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The STA had a stand at the annual 'Futures and Options World'Derivatives and Securities exhibition at the Barbican on 29 and 30 June.The show attracted some 1500 delegates and also included a seminarprogramme. Such was the level of interest in the STA’s activities that weactually ran out of application forms, despite taking many more than forlast year's exhibition. All the people involved in manning the stand feltthat we had scored a success in raising the profile of the STA. CliveLambert, Robin Griffiths and Shaun Downey gave presentations coveringthe short, medium and long term approaches to market trading.
Our seminar programme was aimed at “Prop” traders who are prevalentin London these days. Many of these traders are often very well versedin the day-to-day mechanics of their own particular market butsometimes miss out on the "bigger picture". Robin Griffiths (head ofasset allocation, Rathbones Group) attempted to fill this gap byexplaining his unique "Road Map" theory. According to his maps, theend of the bull market in European equities is not far away (and we maywell already have seen the top in the US). He also warned that 2006could be a difficult year for investors.
Clive Lambert (FuturesTechs) followed with a look at JapaneseCandlestick analysis with particular reference to the recent "HangingMan" and "Hammer" patterns seen in the Bund Futures. He alsodiscussed the prevalence of ‘Marabuzo lines’ recently and their ability toprovide a powerful confirmation signal.
Shaun Downey (Head of Customer Support for Europe and Asia, CQGand Partner, Oasis Research) finished the afternoon with a look at MarketProfile (© CBOT), a method much used in the Futures markets,particularly in Chicago where the technique was first conceived.Amongst the interesting snippets from this talk was the ‘Initial Balancing
Periods’ Shaun attributes to different markets. One thing that all thespeakers seemed to agree on was that oil was due a correction from thecurrent heady $60 level.
The Society’s joint meeting with the ACI on the 8th June was also verywell attended. The theme was the outlook for the global markets.Shamik Dhar of Fathom UK and Steven Saywell, Citigroup’s currencystrategist represented the ACI while Nicole Elliott (Mizuho CorporateBank) and Phil Roberts (Barclays Capital) represented the STA.
Shamik Dhar explained how their firm arrived at a central forecast andthen looked at the probability of other outcomes occurring. Heexpected bond yields to rise except in the UK where the vulnerability ofthe housing market is an important risk factor. But when it comes toequities, he thinks the UK market offers the best upside potential,followed by Japan and the US, with Europe bringing up the rear in hispreference rankings.
Citigroup employs a three-pillared approach by combining economicfundamentals, technicals and client flows to arrive at a three-monthforecast. Their central forecast was for the dollar to strengthen. Theywere also bullish on sterling where they believe the yield spread favoursthe UK, especially against the euro. Inevitability some of the speakersover-ran their allotted time and the last speaker Phil Roberts of BarclaysCapital reassured the audience that he would take the Julie Andrews’approach and just concentrate on “a few of my favourite things”. He drewattention to the fact that we have seen the biggest correction in theeuro/dollar rate for four years and thought the situation bore anuncanny resemblance to that of 1988. There are no trend-ending signalsin evidence at the moment and his target for euro/dollar was $1.1590.Nicole Elliott’s views appear on page six.
Sixty-one candidates sat the Society’s Diploma examination in Londonon 22nd April and the results appear on page 2. Candidates also sat theexam in Jeddah, Mumbai and New Delhi.
IN THIS ISSUE
STA Exam Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Bill Adlard Dow Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Nicole Elliott Global Market Outlook . . . . . . . . . . . . . . . . . 6
Peter Goodburn Sterling/Dollar –
An Elliott Wave Perspective. . . . . . . . . . . . . 8
COPY DEADLINE FOR THE NEXT ISSUE 30th August 2005
PUBLICATION OF THE NEXT ISSUE October 2005
FOR YOUR DIARY
Wednesday 14th September EGMTom Pelc, Royal Bank of Scotland
Thursday 22nd September STA DinnerNational Liberal Club
Wednesday 12th October Monthly MeetingSpeaker to be announced
Wednesday 9th November AGMDavid Sneddon, CSFB
Wednesday 7th December Christmas Party
N.B. Unless otherwise stated, the monthly meetings will take
place at the Institute of Marine Engineering, Science and
Technology, 80 Coleman Street, London EC2 at 6.00 p.m.
