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. 13 (Lucky for some, unlucky for others)

18th August 2010

Bottom Line: The next meaningful sell-off, although in its infancy, now appears to have commenced. 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 August,
September and October should provide swift and broad declines. The next leg down in the larger degree
bear market has now been confirmed. Limited time remains to protect yourself from the next leg down
and profit from this opportunity!!

Chart 1 – US S&P 500

• The recent declines over the past week are defining the right shoulder of the head and shoulders
pattern on the S&P 500.
• We have mentioned repeatedly that the rallies have been anaemic at best and last week we
mentioned that the market rally since early July “could conclude at anytime”.
• Since mid last week the market has been declining impulsively and the declines should shortly
begin to gather momentum.
• This next leg down should see the S&P 500 decline at least into the 800s before the market takes a
meaningful breather.
 • However, there is the very real prospect that declines could be worse.
• History suggests that the months of September and October have proven to be less than
favourable to financial markets in the past and recent evidence suggests that this is likely to
continue.

Chart 2 – US S&P 500 – A closer look

• In last week’s edition of Chartered I highlighted that a key Elliott Wave guideline suggests that
counter trend rallies tend to end near the termination of Wave 4 of the previous impulse move.
• In other words, the three-wave ABC correction (or combination of) following an impulse move
usually terminates near the price territory of the previous fourth wave of one lesser degrees
termination.
• Importantly, this is a guideline only and not a rule, however the above countertrend rally since
early July appears to be a nice example of this relationship.

Chart 3 – US S&P 500 – Using Moving Averages

• To cross check our Elliott Wave analysis and confirm the impending declines and change in trend, a
useful method is to analyse the moving averages of a particular market and assess what they
appear to be telling us.
• I prefer to use the 50 day and 200 day simple moving average.
• A cross of the 50 day moving average (pink line) above the 200 day moving average (green line) can
be a bullish signal while a cross below could be a bearish signal.
• But these crosses on their own are prone to providing false signals.
• To confirm the medium term trend has changed from up to down, I like to see the actual price of
the share, currency, commodity or index first cross below the 50 day moving average and then the
200 day moving average, followed by the 50 day moving average crossing below the 200 day
moving average.
• Once these crosses take place I then like to see the price rise back up to cross the 50 day moving
average and test the 200 day moving average line.
• If the price or index fails to convincingly break above the 200 day moving average, I like to see the
price or index level decline again and cross back below the 50 day moving average, while remaining
below the 200 day moving average, to confirm this weakness and provide the first sell signal.
• The opposite is true on the buy side.
• The above chart highlights where the first sell and buy signals occur as indicated by the arrows
farthest to the left.
• The second confirming sell signal occurs with the price below the 50 day moving average, which is
below the 200 day moving average AND the 200 day moving average begins its first declines and
rolls over.
• The above chart shows that the declines over the past week have triggered the first sell signal.
• While the 200 day moving average on the S&P 500 has flattened, it is yet to start its decline and
provide the second confirming sell signal, however, given other methodologies point to the same
conclusion, the first sell signal is more than sufficient and waiting for the second may see
significant losses in your portfolio.
Chart 4 – S&P 500 ETF - SPY – Using Volume Spread Analysis

• In the last edition of Chartered I had this to say about the spike in prices which occurred on 2nd August
2010 “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.”
• On the 9th and 10th of August we got that second test at this resistance level with exactly the same
manoeuvre, only this time the bar following the no demand up bar was followed with a mark down
in prices on volume which was much higher than the no demand up bar.
• This was a successful test by the institutions and the market was subsequently sold off.
• Given this price action I am quite confident that we are unlikely to see the resistance level
breached in a meaningful way. As such there is a very high probability that the Wave 2 minor
degree countertrend rally since early July is now over and Wave 3 down has now begun.
• Last night’s price bar also indicates further caution is required. An up price bar with a wide spread
which closes in the middle or to its lows of the day, with volume higher than the past 2 bar
suggests some selling.
• Once again though, the warning sign comes with moderate conviction as volume should ideally be
higher than what occurred last night to provide a higher conviction sign of weakness.
• Perhaps another test is needed but it is not necessary if tonight’s price action supports the
weakness displayed.
Chart 5 – S&P ASX 200

• The Australian S&P ASX 200 now appears to have begun its next leg down, with the Wave 2
countertrend rally, which I’ve labelled started in May, appearing to be over.
• For simplistic reasons I have labelled the correction an ABC correction, but in reality the correction
was made up of a number of combined ABC corrections.
• Once again we highlight that the sell-off which has occurred over the past week has occurred on
increasing volume adding further evidence that the larger degree trend has resumed.
• Given the S&P ASX 200 appears to have formed a double top, if the market breaks below support
at approximately 4,180, the minimum price target would be somewhere between 3,700 and 3,800.
• But there is the potential is could be much worse than that.
• Like the S&P 500, the technical evidence is favouring large and swift declines between August,
September and October at least.

