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. 26
17th March 2011

Bottom Line: Volatility is back and it was overdue. Markets began selling-off several weeks ago and the
recent turmoil in Japan gave the sell-off the impetus it needed to the give the downside correction a kick
along. For a while now I have been talking about the heightened risks within global financial markets and
those risks have now begun to show themselves. While predicting the events over recent weeks would have
been extremely difficult and perhaps even impossible, we were given plenty of warning signs leading up to
this moment to suggest that not all is right and risks were elevated. From a valuation and technical
perspective, everything was and still remains in place for a correction of a substantial size and even for a
top of major significance. Most global markets are now showing signs of technically breaking down and a
potential significant trend change could be at hand. Investors should remain nimble and reduce their
exposure to the risks in financial markets where appropriate. Always remember that uncertainty brings
opportunity!!

Chart 1 – S&P 500

Is the market on Route 666? For those of you unaware, the S&P 500 price index bottomed in
March 2009 at the index level 666. The big question readers of Chartered will no doubt be asking....
is this the commencement of the next leg down in the larger secular bear market or will it turnout
to be yet another false start and corrective phase? The answer is I’m not 100% sure, but we should
be taking serious note of recent declines given the evidence that is in place. The probability is
extremely high.
 Since the recovery high on 18 February 2011 the S&P 500 has made two lower lows and one lower
high, indicating that a potential trend change could be at play here. We should be treating the S&P
500 with the utmost caution at present as the market is subdividing to the downside following the
completion of a 5 wave Elliott Wave pattern to form what looks like a C Wave of what currently
looks like being an ABC corrective pattern.
According to Elliott Wave theory, if the market is still in an uptrend, then the most likely place for a
downside correction to finish is approximately where Wave 4 of the previous uptrend completed.
Based on this guideline we could expect a correction back to the lows of November 2010 around
1,173.
While I have given numerous reasons as to why I view the rise from July 2010 to the recent high as
likely being a subdivision of a countertrend rally, rather than a Wave 3 of a new bull market, from
an Elliott Wave perspective, if this recent decline was the start of a Wave 4 decline and the rise to
February 2010 a Wave 3 advance rather than a Wave C advance as currently shown, then the
decline currently being experienced cannot fall below the April 2010 high of 1,219 as this would be
a violation of the Elliott Wave rules. As such, a decline below 1,219 would put to rest this possible
bullish wave count alternative and will give greater evidence that more substantial falls will be
likely over the coming 12 to 24 months.
At the moment we should expect further downside before a good sized relief rally. What happens
after the decent sized relief rally will determine whether a major top is in place. I’m looking first for
5 clear waves to the downside and 3 clear waves up and a commencement of a new down
movement before being able to make a more informed determination.
At the moment I can only see 3 waves to the downside.

Chart 2 – S&P 500 – A closer look

The recovery high of the S&P 500 currently stands at 1,344 on 18 February 2011. Since then the
market first declined to 1,294 on 24 February 2011, rose to 1,332 via a three wave pattern on 3
March 2011 and then proceeded to decline below the first low of 1,294 to close below that level
over the past two trading days.
In terms of levels to be considering at this stage, if considering shorting the market, a close of the
S&P 500 above the 18 February 2011 high of 1,344 would be the first level to be placing a
protective buy order. From an Elliott Wave perspective, if the market rises above the recovery high
of 1,344, the above wave count would be incorrect and some other wave count would be at play.
 With regards to the market action since the recovery high, given the 3 wave countertrend rally that
occurred between 24 February 2011 and 3 March 2011, there is a good probability that further
weakness is likely over the coming weeks and months.
According to a number of indicators which I follow, we should still expect further weakness for at
least a few more weeks. The degree of the correction and Elliott Wave structure should give us
clues as to whether or not a major top has been put in place.

Chart 3 - S&P ASX 200

For some time now I have persistently argued that the S&P ASX 200 has been displaying significant
internal weakness and the wave structure of the advance was telling us that the S&P ASX 200 was
not a healthy market.
That weakness has come to the foreground in recent weeks with the S&P ASX 200
underperforming the US’s S&P 500 index. At the time of writing, the S&P ASX 200 had declined
7.8% versus the S&P 500’s 6.5% decline.
The S&P ASX 200 is now back trading at levels it was 6 months ago.
Chart 4 – S&P ASX 200

The reason for my scepticism about the S&P ASX 200’s rise from May 2010 to the recent recovery
high was based largely on the 5 wave decline from April 2010 to May 2010, indicating that the
market’s larger trend had likely changed from up to down. The market was rising out of the low of
May 2010 to February 2011 with declining strength or divergence in the Oscillator as shown with
the red line above. Furthermore, the wave structure of the advance from May 2010 to February
2011 was largely of an overlapping nature, which is typical for corrective waves, not impulse
waves.
Given all of the above, the highest probability conclusion to come from the above wave structure is
that the decline from April 2010 to May 2010 was in fact the first leg of the S&P ASX 200’s next leg
down in the secular bear market. The rise from May 2010 to February 2011 was a Wave 2
countertrend rally of intermediate degree and the decline from February 2011 to March 2011 are
the first 3 waves of minor degree Wave 1 of intermediate degree Wave 3 of Primary Degree Wave
3 or C.
In other words, unlike the S&P 500 and most European markets, our market likely began its next
leg down in the larger secular bear market in April 2010, while the US and European markets seem
to have delayed the onset of their next primary degree declines until perhaps recently.
In short, further significant weakness appears the most likely outcome for the Australian market,
while more time is needed to come to the same conclusion about overseas markets, but it now
becomes more probable than not.
Chart 5 – USD/EURO Cross Rate

