Analisis Tecnico

Technical analysisTuesday 5 January 2010

This is a non-contractual document; it is strictly for the private use of the recipient, and the information it contains is based on sources we believe to be reliable, but whose accuracy and completeness cannot be guaranteed. The opinions given in the document reflect our appraisal at the time of publication and may therefore be revised at a later date. Because financial, economic and technical analysis use different methods, conflicting conclusions are possible.

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5 January 2010 Jean-Christophe Dourret Technical analyst, CFTe +33 (0)1.40.17.52.09 [email protected]

Challenge 2010 – Season 1 Summary a) Combined summary of themes analysed

• Over the short term, our themes as a whole point to a possible last-ditch rally spanning late 2009 and early 2010. There is a wealth of evidence to suggest that the current upswing – that emerged in late 2009 – is limited in both upside and duration. • Over the medium term, it is highly unlikely that equity indices as well as commodities will be able to circumvent a significant secondary reaction to the downside. We expect this to materialise in Q1 2010. • The counter-trend decline in Q1 2010 will probably not signal the start of a new bear market. More likely, the correction (however sharp it may be) will subsequently pave the way for another major advance, corresponding to the third phase of the primary upcycle initiated in March 2009. b) Outlook for H1 2010 - overview

Themes Short term Medium term Long term

I – Technical environment (partially)

II – Charts

III – Intermarket links =

IV – Sectors and stocks

INDEX OUTLOOK FOR EARLY 2010 FROM STANDPOINT OF DOW THEORY

MT Resistance Area

Expectedsecondaryreaction

(Q1 2010)

Next risingprimary advance(Q2 & Q3 2010)

Ultimate rise(late 2009 / early 2010)

Diamond

Symmetricalbroadeningformation

Phase 1Accumulation

Confidence regainedQ1 & Q2 2009

Phase 2Broad participation Upturn confirmed

Q3 2009 to Q1 2010

Phase 3Enthusiasm/euphoriaHopes trump reality

Q2 & Q3 2010

MT Resistance Area


(Q1 2010)



Diamond


Phase 1Accumulation



Q3 2009 to Q1 2010


Q2 & Q3 2010



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c) Key supports and resistances

d) Approximate idea of prospective highs/lows by timeframe

e) Sector plays and stock picks/avoid recommendations

Major supports Major resistances Indices

Long term Medium term Medium term Long term

S&P 500 950 943.8 [1132.6-1219.5] 1150, 1400

DJ Industrial 9000 9026 [10210-10994] 10700, 11670

DJ Transport 2000 [2987-3434] [4287-4734], 4635 5487

DJ Utilities 294.3, 307 360, [324.4-340.8] 422, 460 470

Nasdaq [1261-1350] 2168, [2024-2190] [2430-2550] 2900

DJ Stoxx 600 162.2, 165.8 214.2 [252.7-272.7], 262.5, 290 300

Eurostoxx 50 1847, 2000 2330, 2600 [2978-3272], 3000, 3450 3900

Cac 40 2465, 2581 3400, 3100 [3848-4289], 4002, 4500 5303

Nikkei 225 7000 9000 [11565-11721] 10788, 12000, 14500

Themes < 1 month 1-3 months 3-6 months > 6 months

S&P 500 1168 960 1150 1250 DJ Industrial 10700 9100 10500 11500 DJ Transport 4530 3600 4400 5400 DJ Utilities 417 370 410 458 Nasdaq 2350 2050 2300 2550 DJ Stoxx 600 265 220 255 285 Eurostoxx 50 3150 2650 3050 3450 Cac 40 4170 3450 4000 4450 Nikkei 225 10800 9000 11500 12000 Eurobund 118.1 121.0 116.7 114.8 EUR / USD 1.5030 1.4300 1.5000 1.6000 EUR / GBP 0.9200 0.9000 0.9460 0.9790 Commodity Index 513 440 490 530 WTI 86.5 66 82 100 Gold ounce 1100 1100 1185 1295

STANCE SECTOR STOCKS TO AVOID STOCK PICKS AVOID (Underperformance emerging or underway)

Chemicals Retail Industrial Goods

Air Liquide, Akzo Nobel, Bayer, Syngenta, Carrefour, Areva, Siemens, Suez Environnement

Casino, Delhaize, BAE Systems, Tha-les, Thyssen, Vallourec

GIVE PRIORITY (Outperformance emerging or underway)

Technology Utilities

Medias Oil & Gas

Logica, Nokia, SAP, Lagardère, BG Group, Technip

Alcatel, Atos, Cap Gemini, Iliad, E.ON, EDF, EDF Energies Nouvelles, GDF, Veolia, B Sky B, JC Decaux, Pearson, TF1, Vivendi, ENI, Royal Dutch, Total

STOCKS TO AVOID STOCK PICKS Daimler, Crédit-Agricole, Deutsche Bank, AngloAmerican, Randgold, Adidas, Ubi Soft, Saint-Gobain, Nestlé, Julius Baer, L.S.E., Aegon, ING Group, Cable & Wireless

BHP-Billiton, Salzgitter, Imerys, Danone, Unilever, MAN Group, AstraZeneca, Roche, Sanofi, British Land, Axa, British Telecom, Deutsche Telekom, Vodafone, Air France

ROUGH IDEAS OR TARGETS? The opposite table aims to show approximate values that can be estimated under our present scenario. Signals (targets are set only when a position is recommended, reversions to neutral, etc.) are dealt with in our Technical Overview. The goal of this report is to provide ballpark estimates that will then be fined tuned via our daily publications.