July 2005 The Journal of the STAIssue No. 53 www.sta-uk.org
TECHNICIANMARKET
MARKET TECHNICIAN Issue 53 – July 20052
THE BRONWEN WOOD MEMORIAL PRIZETom Winstone
DISTINCTIONToby Bullivant
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Avi HooperAmman Jesani
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Massimiliano MartiraniAmit Mehta
Kevin McGurkDaniel MooreStephen Ollis
Chris PaineAshley PattisonFilippo Ramigni
Guido RioloMarc Ruddle
Sribhashyam SreenivasPaul StappardRobert StreetLisa Toremark
P Laurence TraynorAung Tun
Marc TwibillTim Viner
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Please keep the articles coming in – the success of the Journal depends
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STA Diploma ResultsAPRIL 2005
Issue 53 – July 2005 MARKET TECHNICIAN 3
Charles Dow was born in 1851, in Sterling, Connecticut, the son of a farmer.He became a journalist, and in the late 1870’s began specializing infinancial reporting, particularly as a mining expert. He moved to Wall Streetin 1880, and met Edward D. Jones while working for the Kiernan NewsAgency. In 1882 they set up Dow Jones and Company as a financial newsagency. In 1885 Dow became a member of the New York Stock Exchange.From 1885 to 1901 he was a partner in a firm of stockbrokers, and was forseveral years the firm’s floor broker. In 1889 Dow Jones & Co founded theWall Street Journal and Dow became its first editor. He died in 1902.
The general perception in those days was that bonds were a better betthan common stocks, i.e. equities. There was, in fact, very little informationavailable to the public about common stocks and the companies behindthem. Daily tables of stock prices did not exist. Information about acompany’s balance sheet was rarely published and, if it was, themanagement would attempt to obscure the full value of their companyfor fear of a takeover. There was a recognition that you could make a lot ofmoney from stocks, but a feeling that they were volatile andunpredictable, and you could easily lose your shirt.
Bonds had the great advantage that they were secured by the assets of thebusiness, there was a fixed and regular coupon, and they were redeemableat a fixed point in time.You did not need to know a great deal about thebusiness, only what its assets were. The challenge, and opportunity,therefore, for Dow Jones & Co was to find a way of making informationabout companies and stock prices more widely available and predictable.
Dow Jones and Co was based near the New York Stock Exchange, and itsoriginal product was a handwritten newssheet called the Customers’Afternoon Letter which was distributed around Wall Street daily bymessengers. The Letter was revolutionary in that it not only containeddaily stock price tables, but also made public quarterly and annualfinancial information regarding companies – information that onlyinsiders had available to them before this. The Letter evolved into the WallStreet Journal when the first issue of the WSJ appeared on July 8th 1889.For many years this remained one of the most important, and only,sources of financial information for investors. It would not be until theSecurities Act of 1934 that companies would be required to file quarterlyand annual reports that all investors could look at.
Dow’s analytical techniques probably arose, therefore, from the need tofind a way to forecast the economy, and therefore stock prices, in an erawhen important data was only available to a small number of insiders,who would keep it secret and use it to manipulate the market to theirown advantage. The market was unregulated, and there was nothing,short of outright fraud, to prevent them doing so.
Dow had experimented with averages since the 1870’s, and probablyinvented the Dow Jones Average in 1884, as an average of 11 companies,mainly railroads. Not many industrial companies were then publiclyquoted. The big growth businesses of the day were the railroads. In 1896he split it into two separate averages, one consisting only of railroadcompanies and the other only of industrial companies. These are still withus today as the Dow Jones Transportation Average and the Dow JonesIndustrial Average.