The USD/EURO cross rate continues its deep corrective pattern. The USD is finding support against
the Euro at levels consistent with the upward supporting trend line which has been drawn using
the lows since 2008.
The above wave count indicates that the USD is likely close to commencing a Wave 3 advance at
several degrees of trend, but the delay in doing so has been odd and also a little frustrating for US
dollar bulls alike.
It is possible that another wave count is at play which might mean that the action since the start of
December 2010 is part of a larger combination correction, however, importantly the action is not
impulsive but rather displays corrective characteristics including declining weakness in the
Oscillator and overlapping waves.
In short, the basic technical trend lines and waves structures suggest that longer term, the USD
should rally significantly against the Euro and perhaps well above parity, but a little more time
might be needed before this market starts to move.

Chart 6 – AUD/USD Cross Rate

 Has the Australian dollar peaked and commenced its next leg down? Unfortunately I’m not sure
but there is now weakness in the Australian dollar which should be noted.
That weakness is evident in the Australian dollars more convincing move to the downside from late
December 2010 to early January 2011. The decline on smaller timeframes appears to be non-
overlapping. The advance from early January 2011 to 1 March 2011 appears corrective with
overlapping waves. The Oscillator has been declining in strength and the advance from May 2010
to December 2010 appears to be the final leg of an ABC correction out of the 2008 lows to finish
what appears to be a B Wave correction upwards.
A break below the Green Wave 4, set in November 2010, would be the first signal that a decline
and change in trend is upon us. A rise above the December 2010 high would likely mean a rise to at
least $1.05 before the trend change commences.
If I was to make a call now, I’d say that the odds favour that the Australian dollar has peaked, but it
is a low conviction call until I see more evidence of weakness.

Has the Australian property market peaked?

Long term readers of Chartered and those who have attended one of my investment seminars would be
well aware of my long term cautious outlook on Australian property. Despite all the hype, evidence is
starting to mount that property prices may have peaked in Australia.

Many reasons are given as to why the Australian property market is different from other markets such as
“our banks are more responsible, we didn’t lend to sub-prime borrowers, we have population growth which
will support prices, we have an undersupply of housing etc, etc”, however, the recent data and anecdotal
evidence is beginning to suggest that heavily indebted households are beginning to struggle under the
weight of their recent GFC stimulus induced debt feast. Unfortunately, history has plenty of examples to
refer to when assessing what the likely aftermath could be following debt induced acceleration in property
prices. See the US, Europe and Japan in the late 1980’s as a case in point.

So before you consider investing in property leveraging up 10:1 or 20:1, perhaps you should consider the
following articles:

No shore thing – The Australian – 12 March 2011

http://www.theaustralian.com.au/news/executive-lifestyle/no-shore-thing/story-fn6njxlr-1226018349673.

Australian house prices 56 per cent over valued: The Economist

http://www.abc.net.au/pm/content/2011/s3155728.htm.

‘Worst Ever’ Property Dive After Disasters – news.com.au – 28 February 2011

http://www.news.com.au/money/property/disasters-knock-property-market/story-e6frfmd0-
1226013426709#ixzz1FEVRFn1i

Auction rates fudged by failed campaigns – The Sunday Telegraph – 6 March 2011
http://www.news.com.au/money/auction-rates-fudged-by-failed-campaigns/story-e6frfmci-
1226016477643 .

Property chiefs warn on units glut – The Age – 14 December 2010

http://theage.domain.com.au/real-estate-news/property-chiefs-warn-on-units-glut-20101214-18wsx.html

Why Australia’s property pulse is threading – Business Spectator – 9 March 2011

http://www.businessspectator.com.au/bs.nsf/Article/Steve-Keen-debt-mortgage-property-house-prices-
pd20110308-ER3LA?OpenDocument
What is striking about the above articles is that they are all talking about Australian property. Not Spain,
not the US, not Ireland, but Australia. Also consider that in February 2011, real estate research firm Residex
estimated that Melbourne currently has an 18,000 dwelling oversupply of residential property.

Now it is still early days, but hopefully this will get you thinking twice about making that next big purchase
in property because “property prices always go up”. As mentioned last week, there is no such thing as a
‘Black Swan’ event, it’s just an excuse used by those who missed the warning signs.

Opportunities to play both sides of the market

Recent weakness in financial markets is providing investors with a great opportunity to add value to their
portfolios so long as you know how to manage the risks. The innovation in the exchange traded funds
market in the United States has opened up an enormous opportunity to play all types of markets in all
directions without the necessity of using leveraged and complex derivatives products. 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=1 to 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
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.

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.