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Contents

Part I – Technical environment ............................ 4 I - Asset allocation ................................................................. 4 II – The liquidity perspective .................................................. 5 III – Investor psychology........................................................ 8 IV – Breadth and sentiment ................................................... 8 V – Round up ...................................................................... 10

Part II - Charts ................................................... 11 I – Dow Theory..................................................................... 11 a) Uptrends intact .................................................................................. 11 b) A confirmed uptrend .......................................................................... 12 c) A counter-trend decline that is sorely lacking! ................................... 12 d) Lines.................................................................................................. 13 II – Chart configurations ....................................................... 14 III - Zones, supports and resistances ................................... 16 IV – Market indicators........................................................... 17 a) Moving averages ............................................................................... 17 b) Status of LT momentum .................................................................... 18 c) Combined analysis of trend, momentum and volumes ...................... 19 V – Round up ....................................................................... 21

Part III – Intermarket links.................................. 22 I – Long-term debt................................................................ 22 a) T-Notes.............................................................................................. 22 b) Eurobund........................................................................................... 23 II - Commodities ................................................................... 25 a) Broad overview.................................................................................. 25 b) Continuous Commodity Index ........................................................... 25 c) WTI .................................................................................................... 27 d) Gold ounce ........................................................................................ 28 III - Currencies...................................................................... 29 IV – Round up ...................................................................... 30

Part IV - Sectors and stocks .............................. 31 I - Sectors’ status in late 2009/early 2010 ........................... 31 II - Sector picks and overview of momentum....................... 32 III - Sector clusters and business cycle ............................... 33 IV – Sector and stock prospects.......................................... 35 a) Stock picks in line with sector-based analysis ................................... 35 b) Stock-picking independently of sector considerations ....................... 35

Appendix: bibliography ...................................... 36



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Part I – Technical environment As we turn the corner into 2010, we might rightly ask ourselves about the technical context. Our analysis in this section will shed some light on the question. I – Asset allocation The following table shows the technical status of the leading three asset classes (bonds, equities and commodities) as we head into 2010 based on key ratios. Naturally, ratios cannot be interpreted in the same manner when analysing in the long or short term.

LONG TERM

• The ratio of T-Notes against Commodities started to decrease in March 2009. The most important indication it can give us are the points of reversal (marking the time when trendlines were breached). When the ratio punches below a trendline, this reveals that commodities are developing positively. This can be taken as a buy signal confirming trends or recoveries observed on other financial markets. On the other hand, upside violations frequently coincide with the onset of consolidation on commodities (and the sectors thereto related), yielding a confirmed sell signal on equities. The ratio’s trajectory both now and over the longer term portrays conditions supportive of equities. However, our momentum oscillator (marked by red circle) is staging an upside cross suggestive of a likely upswing in early 2010. • The stocks/commodities ratio is decreasing over the long term, signalling reversion to a stock-market environment perceived as more prone to inflation, and points towards a rise in long-term yields over 2010.

• The ratio between equities and long-term yields is rising over the medium/long term. The course followed by long-term yields is not yet dampening the outlook for equity markets; nonetheless, this ratio has reached overbought territory and could swing to the downside in the initial months of 2010. SHORT TERM • Over the short term, the market continues to prefer commodities to bonds and is not showing any early indications of a reversal.

Ratio Short term Medium/long term

Bonds/Commodities

Stocks/Commodities

Stocks/10-year bonds

WEEKLY – T-NOTES / COMMODITY INDEX



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• The stocks/commodities ratio is decreasing, signalling that investors have recently bought back into commodities and the related stocks and sectors with a vengeance. The thing is, commodities are primarily assets that lag behind the cycle. Recent outperformance by commodities relative to equities as a whole (as in 2008) suggests that the uptrends driving shares are close to ending. • Over the short term, initial pressure stemming from long-term debt is starting to be felt. The ratio has been in poor shape since mid-December. SUMMING UP What does all this mean for equity markets?

Key points:

1. Over the medium/long term, the only clear sign that the uptrend on equities is starting to wilt is the recent sharp rise by commodities. But even though the other ratios are for now supportive, they could well reverse to the downside in early 2010. 2. Over the short term, warning signs are in more plentiful supply due to the halt in index upturns coupled with the recent surge in commodities and initial stress on long-term yields.

3. The prime beneficiary of asset rotation in the closing stages of 2009 has been commodities.

II – The liquidity perspective Liquidity analysis allows us to take a more in-depth looks at the relationships between the three asset classes noted above. For this exercise: • We have picked a liquidity indicator: M2/Commodities, M2 money supply deflated by the Commodity Index. More effective normalisation methods may well exist (such as using the CPI as the deflator), but as Martin Pring rightly points out, this method confers our analysis a “market” angle missing from economic indicators. • We have selected charts representing T-Notes, S&P 500 and the Commodity Index. • Rather than showing unadjusted historical price trends for these underlyings we have instead sought to show momentum and nothing else. As such, the charts on the following page correspond only to the LT rates of change for each underlying (i.e. rates of growth and decrease over the LT). Price lines have been removed. • Each LT rate of change also shows a short-run signal line. • All charts indicate monthly change.

