Wednesday, October 22, 2008

Welcome to the latest issue of ECAM.

Since my last update nothing has changed with respect to equity investment. We are still in the grip of what will be a severe bear market in equities that may last an additional 2+ years.

Just to refresh everyone's memory, my longer term charts turned bearish at the end of Dec/2007 and at that point I switched to 100% non-equity holdings. At the time that was the Euro (25%), Australian dollar (25%) and Fidelity International Bond fund (50%).

My last switch was out of the Euro and Aussie dollar into USD cash based upon the sudden strength in the USD. I held my International bond exposure until I saw further evidence of technical strength in the USD.

We have now seen this strength and it has forced me to switch my 50% position in the bond fund into USD cash. As of today I am in a 100% USD cash position.

First the equity charts (click all charts to enlarge)

Dow Jones World 1 year daily chart:

This short term chart last turned bearish in early June as indicated. This chart will be one of the first to indicate when it is time to re-enter the stock market.

There is no technical indication we have turned the corner yet and I suggest it is extremely dangerous to attempt to front run any advance before the technicals indicate it is time to do so.

It is possible we have put in a double bottom. If so, price would have to get at least above 191.27 (and to be ultra-safe, above 198.15) to give us a reasonable picture that a short term bottom is in place. Until then, it must be assumed the market is still in a downward trend.

Dow Jones World PNF 1-box chart:

This short term Point and Figure chart remains bearish. It is interesting to note the newest row of "0"s has just formed. If price were to turn around from here and begin to climb, this chart would give a buy signal if price were able to pass 185. This would be the 1st technical sign we are turning the corner but it would be dangerous to go long based upon just this one indication.

I would not go short term long until both short term charts indicate it is safe to do so.

Dow Jones World 10 year weekly chart:

A reminder that irrespective of any change in the short term direction of the markets, the longer term trend is still down.

Until the 13 week EMA crosses above the 34 week EMA we are in a bear market. It really is that simple.

S&P 500 30 minute candlestick chart:

I have included this chart for a specific reason. This is a 30 minute chart of the S&P 500 index. I have shown what looks to be a symmetrical triangle that is forming. This is referred to as a pennant as it forms to resemble a pennant type of flag.

Should this be a pennant, the rule of thumb is that "pennants always fly at 1/2 staff". What this is saying is the pennant is a pause point approx 1/2 way through either a rally or a decline.

This pattern usually takes the form of 5 waves and tends to exit the pattern the same way it entered. In other words, it entered from above (ie. the market declined into the pattern) therefore it is expected it will exit downwards when it completes.

It appears 3 waves have completed. If so, wave 4 should go down to test the lower trend line followed by a wave 5 bounce upwards. This wave 5 usually does not get up to the upper line before turning down. A break of the lower trend line will complete the pattern.

Should this pattern play out as "textbook", it would suggest a further 426 points to the downside from the point at which the pennant exits the pattern (1265 - 839 = 426). That exit point would be approx. 920'ish so the target would be 500'ish on the S&P 500 (920 - 426 = 494).

Even using the more optimistic start point of 1168 would give us a target of 600'ish (1168 - 839 = 329) (920 - 329 = 591).

In either case, it can be seen there is still very real danger in these markets and we better hope to hell that bottom trend line holds or we are in real trouble.

While I am still looking for a short term bottom and then a rise into the spring, should this pattern play out I would highly suggest anyone who is still holding equities in the hope of participating in a bounce consider selling out their positions on the breakdown (should it occur).

US Dollar 10 year daily chart:

Unbelievable strength shown in the USD. While there are a ton of reasons why the USD shouldn't be so strong, it is what it is. I suspect the reason is the 1000's of US based hedge funds having to liquidate foreign holdings to meet margin calls on leveraged positions. This forced liquidation is forcing them to sell all assets and convert their holdings into USD cash. This is leading to a short term demand for US dollars, driving up price.

Long term I think the USD is doomed but you cannot fight the trend. The downtrend has clearly been broken, the back test completed, and the resistance @ 80.39 was decisively broken to the upside.

Price has now risen to its next area of resistance at 84.29 (61.8% retracement level)-84.56 (current price resistance level from 2004). A break above here and we will look to retrace all the way back to the previous start of the bear market @ 92.63. There is no reason technically why this is not possible so we have to assume the USD is able to climb a further 10% from current levels.

As a result, my decision to move out of Euro and Australian dollars was a good one. However, my holdings in the International Bond fund have taken a beating due to its holdings (foreign currencies) not being hedged within the fund and dragging down price.

Fidelity International Bond Fund chart:

Price has broken long term support. If the USD climbs a further 10%, this fund will suffer at least that amount in losses.

As such, I have switched my Fidelity International Bond Fund position into Blackrock/MLIM USD cash fund. Should the USD reverse I can always re-enter the bond fund but to this point it appears the potential short term upside to the USD is a danger I cannot take.

Bottom Line:

-It is still too early to enter equity positions. The only thing currently making money is the USD and short term US treasuries.

-I am looking for an equity price bottom to occur soon. When my short term indicators indicate it is safe to do so I will switch a small portion of my holdings to equities.

Once again I stress this will be a short-medium term trade only with a small position of my total capital as I believe we are within a 3 wave multi-year bear market. Wave 1 is almost complete and when the turn occurs it will result in a multi-month wave 2 up. This will be followed by a multi-month wave 3 down that will result in a price low well below the levels set at the 2003 market lows and may be comparable with the 1929-1932 stock market crash (the DOW lost 90% of its value during that period).

-The USD has shown unbelievable strength and appears to have started a long term uptrend. It is easily possible for it to now regain 100% of the current downtrend to 92. There is strong resistance at that level; from there it is possible the USD collapses into a new low (this could come with the US government defaulting on their debts).

Based upon the above, as of today I have switched my Fidelity International Bond Fund into BlackRock/MLIM USD cash fund.

As of today, my "strategic" positions are as follows:

-100% BlackRock/MLIM US Dollar Cash Fund*

*(actual positions: USD cash 92%, equities 8%)

*percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary several % from that posted (refer to current % holdings).

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