The thinking behind this was that if knowledgeable insiders wereenthusiastic about prospects for goods production, stock prices of goodsproduction companies would rise. But if that was not matched by similarrises, caused by similar buying by insiders, in the prices of railroadcompanies (then the main means of distribution), it would warn of animpending change in economic conditions. He only used closing prices,probably because of fear of “manipulation” in intraday dealings.
Dow discovered that the trends in the market averages did indeed leadthe economy. He put it thus:“The price trend is not saying what thecondition of business is today, but what it will be months from now.”Thisis still as true today as it ever was. We should not let the plethora offundamental information we have today blind us to this simple truth.
As editor of the newly founded Wall Street Journal, Dow wrote a series ofeditorials between 1899 and his death in 1902 interpreting the
movements of his averages and forecasting the economy. His writingswere widely studied after his death, and “Dow theory” emerged.
A couple of historical footnotes: Dow Jones & Co. employed Clarence W.Barron, from Boston, as an out-of-town correspondent. In 1902, on Dow’sdeath, he bought the company, and later launched the monthly Barron’smagazine, which, like the WSJ, is still with us. Dow Jones & Co was alsoresponsible for the invention and introduction of the “tape” for a moreinstantaneous read-out of intraday stock prices.
Dow thought that the reason the averages lead the economy wasbecause people with price sensitive knowledge would act in their owninterest and cause the market to be priced accordingly well before thatinformation become public, and that was undoubtedly true in his time.
However, the underlying emotional state, or mood of people generally, isalso a very influential component, from short to ultra long time-frames.Mood and market prices are very closely related. Rising prices meanoptimism. Euphoria and full commitment to the market means toppingprices. Falling prices mean pessimism. Despair and capitulation meanbottoming prices. Prices are the first thing to respond to changes in mood.The fundamentals always take longer. If a negative mood influences aninvestor, he can reach for his telephone or his computer and sell shares.However, if the same mood influences the CEO of a multinational, he maymake decisions accordingly, but it will take months or years for the effectsthose decisions to be reflected in fundamental data. This is another reasonthat the markets always lead the economy.
In fact, I think the reason that the fundamentals do so badly in predictingmajor tops or bottoms in stock markets is because the inherent optimismor pessimism of the markets becomes embedded in the fundamentals.Then that optimism or pessimism becomes the basis for comparison.Thus comparing optimism with optimism at market highs leads toperceiving optimism as normality. Comparing pessimism with pessimismat market lows leads to perceiving pessimism as normality. Therefore, ifthis is right, at major tops we should in fact see analysts fully bullish, andat major bottoms, we should see analysts fully bearish. The data actuallybears this out. Investors Intelligence (www.investorsintelligence.com)have been polling investment advisors since 1963, and plot the resultsagainst the market. Advisors’ sentiment rises and falls with the market,but always lagging.
Dow’s first principle in interpreting the market averages, and perhaps hisway of explaining this phenomenon, was that the market averagesdiscount everything. The value of the average at any point in timerepresents the sum total of all the knowledge, and of all the hopes, fearsand expectations based thereon, of all market participants at that time –including those all important knowledgeable but selfish insiders.
Dow’s next great observation was that the market averages move intrends. An up trend is in being when the market continues to make higherhighs and higher lows. A down trend is in being when the marketcontinues to make lower highs and lower lows. The trend should beassumed to be continuing until the contrary is signalled by the price. Thisobservation is applicable to any chart of any instrument in any market,and should be the starting point of any attempt at technical analysis.