Chart 6 – S&P ASX 200 – A closer look

 • You will notice that Waves 3 and 5 of minor degree Wave 1 (as signified by the pink number 1),
were occurring on increasing volume.
• You will also notice that while Wave B of minor degree Wave 2 declined, this was on volume that
was relatively flat, while the declines over the past week have occurred on volume which yet again
appears to be increasing.
• I have mentioned in the past that as prices move in the direction of the larger degree trend, these
declines should occur on increasing volume.
• So if the larger degree trend is down, why was Wave B’s volume flat?
• The most logical reason would be that Wave B is actually a countertrend decline of minute degree
within the context of a larger degree Wave 2 minor degree countertrend rally.
• In the last edition of Chartered I provided 2 alternative wave counts for the S&P ASX 200. As a
result of the above price action and that which has occurred over the past week, I have now
labelled the S&P ASX 200 as per the above wave count and for the moment have decided that this
wave count is a better description of what is currently occurring.
• As such I have moved the alternative wave count aside for the time being until further evidence
suggests otherwise.
• As such Wave 3 of minor degree down has now commenced in what should provide the worst
declines to date.

Chart 7 – S&P ASX 200 – Using Volume Spread Analysis

• This time using Volume Spread Analysis as the technique, it is possible to see that at both tops was
a 2 bar reversal.
• A 2 bar reversal occurs after a period of rising or falling prices when the first bar is marked up or
down on volume which appears weaker than the most recent few bars. The bar should close off its
highs or lows for the day.
• The next bar should be a down bar to confirm weakness or an up bar to confirm strength on
volume greater than the previous bar.
• Add further weight to this signal if it occurs at a key resistance/support level such as a Wave 4 of
the previous decline as per above.
 • When this occurs one should be very careful as there is a strong chance prices are about to
reverse.
• I also caution that yesterday’s price bar increased on lower volume than the previous several bars.
Once again this could be a sign of weakness.
• Today’s price bar will provide more insight.

Chart 8 – S&P ASX 200 – Using Moving Averages

• Using the 50 day and 200 day moving averages as a cross check of the trend direction, we can see
that for the S&P ASX 200, both sell signals have now been triggered.
• This is a high conviction confirmation of the change in trend to the downside.
Chart 9 – US recessions and jobs

• Courtesy of The Economist, 12 August 2010, www.economist.com, this graph demonstrates the
severity of the current financial malaise.
• In July 2010, the US economy had 52,000 fewer non-farm employees compared to July 2009.
• A large proportion of economists’ view July 2009 as also being the month in which the National
Bureau of Economic Research will also announce that the US officially ended the first leg of the
recession.
• In other words, this has been a jobless recovery.
• Importantly The Economist makes this point, the US economy has seen recessions this bad and
jobs growth this slow before but the US economy has never had both at the same time.
• Perhaps that is because we are yet to see the worst of the unemployment rate with the market still
working through the overhang of debt and the much needed deleveraging.
• The increase in debt over the past several decades has brought what would have been future
consumption forward. Until that debt has been digested and worked through, making space for a
new cycle to begin, a sustained recovery will be unlikely to occur.
• With consumption representing approximately 70% of US Gross Domestic Product and the
consumer facing a new wave of mortgage resets, reduced incomes and high debt levels, a
sustained US recovery and global recovery, for that matter, is highly unlikely.
• The failure of employment to improve suggests that the debt work through has not yet reached
the desired level.
• The question remains, will the process of deleveraging to come be orderly or disorderly?

Below I provide a link to a recent article I received from Elliott Wave International and it highlighted the
exact same sentiments I have felt with mainstream financial analysis and commentary over the recent past.
Why didn’t anyone see the impending signs of the GFC? In hindsight they seemed so obvious.
The evidence was there last time and it is here again this time. You just had to allow yourself to be
objective and look at the complete picture. I guess hope for the best but prepare for the worst.
This recent article (hyperlink below) and the attached links within the article go some way to showing the
disparity between mainstream analysis and that of the Elliott Wave methodology. The point is not to say
that one methodology is necessarily better than the other and both do not serve a beneficial purpose, my
point is that by looking at just one part of the picture and not considering the other aspects which affect
financial markets, you significantly increase the likelihood of missing something of great importance.

http://www.elliottwave.com/freeupdates/archives/2010/07/30/The-Economic-Crisis-No-One-Saw-
Coming-A-Convenient-Untruth.aspx

At Fortrend Securities – Wealth Management we advocate and practice numerous techniques to analyse
financial markets and use each technique as a cross reference to ensure that we are positioning client’s
portfolios to the regions, markets, asset classes and investments which have the highest probability of
generating each individual client’s desired return for an acceptable level of risk.
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.