Ratio Short term Medium/long term

Bonds/Commodities Positive impact Positive impact

Stocks/Commodities Negative impact Negative impact

Stocks/10-year bonds Negative impact Positive impact



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It is normal for money supply to influence debt markets, which in turn affects equity markets, which then have an impact on commodities.

However, ordinary prices of each underlying can have highly disparate configurations. Using rates of change, which have a smoothing effect and facilitate comparison, highlights the conventional economic sequence between the three asset classes.

Generally speaking the following sequence is commonly accepted: a contraction in deflated money supply, discontinued decline in long-term yields, a peak in equities followed by a peak in commodities prices. Of course, this is not foolproof. Momentum has at times got ahead of the reversal signal supplied by the preceding asset class in the sequence.

CONVENTIONAL "BUSINESS CYCLE"

BondsStocksCommodities

PINPOINTING LT DOWNSIDE REVERSAL POINTS VIA LT RATES OF CHANGE

?

?



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The long-term technical status flagged by the above chart is that bearish signals have appeared in terms of market liquidity and the direction of yields on long-term US debt.

The charts also substantiate the conventional chronological order. The main lesson is that following positive liquidity stimulus in 2007 (with the onset of the uptrend on bonds) and 2008 (bull signal on liquidity indicator), equities and commodities issued a long-term bull signal as recently as in November 2009. SUMMING UP

1. Mounting constraints arising on liquidity (which is contracting) and debt markets (with the discontinued decline in long-term yields) will have a bearing on equity markets in the months ahead. 2. Even so, both shares and commodities are in good shape over the long term on the momentum front (i.e. solely from this angle). This suggests that the negative fallout from the preceding point will not result in a major downside-reversal signal for some time yet – perhaps not until 2011 or even later.

For now, as we head into 2010, the LT momentum signal is bullish on both equities and commodities.

PINPOINTING LT UPSIDE REVERSAL POINTS VIA LT RATES OF CHANGE



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III – Investor psychology Throughout this past year we have used several ratios to pinpoint the investor mindset of the day. As we head into 2010, it is worth asking whether the market is thinking offensively or defensively? The following table provides an answer. Rising arrows indicate a bullish mood (a mindset supportive to appreciation in equities) while falling arrows mark a defensive slant (bearish for equities).

These findings highlight the following:

1. A sharp shift to a defensive bias over the medium term, gradually coming into play as the uptrend has progressed. 2. The recent resurgence of slightly more bullish conditions over the short term. Other ST indicators may follow this same path in upcoming sessions.

3. The combination of the above two findings (a market again more bullish over the short term but as cautious as ever medium term) tallies with our baseline scenario1.

This renewed upward-facing stance over the ST has produced upside breakouts from diamonds. At the same time, the market remains on the defensive and will not hesitate to sell positions once targets are attained and/or if subsequent profit taking takes an aggressive turn. This would then fuel the secondary reaction over the medium term.

IV – Breadth and sentiment The observations summed up in the following table do not give much reason for cheer:

On the whole, fewer shares drove the latest trend-based upturn in Q3 and Q4 2009, the market is overcome with euphoria, fewer shares are exhibiting bullish configurations, and the final part of the year – a period in which indices generally hold their own – was used to thin out long positions.

1 See our Focus from 30 Nov.: Dubai-related panic under control.

Ratio Category Short term Medium term

Gold ounce/DJ Stoxx 600 Inter-Asset (since 14 Dec) (since 18 Aug)

Emerging Markets/DJ World Inter-Region (since 28 Oct) (since 20 July)

CME Midcap 400/S&P 500 Intra-Market (liquidity) (since 15 Dec) (since 26 Oct)

DJ Industrial/S&P 500 Intra-Markets (selectiveness) (since 26 Oct) (since 26 Oct)

Food & Beverage/DJ Stoxx 600 Inter-Sector (since 6 Oct) (since 7 Dec)

60% - 40% 100%

Ratio Short term Medium term

Breath

Sentiment Excessive optimism n.m.

Diffusion Bearish divergence Softening

Volumes Distribution Distribution

BASELINE SCENARIO EXPOUNDED ON 30 NOV

1. UPSIDE BREAKOUT OF DIAMONDS 2. ATTAINMENT OF ST TARGETS, SITUATED INSIDE MT RESISTANCE AREAS 3. SHARP CORRECTION MT Resistance Area

OVERALL PROBABILITY: 60%



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BREADTH Several indicators can offer a view of investors’ participation in the upturn. Amongst these, broad advance/decline and high/low indicators have continued to rise. Conversely, more detailed analysis of specific timeframes (ST and MT) reveals the following:

• Receding participation over both the short and medium terms. In other words, fewer shares are driving the upturn either in the US or in Europe: investors are becoming more selective. This incidentally supports the conclusions from Part III of this report regarding the market’s current mindset. Selectiveness is problematic because, at the same time, some indices have managed to rise to new highs recently. Because these advances were comprised of a smaller number of stocks, they are more at risk. • A small proportion of stocks fuelling the formation of new highs. Less than 10% of stocks on the NYSE are involved in peak formations. According to Paul Desmond2, this is a weighty bear signal, one that has shortly preceded the formation of 14 market tops on the DJ Industrial over the course of time.