Dow theorySummary of a presentation given to the STA on 9th March, 2005 By Bill Adlard
MARKET TECHNICIAN Issue 53 – July 20054
Dow classified trends into three types: the primary trend, the secondarytrend and the minor trend. In Dow’s time, the markets were unregulated,and as we have already seen, it was widely believed, and probably true, thatlarge operators combined together to manipulate the market to their ownadvantage. Dow held that the primary trend was not capable ofmanipulation, and that the primary trend was in fact the most reliableleading indicator of the economy.The primary trend would last for a year atleast, or possibly several years.The chart above shows that the marketalways begins to rise in anticipation of the end of a recession, bearing outCharles Dow’s canny observation 100 years later. It refutes completely anynotion that the economy picks up, and then the stock market reacts to that.
The secondary trend was a partial retracement of the primary trend whichwould occur from time to time, and would retrace between one third andtwo thirds of the preceding movement in the direction of the primarytrend, and last several months.
The minor trend was thefluctuations in both primary andsecondary trends, which wouldlast weeks.
William Peter Hamilton’s 1922book “The Stock MarketBarometer”, is still in print. It wasso called not, as one might thinktoday, because he had foundsome profitable means ofpredicting the stock market, butto show that the stock marketwas a “barometer”, i.e. anadvance warning signal for theeconomy. Hamiltondemonstrates that by reviewingthe trends in the economy andin the averages from 1900 to1921. This includes, of course, theupheavals of the First World War.
Dow held that the two marketaverages should confirm eachother. Therefore one can re-statethe earlier rules more fully. Anup trend is in being when themarket continues to makehigher highs and higher lowsand both averages confirm eachothers’ higher highs and lows.
They may not do so at exactlythe same time. A down trend isin being when the marketcontinues to make lower highsand lower lows and bothaverages confirm each others’lower highs and lows. Theymay not do so at exactly thesame time. The trend shouldbe assumed to be continuinguntil the contrary is signalledby the price and that isconfirmed in both averages.
When one average makes anew high or low and that isnot confirmed by the otheraverage, it is a warning thatthe continuation of the trendis not confirmed, and thereforea warning of possible trendchange. In my opinion, this stillholds good today. There havebeen two major non-confirmations in recent timeswhich heralded major trendchange, marked 1 and 2 in mychart. There is another onepotentially forming marked 3,
which requires the Dow Industrials to make a new all time high for amajor non-confirmation to be avoided.
Trend changeA change in the primary trend should not, however, be inferred until thefinal phase of a bull or bear market has been reached (see below), and untilvaluations are cheap, for a bear market low, or high, for a bull market top.
LinesA change from primary trend to secondary reaction would often besignalled by the formation of a ‘line’, i.e. a sideways consolidation within arange of about 5% above and below a mean figure, followed by abreakout, which had to be confirmed by both averages. If the breakout
Issue 53 – July 2005 MARKET TECHNICIAN 5
was in the direction of the primary trend, that trend was continuing. If thebreakout was in the opposite direction, a secondary reaction had started.
This is another observation of general usefulness – trading ranges are verycommon, and the direction of the breakout generally determines whetherthe trend is continuing or correcting.
VolumeDow also noticed that volume tends to increase in the direction of the trend.Therefore in an up trend, the volume will increase as the price rises anddiminish as the price falls. In a down trend, the volume will increase as theprice falls and diminish as the price rises. In my view, since 2000 the volumepattern has continued to show falling volume under a rising market andrising volume under a falling market – which is not good news for the bulls.
Dow identified three phases to a primary bull market.First, accumulation. Prior to this phase, the general public has capitulatedand is extremely bearish. The financial news is at its worst. Distressedsellers are in the market, but knowledgeable and strong buyers arebuying, and are prepared to raise their bid to acquire stock.
Next, public participation. During this phase, the fundamentals improve,the public begins to join in, and a strong broad rally results.
Finally, distribution. During this phase, the public’s enthusiasm for stocksknows no bounds, but knowledgeable strong investors – Dow’s insiders –are selling, effectively offloading their stock. Speculation reaches a height,and there is the opposite of a “flight to quality”: an aversion to “boring” solidstocks, and an indiscriminate willingness to accept greater and greater risk.In the distribution phase, indicators will show bearish divergence.
