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Edition 24 - Chartered 16 February 2011

Edition 24 - Chartered 16 February 2011

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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 Feb 18, 2011
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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. 2416
th
February 2011
Bottom Line
:
Be fearful when people are greedy and greedy when people are fearful (Source: WarrenBuffett). 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 inMay/June 2010 as an opportunity to reduce risk and position their portfolios to profit from thisopportunity!! 
Chart 1
 –
Annual Average Prices of the US Stock Market
(Source: Conquer the Crash, Robert R Prechter Jr, 2002)
 
23451
 
Those familiar with Elliott Wave Analysis and the works of Elliott Wave International would no doubt beaware of their call for a new paradigm shift in financial, political and societal forces over the coming years.This change is due in large to the unwinding of global excesses built up through a period of extreme socialoptimism. It is purported that this wave of social optimism occurred within the context of a super largeElliott Wave pattern known as a Wave 3 of Grand Supercycle Degree.Elliott Wave International argues that this wave of Grand Supercycle Degree optimism peaked with thecompletion of a 5 wave impulse move into the 2000 dot.com peak. In their opinion this Grand SupercycleDegree Wave 3 first commenced out of the lows of a severe depression in the US in 1784-85, following therevolutionary war which finished in 1783.In this edition of Chartered,
I’m going to take a brief look at the technical patterns which have unfolded
since the peak in 2000 and try and map where the US stock market is now and where we could potentially
be in regards to Elliott Wave International’s pattern expectations.
 The purpose today is not to argue the fundamental reasons about why we are likely in the midst of a largescale secular bear market, of which the current rally is a large scale bear market rally. Previous editions of Chartered, which are now available on our website at http://www.fortrend.com.au/Publications.htm,can be reviewed to better understand my arguments, but rather, in this edition
I’ll
analyse and summarise thework already completed by Elliott Wave International, to walk you through their thesis and explain how itrelates to financial market patterns and other technical indicator readings being displayed today.Before I do this, it is important to understand that these views are confronting and I am not attempting toadvocate or disprove these views in any way. However, I do believe that there are some real merits in thepossibility of some of these outcomes arising, so I thought it would be worthwhile briefly demonstratingthe expectations Elliott Wave International have and allow you to seek further information if you viewthese possibilities as being worthy of consideration.Firstly, by looking at Chart 1 above, the bull market which lead to the peak in stock prices just before thebursting of the
South Sea Bubble in the 1720’s
is probably the best example we have of a stock market inthe early years. This bubble, which occurred within the earliest version of the stock market, is suitablylabelled Wave 1, as it is the first chartable wave of the stock market as we know it. The bursting of theSouth Sea Bubble lead to a spectacular secularbear market which lasted for the best part of 60 years. Notice how it is possible to label thedecline in 3 waves known as ABC, thusforming a typical zigzag pattern to completeWave 2 of Grand Supercycle Degree.Should the above labelling be correct, the bestinterpretation of the above Grand SupercycleDegree pattern would then call for a Wave 3of Grand Supercycle Degree out of the Wave 2lows of the 1780s. Therefore the ensuingWave 3 should subdivide into 5 upwardslopping waves, 3 up and 2 countertrendrallies in between, which should alsosubdivide a further 5 times within each of those waves. As such, upon the completion of Wave 3 of Grand Supercycle Degree, weshould expect the commencement of Wave 4down. That is, if the above Elliott Wavelabelling is correct, the market gyrations since2000 (or possibly 2007) are likely the firstsubdivisions within a potentially multi-decadeElliott Wave bear market pattern. Should thatbe the case, this pattern will have very largebull markets and bear markets within the
 
pattern, but the net result will be that we are unlikely to witness a meaningful and sustainable break abovethe peaks in the Dow Jones Industrial Average or S&P 500 for potentially a very very long time.
Now I should make it very clear, I don’t know what is going to happen in the future, no one does, neither
do the analysts at Elliott Wave International. But where Elliott Wave analysis is useful is in the ability of atechnician to map where a market might be within the context of its degrees of trend to help increase thechances of making the right investment decisions. So while it has been mentioned that this is a possibility,
I’m also not p
rofessing that the above waves are a fait accompli by any stretch of the imagination.However, if you are a long term reader of Chartered, you will know that I still view markets to be in a verylarge degree secular bear market, which has not yet completed.The fundamental reasons as to why the above labelling is possibly correct are many, but in a nut shell,
Wave 3’s should be the strongest rallies within any Elliott Wave pattern, they are the most likely to extend
and are most often the longest rallies within the Elliott Wave pattern. All these characteristics are present
in the above chart. Furthermore, Wave 3’s are usually backed by significant new strength in economic,
financial and social optimism. Consider the fact that Wave 3 (as labelled above) was accompanied by theindustrial revolution and to a lesser extent, the more recent technological revolution. When consideringthese facts, labelling the advance from the 1780s to 2000 as a Wave 3 of Grand Supercycle Degree seemslike a reasonable proposition.Given that the above labelling suggests that Wave 3 ended in 2000 (or perhaps 2007 as shown below), thiswould mean that we are now due for or have most likely commenced Wave 4 (a corrective pattern) of Grand Supercycle Degree.Now consider also how the fundamentals of the current macroeconomic environment have significantly
deteriorated to the point where you can’t look at a western economy without wondering how the current
level of private and public debt and deficits are going to be mended without some pain, and all of a suddena Wave 4 decline of a very large degree becomes a possibility. It is also useful to consider that largedeclines similar to that purported above have happened before, from both a time and price perspective,but thankfully they are rare.So before we look at the current markets, I provide below the basic Elliott Wave Principals so that we canapply our analysis to the current market patterns and you can follow along.
Basic Elliott Wave Theory:
Markets are patternedThose markets subdivide into fractals (self-similar patterns appearing at every degree of trend) andare reflective of changes in social mood.Markets are the best indicator of an impending change in social mood through the analysis of thewave subdivisions.Social mood can be measured in waves, 3 waves up with 2 countertrend waves between.Social mood and changes in social mood dictate economic changes and not the other way around.Extremes in optimism indicate a change in social mood to pessimism is likely and vice versa.
3 Basic Rules
Wave 2 never retraces more than 100% of Wave 1.Wave 3 is never the shortest wave.Wave 4 never overlaps the price territory of Wave 1.
3 Basic Guidelines
Corrective waves following a 5 wave impulse move tend to terminate within the price territory of the previous 4
th
wave.Alternation usually occurs between Wave 2 and Wave 4 i.e. if Wave 2 is a sharp and steepcorrection then Wave 4 is usually a sideways correction.

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