• The Bullish Percent Index,3 showing the proportion of shares trading with point and figure buy signals, is signalling bearish prospects on the NYSE and a confirmed bear climate on Nasdaq. This indicator is showing percentages of 70% on the NYSE compared with 84% in September and 59% on Nasdaq compared with 74%. This indicates that recent upturns have been substandard in quality. A growing proportion of shares has been buoyed by the rising tide despite no longer benefiting from positive charts (which would signal a bullish mindset). They will have no trouble accompanying the decline once the correction takes hold.

SENTIMENT The swift resolution of fallout stemming from Dubai has given investors a false sense of security. At the end of 2009, there were three times as many buyers as there are sellers – levels on a par with June and September 2007. This does not portend that the stockmarket trend in store for 2010 will be the exact replica of that witnessed in 2007/2008. Rather, it emphasises beyond any doubt the excessive optimism raging in the market. DIFFUSION

• Over the medium/long term, the proportion of shares still trading above moving averages has ebbed to 90% on the S&P 500 (from 95% in Sept.) and 86% on the NYSE (down also from 95%). A restricted number of stocks are starting to consolidate over the medium/long term. • Over the short term, bearish divergence has been looming large since September/October – signalling the inability of a growing cluster of stocks to sustain the advances on equity indices.

2 See feedback on 2009 IFTA conference, available from us shortly. 3 Or BPI.



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VOLUMES Most dedicated volume oscillators are exhibiting distribution over both short and medium terms, on a wide array of indices (e.g. Cac 40, DJ Industrial and Nasdaq). Taken by itself, this is not a bearish indication; it may simply reflect end-of-year adjustments in investment portfolios as opposed to selling in anticipation of a downturn. As such, recent distribution may have a supportive effect over the short term. If equity indices can sustain their upward trajectory in the new year, there will be a “catch-up effect”. Investors will have to buy back the stocks they jettisoned too early. Even so, in the meantime (and from a more pragmatic standpoint), indices are stabilising in a climate of mistrust and amid technical selling. V – ROUND UP: Technical environment

Altogether, equity markets are entering 2010 in an adverse technical environment, broadly speaking. But we should specify the following:

1. Information relating to short-term conditions insinuates support for a last-ditch rise (following recent upswing in the market’s mood) while underlining the limits and vulnerability of the latter. 2. The market’s fragility over the short term warrants expectations for a short-lived upturn while medium-term observations reaffirm the imminence of bearish secondary reaction. The correction – expected in Q1 2010 - is likely to be sharp.

3. Analysis of long-term cycles between asset classes points to a major bullish slant on equities and commodities. Consider:

a) We are talking long term. This finding does not rule out a correction spanning the short or medium term.

b) Even now we can project that the market is not heading for a full trend reversal in 2010 in the wake of the prospective MT correction in Q1 2010. After the counter-trend decline, the market is likely to bounce back and revert to the primary uptrend initiated in March 2009.

The end result is a probable trend-based upturn in the wake of the MT correction expected for Q1 2010. This is crucial (and new) information suggesting that we should buy once the MT counter-trend decline is over – regardless of how sharp it is – rather than revert to neutral at that point. That would be too passive a stance in the light of the long-term cycle.

Ratio Short term Medium term Long term

Asset allocation (heading ) n.m.

Liquidity and LT cycles n.m. n.m.

Market psychology (40%) - 60% n.m.

Breadth and sentiment n.m.

REVISED SCENARIO TAKING LT OBSERVATIONS INTO ACCOUNT

MT Resistance Area


(Q1 2010)



Diamond



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Part II – Charts At which stage within Dow Theory are equity index trends located? What are the dominant chart configurations as we head into 2010? What are the supports and resistances that must be watched above all? How are indicators shaping up at the cusp of the new year? I – Dow Theory Regarding Dow Theory three key points are worthy of note as we head into 2010:

1. Uptrends remain intact over the ST and MT. 2. The three Dow Jones indices are rising in tandem. In this instance, the upturn on the DJ Industrial has been endorsed by the DJ Transport and DJ Utilities.

3. Two pivotal US indices – the S&P 500 and the DJ Industrial – are sorely lacking a bearish secondary reaction. However, there are no indications at this juncture that the prospective correction will retrace the whole of the preceding advance. In fact, retracement to the downside will probably be only partial and will not undermine the primary upcycle initiated in March 2009.

a) Uptrends intact The following charts play down the bearish views currently doing the rounds. Dow Theory is highly pragmatic in its approach, describing price trends rather than trying to forecast their future direction. There can be no doubt that US equity indices are following uptrends at the moment.

In the medium term, the DJ Industrial is forming systematically higher peaks and troughs. This same pattern emerged on the DJ Transport in July and recently, in December, on the DJ Utilities. The latest breach in a MT high, on the DJ Utilities, has delivered a message of strength just as a last-ditch ST upswing is expected to materialise –before the counter-trend decline takes hold.