The same three phases apply in reverse to a primary bear market. First,distribution. This overlaps with the final phase of the bull market. As themarket trend rolls over from bull to bear, volume begins to diminish onrallies, and rise on down moves.
Next, panic. Prices may drop vertically, and volume mounts to climacticproportions.
Finally, capitulation. In this last stage, even top quality stocks decline, andcause distress to those who have held through the panic stage, forcingsales. By the time all the bad news and pessimism is fully priced in, themarket will bottom. It may do so on a day of climactic volume and hugenegative breadth, ending, or followed very soon after, by a strongrebound. Before the bottom there may be several days of 90% plusnegative breadth. During the capitulation phase, indicators will begin toshow bullish divergence.
Strength of Dow theoryIt is the ultimate fallback technique. If all else fails, look to see whether youhave a pattern of rising highs and lows, or falling highs and lows. Checkthe volume to see whether it rises with the up moves or the down moves.Look for sideways consolidations and look for a breakout to establish thedirection of next move.
Limitations of Dow TheoryThere are two principal limitations.
First, because you have to wait for an out of sequence high and low for asignal of trend change, you may miss the highest high or lowest low by aconsiderable amount. Dow theory signals “late” – but reliably.
Second, there is no telling how long a new trend may last – it may onlylast one high and one low before the previous trend continues. AsEdwards and Magee put it: “A reversal in trend can occur any time afterthat trend has been confirmed.”
The answer to this conundrum lies in Elliott wave theory. Ralph NelsonElliott studied the work of Robert Rhea on Dow theory after the 1929crash, and developed his wave theories on the foundations so ably laid byCharles Dow.
MARKET TECHNICIAN Issue 53 – July 20056
The framework for my technical analysis of the markets is Classic Dowtheory. To this I add the usual: trendlines; moving averages; Fibonacciretracements and projections; the odd wave count, an occasionaloscillator; and of course, my Japanese Ichimoku clouds. The followingcharts have been deliberately kept as simple as possible in order to focuson the big picture and provide the basis for my long term views (one yearplus) on major equity indices and fixed income yields
Stock markets
The Dow Jones Industrial Average has been the best-performing G7index. At 10,000 and change we are basically where we were six/sevenyears ago and in the upper half of a very broad rectangular pattern. On along term view this is not a particularly stellar performance. The index isstill well above the long term uptrend that has been running since 1980but, in my view, it is looking top-heavy and expensive. At best, the indexmay remain trapped between 8,000 and 12,000 for another few years and,with commissions and expenses chewing up gains, profits are likely to benegligible. At worst, we may see another good clear-out where a drop to6,500 cannot be ruled out.
European investors are currently a lot further under water, as can be seenfrom Chart 2, which shows the Dow divided by Euro/$ exchange rate. TheUS dollar’s approximately 40 per cent depreciation since January 2001 isresponsible for much of the damage on this chart. The rally since April thisyear is due mainly to movements in the exchange rate. Try and think howforeign exchange moves hit business, the value of things, and their futurevalue. A weak currency lends an underlying bid to the price of decentcompanies. One must learn to factor this in to investment views. Just thesame idea as what you are willing to pay for the villa in Spain, or the priceof a Big Mac in Switzerland. As far as I am concerned the Dow Jones doesnot offer much upward potential for investors.
How long does it take for a bubble to burst? In Japan’s case, rather than asudden pop it has been a very, very slow deflation - like one of thosenasty flabby balloons found lurking in the corner three days after a kid’sbirthday party. This deflation has gone on now for fifteen years, which is along time, especially when one is awash with cheap cash! Part of theproblem is that the Japanese never really took the bull by the horns.Japan’s experience is important because I think something similar couldbe happening in other G7 countries. The Nikkei 225 index may beforming a very long term base against the 8000 area, but with othermarkets more likely to slip lower over the next year, I shan’t be holding mybreath for this one. Like the Dow, it is currently struggling with cloudresistance. A monthly close above pivotal resistance at 12,000 would bevery significant but, until then, another market to avoid.
