearish sentiment readings of less than 25 on three different occasions while atthe same time producing extreme bullish readings of greater than 50 on four occasions. The level
 
of bullish optimism and complacency from investors is almost unprecedented and we are still somemargin below the all time highs.
 
Something of interest that was brought to my attention this week was the fact that a newconfirmed Hindenburg Omen was triggered last week. I’m not all that familiar with the HindenburgOmen but according to Wikipedia, it is a combination of technical factors that attempt to measurethe health of the New York Stock Exchange and by extension, the stock market as a whole. The goalof the indicator is to signal an increased probability of a significant stock market decline. Therationale is that under "normal conditions" either a substantial number of stocks may set newannual highs or annual lows, but not both at the same time. It is assumed that a healthy marketpossesses a degree of uniformity, whether up or down, and the simultaneous presence of manynew highs and lows may signal trouble ahead as the market displays a degree of fracture(http://en.wikipedia.org/wiki/Hindenburg_Omen, 21 Dec 2010).
 
While I am not all that familiar with this technical model, Dr Robert McHugh fromtechnicalindictorindex.com had this to say about the model:
 
o
 
While Hindenburg Omens have occurred without market crashes, over the past 25 years,no market crash has occurred without the presence of a Hindenburg Omen.
 
o
 
Given we have a confirmed Hindenburg Omen, there is now a 28% probability of a 15% orgreater panic sell-off over the next four months, there is a 39.2% probability that a 10% orgreater sell-off will occur, a 53.5% probability that a decline of 8% or greater will occur anda 74.9% probability that a stock market decline of at least 5% will occur.
o
 
Approximately only 1 in 14 of these signals will fail.
o
 
August 2010 produced a Hindenburg Omen but it only resulted in a minor correction of 2%to 5%.
 
According to Dr Robert McHugh, we should take this Hindenburg Omen seriously as the ElliottWave pattern, internal strength indicators and sentiment indicators all suggest the same.
 
Only time will tell but the indicators I look at suggest that the markets internal strength is waningand is not performing the way a normal bull market should.
Chart 2 – US S&P 500 – A closer look
 
The S&P 500 appears to be in the final 5
th
wave advance of what looks like an ABC correction.While there are still several possibilities in terms of wave counts, this wave count appears to havethe greatest level of evidence supporting it.
 
 
At this stage the Oscillator is confirming the assessment of the current move being a 5
th
wave as itis yet to have breached its November 2010 peak strength reading. 5
th
waves tend to exhibit lessOscillator strength than 3
rd
waves as institutional support tends not to be as great in 5
th
waves asfor 3
rd
waves.
 
The S&P 500 is currently trading within the 1,200 to 1,300 significant resistance zone. A top in therecovery rally is most likely within this range.
Chart 3 – S&P ASX 200
 
The S&P ASX 200 has strengthened over the past fortnight but not by much. At this stage the S&P ASX200 continues to trade below its November 2010 short term peak and remains some margin below itsrecovery high in April 2010.
 
 
The S&P ASX 200 continues to appear as though its recovery from May 2010 is corrective.
 
 
The likelihood of the S&P ASX 200 rising above its April 2010 recovery high over the medium termappears low.
Chart 4 – S&P ASX 200 – A closer look

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