WEEKLY – DJ INDUSTRIAL (TOP) & DJ TRANSPORT (BOTTOM) WEEKLY – DJ INDUSTRIAL (TOP) & DJ UTILITIES (BOTTOM)



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THEORETICAL ASIDE Incidentally, it is plainly clear that the strength of Dow Theory lies not in its ability to forecast reversals but to ratify new trends. To take the example of the DJ Industrial on its own, the downside reversal in its MT trend was only signed and sealed in June 2008, which is late4. However:

1. It is not the job of Dow Theory to project the future. Rather it observes whether a trend is still in action or has been reversed. Naturally, when price analysis is applied to the long and short terms separately, shades of distinction quickly emerge and the price action is then better understood. However, it is first and foremost a factual, descriptive approach. 2. Confirmation of a trend reversal using Dow Theory delivers a strong signal, making it possible to avoid taking contrarian positions at that specific time and ascertain the right position in a trend at a time when we would rather pull back from the market.

3. A trend reversal that is ratified by Dow Theory at times will offer the very last entry point into a trend when other technical methods have failed to anticipate a reversal in trend with a satisfactory level of probability5.

b) A confirmed uptrend A new trend cycle is only valid if confirmed by two indices (the crucial relationship is represented by the ties that bind the DJ Industrial with the DJ Transport) and possibly a third one as well (DJ Utilities). The current MT uptrend was flagged simultaneously by the DJ Industrial and DJ Transport in July 2009 but was only recently endorsed by the DJ Utilities. This decisive surge (triggering a reversal in MT trend to the upside on utilities) came in the nick of time. A renewed bullish mood in one of the market’s spaces may temporarily provide fuel for the upside extension expected on equities at the start of the new year. c) A counter-trend decline that is sorely lacking! It is widely known that during uptrends each intermediate oscillation is comprised of an intermediate advance and a secondary reaction to the downside. During a downtrend, the terminology would be a secondary reaction to the upside (or bear market rally) followed by an intermediate decline.

4 However, Dow Theory had issued a strong alert over the status of the uptrend in the summer of 2007. Additionally, other technical methods had yielded a warning of a possible reversal in trend as early as August 2007 before flagging the reversal in Europe and the US in January 2008. Dow Theory is only one piece of the puzzle. Other technical indicators are better suited to forecasting. 5 This was especially true in July 2009 when upside reversals in trends picked up by Dow Theory led to us shelving our bear stance (before prices had shot up) and confidently buying into the new trend as it was materialising.

INTERMEDIATE OSCILLATIONS

AN INTERMEDIATE OSCILLATION IS COMPRISED OF:

1. AN INTERMEDIATE MOVE IN THE SAME DIRECTION AS THE PRIMARY CYCLE 2. A SECONDARY REACTION

Risingprimary trend

Intermediateadvance

Bearishsecondaryreaction

Secondaryrallye

Intermediatedecline

Fallingprimary trend

Intermediateoscillation



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As the following charts indicate, the DJ Industrial and S&P 500 have produced an ambitious intermediate advance dating from July 2009 … but neither has staged a secondary reaction.

In the case of the DJ Industrial, the intermediate MT advance has been particularly strong and has not allowed for retracement of any real magnitude. As for S&P 500, one could argue that a slightly fuller correction took place in October. However, this lacked the dimension to suggest that the market had paused sufficiently for breadth or firmed up its foundations. Amongst the other factors revealing the continued state of stress in the market in the wake of this ST correction, the ST upturn was not even knocked off course by this decline. A genuine MT secondary reaction to the downside would have easily punched through ST lows. But this is no cause for concern: a poignant example is likely to emerge in early 2010. d) Lines Granted, but have not other indices formed “lines”? In Dow Theory, lines are ranging markets that can temporary take the place of a conventional secondary reaction. Instead of declining, investors opt for consolidation over time6. Hesitant configurations in the guise of diamonds (see next section) on European indices (DJ Stoxx 600, Eurostoxx 50 and Cac 40), or the broadening formation on Nasdaq, are simply examples of sideways consolidation or lines under Dow Theory. On these indices, chart configurations have been firmed up by consolidation moves (laterally) and in theory should produce a fresh rally.

6 The two forms that consolidation can take – laterally or declining – crops up regularly in stock analysis contained in our Technical Overview.

WEEKLY – DJ INDUSTRIAL DAILY – S&P 500



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However, technical analysis has many facets and should take into account a whole gamut of different factors. Furthermore, this particular slant has some serious drawbacks:

1. Two heavyweight US indices have not staged standard consolidation moves. The onset of secondary reactions on these two indices (S&P 500 and DJ Industrial) would force others to halt their upward course, even if the upturn was initially confirmed by an upside breakout of a continuation pattern. 2. Theoretically, an upside breakout of a transition period will leave an accumulation area behind it. Yet, as stated in the section of this paper devoted to technical environment, this recent period was mainly characterised by distribution rather than accumulation.

3. Lastly, the upper limit for uptrends is often shown by resistance areas with the mettle to slow or possibly even halt upcycles. In Europe, all the indices we track are located inside MT resistance areas that are likely to mark the end of MT upcycles (measured move ups). These zones will muster sell trades such that the next rally, despite being bolstered by a long-run consolidation period, will probably be stopped in its tracks and flipped over to the downside.

II – Chart configurations Here is a list of active or potential chart configurations7 at the end of 2009 and beginning of 2010 by index. Attached to the name of each pattern is an arrow indicating each of their ramifications.