Turning to Europe, the FTSE 100 can be used as a proxy for a whole rangeof other European indices, all of which have roughly the same pattern. TheUK is one of the best performers in this region and one of the less neuroticand jumpy. It is still in retracement mode, a rather nasty creeping, crawlingcounter-trend move that has gone on further and for a lot longer than Ihad expected. Although not a technical term, I liken the UK’s performanceto that of a funicular railway where the cogs are ratcheting it up but itcould slip back at any moment. When moves grind on for so long, and fornot insignificant amounts, one begins to feel it must be a bull market. But,again, a market to be avoided for the time being.
Are there any indices that I might consider buying at the moment? Theanswer is yes but these markets should only represent a tiny speculativepart of a portfolio.
India’s Mumbai index looks very positive. Another constructive-lookingchart is the Jakarta’s composite index although it is important to note thatsome of the move here is due to the exchange rate (a 12% foreignexchange loss since June 2003). These chart patterns and those of
Global Market OutlookThis article is a summary of the presentation given at the joint STA/ACI meeting on June 8th 2005 by Nicole Elliott
Reuters ones.
Dow monthly .DJI, Last Trade [Candle] Monthly
22Dec93 - 16Aug05
Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
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.DJI , Last Trade, Candle
30Jun05 10462.86 10656.29 10430.97 10564.45
Chart 1 – Dow Jones Monthly
.N225, Last Trade [Candle] Monthly11Dec89 - 03Oct05
Jan90 Jan91 Jul Jan92 Jul Jan93 Jul Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
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.N225 , Last Trade, Candle
30Jun05 11220.94 11539.18 11148.36 11483.35
Chart 3 – Nikkei 225, Monthly
Then Dow in Euros DOW*EUR [Line] Daily
02Mar96 - 26Aug05
Jul96 Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
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DOW*EUR , Line
20Jun05 8703.65
Chart 2 – Dow Jones in Euros
Then monthly FTSE 100 .FTSE, Last Trade [Candle] Monthly
21Jun96 - 21Aug05
Jul96 Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
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.FTSE , Last Trade, Candle
30Jun05 4964.0 5098.5 4964.0 5066.1
Chart 4 – FTSE 100, Monthly
Issue 53 – July 2005 MARKET TECHNICIAN 7
Argentina’s Merval and Mexico’s IPC look very different from those of theG7 indices
The fixed income markets are not constrained by the rather arbitrarylevels of interest set by central bankers. In this ‘global’ world they are morelinked to each other than to any repo rate.
Mr. Greenspan may be facing his ‘conundrum’, but it is interesting to seewhat has happened to UK 30-year gilt yields. They have been stuckbetween 4% and 5% since 1998, despite numerous Base Rate changesover this period. The long term trend is still to lower yields in other areasof the yield curve, but something that has been stuck sideways for thislong cannot be ignored. In the short term it is likely that the yield will diplower here too, dragged along by other maturities and general euphoria,but I would be very careful indeed. A final probe lower and then back intothis range is the most likely scenario.
Core Europe has been a sick man for sometime and, after the French andDutch referendums, we are not too sure about the currency either. A cleardowntrend can be seen in the yield on the benchmark German ten-yearBund since Unification in 1991. It has broken below the triangle formation
to a new record all-time low. How low can this go? A move to 3.00%seems very achievable and it could extend down to 2.60/2.75%, or maybeeven 2.25%. These projections are based on the size of the triangle, theprevious waves and channel, plus the shape of the yield curve.
