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Fortrend Securities ‐ Wealth Management
Joel Hewish is an Investment/Financial Adviser at Fortrend Securities. The opinions expressed are his own. Edition No. 12 4th August 2010 Bottom Line: There now appears to be limited time left before we start to see the next meaningful sell‐off in most global financial markets. Major equity markets appear to have either completed a topping formation, are completing a topping formation or are already well entrenched in the next phase of their downtrend. My expectation is that the next three months should see swift and broad declines. The next leg down in the larger degree bear market has now been confirmed. If you have not moved to manage these risks and take advantage of this opportunity you should be doing something about it!! Chart 1 – US S&P 500
It has been a month since the last time I wrote Chartered in its traditional form so we provide an update on the two markets of immediate concern, the S&P 500 and S&P ASX 200. In edition 9 and 10 I made a specific point of noting that the S&P 500 had etched out a topping formation called a head and shoulders pattern. We made special mention that given the market had broken below support around 1,040, that this confirmed the trend has now changed and that the commencement of the next leg of the bear market has been confirmed. IMPORTANTLY, the break of support continues to confirm the downtrend and the recent rally over the past month has not changed my assessment of the trend. The trend is still down and the confirmation stands.
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In recent editions I also noted that the head and shoulders pattern was “not text book with regards to symmetry” but that it “is a head and shoulders pattern.” The recent rally from early July to date has allowed the market to unfold further, revealing some interesting technical movements. The first being the movement in prices for the Elliott Wave pattern appear to be larger than initially thought. That is the S&P 500 continues the formation of a head and shoulders pattern, however, what I first thought was the completion of the right shoulder now appears to form part of the head pattern. The rally from early July to date now appears to be forming the right shoulder and in the process appears to be showing a minor degree wave 2 counter trend rally (as I currently label it) that is losing strength by the day. I note that the rally from early July to date shows none of the volume characteristics which would generally be expected in a healthy bull market. As such I remain comfortable that upon completion of this rally, which could conclude at anytime, we should see the resumption of declines in share prices which should initially see the S&P 500 decline at least into the 800’s and well into bear market territory. It is my expectation that the next three months should provide the most tumultuous market conditions since the start of the downtrend in April 2010.
Chart 2 – US S&P 500 ETF – SPY
• The above chart of the S&P 500 Exchange Traded Fund – SPY, a good proxy for the S&P 500 for volume data, highlights the spikes in volume as the S&P 500 declines to new lows between May 2010 and July 2010. These spikes represent what generally occurs when prices are moving in the direction of the larger degree trend. In this instance that trend has been down. The above chart also shows the noticeable lack of spikes in volume as the S&P 500 increases. That is new price highs are not matched with new highs in volume. I should be very clear, the price action since March 2009 shows none of the characteristics that a healthy market should display. This is particularly true for the period April 2010 to date.
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Given that the larger cycle degree trend is down, although the smaller primary degree trend between March 2009 and April 2010 was up, you can also see the characteristics of the weak market being played out during this time period. Notice that as the market was increasing, volume was decreasing. Notice also that as prices declined, firstly in the first week of September, again in October and again between January and February, volume spiked. This gives me confidence that our labelling of the rise between March 2009 and April 2010 was in fact the wave 2 primary degree counter trend rally that I had labelled it. Importantly, the primary and intermediate degree trend is now aligned with the cycle degree trend and I expect the minor and minute degree trends to turn down shortly. Of note recently was the large move in the index on Monday night and the corresponding large move in the ETF as displayed above. Of interest was that this move in the ETF came on volume that was lower than the previous 2 bars. This mark up on lower volume could be a test by institutions to determine whether there are any buyers prepared to buy at higher prices. With the next bar closing down, this is of some concern also and a potential sign of weakness. It does however, come with a low level of conviction as the volume on last night’s down bar was not overly supportive. Institutions will likely further test this resistance before the minute and minor trends change meaningfully.
Chart 3 – US S&P 500 – An even closer look
• The S&P 500 has now corrected up to the area of the 4 wave of the previous decline. Elliott Wave guidelines suggest that corrective waves tend to, but do not always, correct back to the level of the previous 4th wave. It is therefore not surprising to see the large upthrust which occurred on Monday night as institutions test this resistance level for further demand.
Chart 4 – S&P ASX 200
• The S&P ASX 200 can be counted in several ways at present with the recent rally from early July 2010 to date potentially being counted as a wave 2 minute degree counter trend rally of wave 3 minor degree, as outlined above, or a Wave C minute degree rally which forms the last leg of a wave 2 minor degree counter trend rally as outlined in Chart 6 below. Either count is relevant at this stage, however, the overall picture does not change, upon conclusion of this weakening rally, the S&P ASX 200 should decline in line with the S&P 500. We also note that the S&P ASX 200 also shows the same divergent nature of volume and price as displayed in the S&P 500 as the index rises. The S&P ASX 200 is showing the same bearish characteristics that are being displayed in the S&P 500.
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Chart 5 – S&P ASX 200
• You will notice that both alternative counts of the S&P ASX 200 appear to be correcting into the price territory of approximately that of the termination of wave 4 of the previous decline.
It is uncanny how often these patterns repeat.
Chart 6 – S&P ASX 200 – Alternative wave count
• Chart 7 – Economic Cycles Research Institute – Weekly Leading Index The above chart shows the alternative potential wave count of the S&P ASX 200.
Since 1968 a reading of ‐8.3% has ALWAYS been associated with a recession and since inception a reading of ‐10.0% or less has ALWAYS preceded a recession (via Reuters).
(Economic Cycles Research Institute, www.businesscycle.com) • In my most recent seminar on Wednesday 21 July 2010, I highlighted that the Economic Cycles Research Institute publishes a weekly leading index of economic growth in the United States.
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I highlighted that since 1968, a reading of ‐8.3% has always been associated with a recession in the United States. More importantly now, since the index’s inception, a reading of ‐10.0% has ALWAYS preceded a recession (via Reuters). The two most recent readings on 16 July 2010 and 23 July 2010 have now produced readings of ‐10.5% and ‐10.7% respectively. Needless to say, this is a very concerning sign.
All the technical evidence available is heavily skewed to the downside. Expectations are that markets do not appear to have long now before the next leg of declines commences. Our analysis indicates that this next leg of declines should see us well and truly into bear market territory. This can be a very profitable and pain free time in the markets or a very painful experience. It’s your choice and you need to take the first step. At the very minimum you should be considering your risk management strategy. Famous quotes, authors unknown. “History doesn’t repeat but it certainly rhymes” “Those who forget history are destined to repeat it” The greatest uncertainty provides the greatest opportunity. As such we 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. We 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@example.com and we 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. 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 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.
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