From a chart-configuration standpoint, we can indicate that the market’s mood is currently:

1. Bullish short term, as the majority of indices have recently broken upside of sideways consolidation periods (diamonds in Europe and assorted broadening formations and flags in the US). 2. Bearish medium term because MT upcycles are terminating on the vast majority of indices. From this standpoint, a post-cycle correction seems unavoidable in the near future. The Nikkei 255 seems to be leading the pack. The secondary reaction has come and gone and the price action is now tentatively tracing a possible head and shoulders.

7 As always in our nomenclature, potential patterns carry question marks.

Index Short term Medium term

S&P 500 : Flag : Measured move up ending

DJ Industrial ?: Ascending broadening wedge? : Measured move up ending

DJ Transport : Desc. right-angled broadening formation : Measured move up ending

DJ Utilities : Asc. right-angled broadening formation : Upside breakout of LT trading-range

Nasdaq : Broadening formation Neutral

DJ Stoxx 600 : Diamond : Measured move up ending

Eurostoxx 50 : Diamond : Measured move up ending

Cac 40 : Diamond : Measured move up ending

Nikkei 225 Neutral ?: Head and shoulders?



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As the following table shows, the Nikkei 255 is not the only index emitting a warning. The Nasdaq is doing so too, as it is devoid of an uptrend over the MT. Additionally, the DJ Industrial has already terminated its measured move up and has also been forming a powerful reversal pattern (an ascending broadening wedge).8

Altogether, ST upside relating to the transition-period breakouts is capped by the following:

1. Upside is indissociable from the longer-run trend (medium term). Over this timeframe, an upcycle is coming to an end. 2. Neither can it be uncoupled from the period in which breakouts took place. The surges took place at the end of the calendar year9, around a holiday period10, amid low volumes.11

Thus, even though indices are sustaining positive ST momentum, their move are fragile and could be swiftly thwarted by contrarian trades connected with the medium term.

8 This pattern conveys a period during which buyers run out of steam. This same observation has been yielded by analysis of breadth indicators especially (fewer shares driving the upturn, etc.). A glance at the current technical environment ratifies the formation of such a pattern. 9 Given that 2009 was a year of gains and 2008 contained the worst market crash in 80 years, investors felt no real incentive to take excessive risks as the year drew to an end. There was particular enthusiasm to lock in portfolio performance; it would have been inconceivable to hand back a large chunk of the profits chalked up in 2009 (which partly offset losses in 2008) at the end of that year. Conditions would have been different after a long bull market. 10 Holidays discourage the establishment of new positions, especially short positions due to market closures and the widely shared view that stockmarkets tend to progress at the end of the year. 11 Weakening the upside breakouts.

EUROSTOXX 50ST: UPSIDE BREAKOUT OF DIAMOND MT: RESISTANCE AREA LIMITING SCOPE FOR EXTENSION



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III – Zones, supports and resistances The following table shows decisive thresholds, either lines or price bands (resistance and support areas). Long-term thresholds naturally carry more weight then those connected with the medium term.

What lessons can we learn from this?

• European and US stock indices are entering 2010 either inside or in close proximity to MT resistance areas. We expect to see massive sell trades emerge inside these price areas (selling pressure is rising as indices gravitate towards the upper lines), which should encourage the indices concerned14 to form their next MT top inside these zones.

In other words, the next secondary reaction is expected to materialise in this chart territory. • All else being equal, the next MT secondary reaction stands a high chance of petering out in the immediate vicinity of the MT supports indicated. Naturally, if other chart-based information comes to the fore (e.g. specific patterns or candlesticks), we will fine tune the targets in question. Ahead of the prospective MT correction, however, this can give us an approximate idea of the standard downside in store. • Long-term resistances are unlikely to be overcome in 2010. This gives us an idea of the maximum upside potential on indices in 2010, for those wanting to take an optimistic tack (which would not reflect our viewpoint).

12 Price bands such as support, accumulation, resistance and distribution zones are indicated as follows: [limit–limit]. Commas are used separate to separate two variable with no relation to each other. 13 Slightly upward sloping threshold. 14 S&P 500, DJ Industrial, DJ Transport, DJ Stoxx 600, Eurostoxx 50 and Cac 40. For each of these indices, the MT resistance areas indicated in the table correspond to zones in which the next MT top is expected to form as measured move ups terminate.

Major supports12 Major resistances12

Index Long term Medium term Medium term Long term

S&P 500 950 943.8 [1132.6-1219.5] 1150, 1400

DJ Industrial 9000 9026 [10210-10994] 10700, 11670

DJ Transport 2000 [2987-3434] [4287-4734], 4635 5487

DJ Utilities 294.3, 307 360, [324.4-340.8] 422, 460 470

Nasdaq [1261-1350] 2168, [2024-2190] [2430-2550] 2900

DJ Stoxx 600 162.2, 165.813 214.2 [252.7-272.7], 262.5, 290 300

Eurostoxx 50 1847, 200013 2330, 2600 [2978-3272], 3000, 3450 3900

Cac 40 2465, 258113 3400, 3100 [3848-4289], 4002, 4500 5303

Nikkei 225 7000 9000 [11565-11721] 10788, 12000, 14500



17

Likewise, long-term supports can be used to help consider the bleakest stress scenarios (once again, this is not our stance on 2010).