The very long term trend since 1981 suggests that the yield on thebenchmark US ten-year Treasury notes will move decidedly lower. The2003 and 2004 rallies are just another in a series of counter-trend movesover this period. Lower yields (30-year bonds are very close to their all-time lows) are the result of convexity hedging, worries about the outlookfor the global economy and too much cheap money seeking a safe-haven.We are on our way down to scarily low yields. I see no reason why weshould not move down to the 2003 low at 3.07% and probably more -perhaps 2.75%? Those who say yields this low are unnatural or that theyield curve is too flat obviously have memories that do not stretch backbeyond the 1960s.
Japanese Government bonds have been at or below 2.00% for the bestpart of eight years! Hovering above 1.20% most of the time, plus theodd collapse to a record low of 0.45% (for ten year paper). Most of theworld thinks that the Japanese investor is mad to accept such a paltryreturn from such an indebted borrower. Why? Desperate times, call fordesperate measures - extreme prices for risk-aversion and a lack ofviable alternatives. Just as they have had to endure a sliding stockmarket, crumbling property prices and low, low yields, so probably wetoo in the West will have to get our heads round this ‘novel’ way ofseeing things.
One final thing to consider is the effect on charts, and on everything else,as prices move towards zero. Rules are not the same; price swings andpercentage moves behave differently. Your mortgage interest costs candouble or halve very easily. ‘Normal’ equity returns of 7-10% look massiveby comparison to these low yields. The elasticity of market swings iscompressed, and if they break out of a range it feels like a very big move.
Long term bases can take an absolute age to complete, as happened tothe commodities markets for much of the 1990s.
Above all, the moves that I am expecting are likely to be very slow anddrawn out, not a true market collapse or a sudden pop of a bubble. Just aslow grind.
Jakarta, Indonesia .JKSE, Last Trade [Candle][MA 200] Monthly
27Mar95 - 16Oct05
Jul95 Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
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.JKSE , Last Trade, Candle
30Jun05 1087.559 1148.798 1079.136 1147.710
Chart 5 – Jakarta Composite Index
US10YT=RR, Yield_1 [Candle][MA 200] Monthly
05Jan95 - 09Sep05
Jul95 Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Yield
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4.4
4.6
4.8
5
5.2
5.4
5.6
5.8
6
6.2
6.4
6.6
6.8
7
7.2
7.4
7.6
US10YT=RR , Yield_1, Candle
30Jun05 3.98700 4.15800 3.80700 4.12700
Chart 8 – US 10-year Treasury Notes
JP10YT=RR, Yield_1 [Candle][MA 200] Monthly
08May97 - 09Aug05
Jul97 Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Yield
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2.2
2.4
2.6
2.8JP10YT=RR , Yield_1, Candle
30Jun05 1.249 1.328 1.205 1.300
Chart 9 – 10-year Japanese Government bond
GB30YT=RR, Yield_1 [Candle][MA 200] Monthly
07Sep98 - 09Aug05
Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Yield
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
5
5.1
GB30YT=RR , Yield_1, Candle
30Jun05 4.329 4.405 4.183 4.370
Chart 6 – UK 30-year gilt
Then 10 year German bund yields. DE10YT=RR, Yield_1 [Candle][MA 200] Monthly
12Oct94 - 30Aug05
Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul Jan03 Jul Jan04 Jul Jan05 Jul
Yield
3.2
3.4
3.6
3.8
4
4.2
4.4
4.6
4.8
5
5.2
5.4
5.6
5.8
6
6.2
6.4
6.6
6.8
7
7.2
7.4DE10YT=RR , Yield_1, Candle
30Jun05 3.281 3.365 3.110 3.306
Chart 7 – 10 year German bund yields
MARKET TECHNICIAN Issue 53 – July 20058
Sterling’s decline against the dollar has been following an Elliott Wavepattern, namely an expanding flat. Extracts from our Currency Reportsshows how the progression has unfolded over this year.
In January 2004 we had identified a 144 month, 12 year cycle high forsterling with the next event due in August-September 2004. At the timewe noted in our report, "...Whenever this cycle begins,sterling seems todecline rapidly, causing comments like 'Crisis' to appear again."
Twelve months later in January of this year the effects of thiscycle were evident, although the exact month of the reversalarrived late - 16th December 2004 to be exact – but thedeviation was only 3 months, or 2%, which is acceptable.Furthermore, the decline from the high had been accompaniedby concern related to a bubble in the UK property market.Although in January there were no ‘Sterling Crisis’ headlines,the beginnings of an Elliott Wave pattern were clearlydiscernible.
In our Currency Service on the 19th January, 2005 we madethe following observations:
A five wave impulse sequence has declined from theDecember high at 19550. The low recorded yesterday at 18527completes minor wave i. within an ongoing, larger decline.Minor wave ii. is now in progress, with upside targets towardsfib. 61.8% resistance at 19153.
Minor waves iii, iv. and v. to follow in succession to completeIntermediate wave (C) of the larger expanding flat pattern -targets towards 17112 – see fig 1. It will probably be duringthis phase that the 'Crisis' comments will emerge but, like anyextreme, this usually marks the point where a reversal occurs.
Basis the Primary degree trends, the 17112/99 level becomes the fib. 50%support level for the completion of Primary wave 4 within the longer-termuptrend. Ultimately, wave 5 targets towards 2.0829.
The 73 month cycle suggests a high developing in Nov/Dec '04 - this isactually a derivative of the 144 month cycle. The 49 month cycle that isattributed to reversal lows is next scheduled for July/Aug '05. From thisdate, the next advance can begin. This describes the advance from 10463in 1985 as unfolding into a double zig-zag pattern in cycle degree, A-B-X-
X-A-B-C. If each zig-zag measures equally, a final target is calculatedtowards 26284 by Nov/Dec 2010. Cutting this advance to create a goldensection provides a target for cycle wave A towards 20482.
With reference to the 144 month cycle shown last year, it was originallythought that such a phenomenon would cause a dramatic sell-off for thecable. Now that a three wave zig zag sequence has since unfolded from17482 to the current high at 19550, this somewhat limits the decline aspart of the expanding flat pattern described earlier in fig #1.
On 12th July 2005 our analysis of sterling/dollar is as follows:
Minute wave 5 targets towards 17658 were met then exceeded as lastweek's sell-off extended to complete this sequence at 17319. This low alsocompletes minor wave iii. that originally began from 19325 back in March- see fig 2. Minor wave iv. has already begun a strong rebound and isexpected to unfold into a complex corrective pattern, i.e. acontracting/symmetrical triangle. Minute wave a will set the priceextremity of this pattern - there are three targets that are expected toconclude this counter-trend advance, all converging within a narrow price
band...
...the first is towards 18074 - calculated to allow wave v. to unfoldto a fib. 100% ratio to wave i. and still conclude at original wave(C) targets at 17112. The next is towards 18059 which is a simplefib. 38.2% ratio retracement of minor wave iii.'s decline basedupon a log scale calculation. The final target is towards 18085using an arithmatic scaling.
In order to get there, the advance must subdivide into an [a]-[b]-[c] zig-zag sequence of minuette degree. The conclusion of wave[a] can be estimated by cutting the 18085 target into a 'goldensection' and this pinpoints a probable target at 17790.
The overall triangle pattern unfolding as minor wave iv. is forecastto consume fib. 161.8% more time than minor wave ii. estimatinga conclusion into late September, early October. A final thrustlower as minor wave v. should be swift, ending before year-end.
Peter Goodburn is Senior Consultant to WaveTrack International.The company produces regular Elliott Wave price forecasts on FixedIncome, Stock Index, FX & Commodity products –[email protected]
Sterling/dollar – an Elliott Wave PerspectiveBy Peter Goodburn
Fig. 1
Fig. 2