• The Nikkei 225 is a case apart. It is trading close to several resistance areas connected with the long term. These barriers will be hard to breach but, on the other hand, if the index does manage to break away, it would mark a significant milestone with regard to each barrier. Our viewpoint is that the Nikkei 225 is likely to be repelled by the line at 12000 just as other indices pull the curtain down on their MT upcycles (by hitting end targets) and embark upon counter-trend declines over the MT. The Nikkei 225 will be especially quick to decline in that a LT resistance would have mustered extra sell orders.

SUMMING UP • The MT resistance zones in place on six leading indices mark the boundaries of the intermediate MT advance initiated in July 2009. A MT market top is expected to materialise inside. • In extreme cases, the secondary reactions would conventionally decline to the points marking the start of the rally in July 2009. This time round these thresholds will act as supports (they are indicated under "MT supports" in the table, e.g. 3400 on the Cac 40 and 943.8 on the S&P 500). IV – Market indicators This section gives details of the technical status of key indicators at the end of 2009, calculated using weekly data from the S&P 500, Eurostoxx 50 and Cac 40. The top chart shows the S&P 500, the middle one the Eurostoxx 50 and the bottom chart the Cac 40. In some places we have removed the bars to improve indicator readability. This makes no difference to the underlyings to which they refer. a) Moving averages

S&P 500, DJ 600 & CAC 40 – LONG-TERM MOVING AVERAGES



18

• Trend confirmation. LT moving averages are pointing upwards and staged a bullish cross in October 2009. This confirms15 the bull signal delivered by the intermediate advance in July 2009. • Type of trend cycle. The LT bull signal increases the likelihood of the uptrend initiated in March 2009 corresponding to a primary upcycle.

• Following the trend. The above moving averages have been optimised to track upcycles over the long run (note how the secondary reactions during the previous primary bull market (2003-2007) stopped dead on these moving averages16). They can therefore be used to spot rising MA supports (which would otherwise be invisible) coming into play during the next secondary reaction. These levels complement the aforementioned supports.

b) Status of LT momentum The following charts indicate the rates of changes on the equity indices we cover together with moving averages and the signal line thereof (the moving average of the moving average).

15 Moving averages are primarily used as confirmation and trend-following indicators. They play only a small part in forecasting because there are other oscillators available that are far more accurate and sensitive to change. 16 Since history never repeats itself exactly, moving averages will again be adjusted in the wake of the next MT secondary reaction (which will define the specific growth rate of the current primary cycle).

S&P 500, DJ 600 AND CAC 40 – LONG-TERM RATES OF CHANGE



19

• The resurgence of the uptrend in 2009 took place at break-neck speed. Momentum readings are still largely in positive territory (the decline in ROCs inside positive territory merely signals that the growth rate has slowed17). The bearish cross currently shown by moving averages indicates solely that the growth rate is unsustainable over the long run and is likely to be dampened in 2010. This will be the job of the secondary reaction in early 2010 … • That rates of changes hit peak oversold territory in late 2008/early 2009 before swinging up to peak overbought zones in late 200918 corresponds to a specific technical configuration. For specific reasons we call this mega-overbuying19. This arrangement often points to the emergence of a primary upcycle over the LT.

c) Combined analysis of trend, momentum and volumes The following charts provide a sample combined analysis of one indicator conveying momentum and volumes (MFI) and two trend-following indicators (ADX and DMI).

17 This equates to "disinflation" but applied to the market ticker. 18 With the exception of the Cac 40, which has achieved readings on a par with the TMT-bubble era culminating in 2000, upside momentum in 2009 has exceeded this period (on the S&P 500 and DJ Stoxx 600). 19 In contrast to Martin Pring, who would talk about two extreme LT readings. Though the terminology differs, the implications are the same, namely we strongly suspect that a LT primary advance is underway.

S&P 500, DJ 600 & CAC 40 - MONEY FLOW INDEX, ADX AND DMI



20

Analysis of the Money Flow Index, situated in overbought territory, endorses the message of lessening growth rates expressed by rates of change and confirms that indices are delicately poised at the beginning of 2010. Indices are vulnerable.

• Equity markets are in an especially fragile position because this indicator also records upside and downside volumes, in its own particular way. That it has reached overbought territory in less than a year indicates that, during this period, the market has bought back into equities as heavily as during the recovery of 2003/2004 (obviously a longer period), at the heart of the primary uptrend (late 2005) and during the so-called "contrarian temptation of late 2007"20 which was driven by the representativeness bias.21

• Concurrent with these bullish excesses, a trough has been reached on the ADX, a directional indicator.22 Hence, in regard to this indicator, equity indices (represented here by the DJ Stoxx 600) are no longer driven by rising directional impetus. The trend was drained of its strength by the lethargic stock prices of late 2009.

It is widely known that contrarian positions should not be established when momentum indicators are overbought AND trend-following indicators are firming up. Indeed, momentum indicators can remain in an overbought state for a long while. Conversely, a clear sell signal is issued whenever momentum indicators climb to overbought territory AND trend-following indicators imply trend-less conditions (emphasising that the movement to date cannot be prolonged). This is exactly how the above indicators are poised at the moment: overbought MT on momentum and upside volumes (MFI) with the ADX pointing to a trend-less MT environment. This represents a sell signal that substantiates the prospect of a secondary reaction to the downside.

• Lastly, the Directional Movement Index (DMI) usefully fills in some blanks. As the ADX is simply a measurement of divergence between the directional momentum components of the DMI, a contraction in the ADX can stem from a variety of combinations. For example, the directional indicators, DM+ and DM-, may exhibit a low degree of divergence but while at the same time rising, falling, separating, or coming together. In current conditions, the drop in directional momentum is compounded by a brisk decline in upside directional momentum in the preceding weeks, in tandem with firmer downside momentum. This observation indicates that while index prices have continued to edge forward, sellers are even now starting to mobilise again. This substantiates the prospect of a last-ditch upturn over the ST followed straight away by a secondary reaction.

20 During this period US indices managed to climb above the highs of summer 2007 (!), unlike European indices (which remained below their equivalent benchmarks), which issued a bear alert picked up easily by Dow Theory. 21 A behavioural bias by which we forecast the future in the light of the recent past. 22 This oscillator is calculated over a relatively short period (13 weeks) such that its decline cannot be pinned on the fact that the trend has changed direction. Otherwise, it would have been easy to misinterpret.



21

V – ROUND UP: Charts

• Dow Theory shows from a highly pragmatic angle that a secondary reaction is likely to emerge in Q1 2010 while emphasising that there are no grounds for ruling that the primary upcycle initiated in March 2009 will be reversed. More likely, this counter-trend decline will be followed by a fresh surge on indices. • Indices have broken upside of sideways transitions and rekindled their upturns over the short term. Over the medium term, however, upside is capped by entrenched resistance areas.

• A string of resistances are likely to dampen then halt price appreciation at the start of the year. The next secondary reaction will probably end on levels around which the rally started in July 2009.

• Analysis of key indicators points to a bullish long-term environment (underscoring the existence of a new primary bull market) while pressing home the need for the rate of growth to slow in Q1 2010 (by means of a correction).

Finally, the observations yielded by Dow Theory as well as the discovery of conventional chart configurations, principle supports/resistances and momentum indicators lead us to ratify the conclusions from the section on technical environment:

1. A last-ditch advance is likely to form starting from late 2009/early 2010. 2. Subsequently a major correction called a secondary reaction will materialise in Q1 2010. 3. After this correction the primary LT upcycle initiated in March 2009 will resume.

Ratio Short term Medium term Long term

Dow Theory n.m.

Chart configurations n.m.

Supports and resistances n.m. n.m.

Indicators n.m.

REVISED SCENARIO BASED ON LT OBSERVATIONS

MT Resistance Area


(Q1 2010)



Diamond



22

Part III – Intermarket links Trends on other major asset classes (bonds, commodities and currencies) naturally have an influence on equity markets. Let us look at how these three closely related markets are faring as we head into 2010. I – Long-term debt In 2010 we are likely to see appreciating long-term yields in both the US and Europe. But our tone is moderate. Renewed rises in yields will still take place inside the underlying downcycle in place since the 1980s. Negative fallout on equity markets will be limited, not substantial as when debt contacts will breach very long-term trends. a) T-Notes The monthly T-Notes chart places matters quickly into perspective.

Consider the following:

• In December 2008, T-Notes terminated a LT measured move up, coming within a stone’s throw of the LT resistance zone. The last stages of the trend took place outside the ascending channel in place since the 1980s, leading to an exhaustion break and a sell signal.

MONTHLY SINCE 1986 - T-NOTES



23

• Initial profit taking (spread out between December 2008 and June 2009) has given way to a sideways transition period. This is now coming to an end via transformation of the MT pivot point at 121 25/32 into a resistance and breakout from the flag pattern representing the transition. In other words, the market has reiterated its bearish intentions over the medium term.

• T-Notes are heading back to the lower end of the VLT ascending channel at 110 points (yield 4.25%). Most likely, this target will be hit in 2010, and probably in H1 as opposed to H2. The reversal in market participation ratifies this prospect.

• The long-run uptrend on T-Notes is still active. The renewed rise in yields23 in late 2008 falls into this context.

Right now the downcycle on long-term yields is therefore not reversed. That said, the current correction could well be part of a broader move that might ultimately end in violation of the channel’s lower limit (thereby producing a long-run upcycle on long-term yields). Note, however, the chart’s time scale. It may take years for T-Notes to sink back to the channel’s lower line, bounce back (via a secondary reaction to the upside) and then, possibly, decline again to breach the channel’s baseline. The projected time horizon is 2011 or 2012 if the market loses time along the way inside a trading-range, for example.

b) Eurobund Long-term yields on European debt are also likely to head upwards in 2010 judging by long/medium-term configurations on the Eurobund.

23 A note for private clients: long-term yields move inversely to debt contracts (T-Notes, Eurobund, 3m Euribor etc.).

MONTHLY SINCE 1991 – EUROBUND WEEKLY SINCE 2005 – EUROBUND



24

This calls for several comments:

• Note on the monthly chart the rapidly shrinking power of each successive upswing above previous LT highs (marked A, B and C24).

The declining strength of buyers long term can be easily seen via the decreasing height of the price swings and via volumes, which were sorely lacking during the most recent surge. • Staying with the monthly chart, we can see a peak oscillation on the rate of change. The market has never produced such velocity in fuelling a primary advance … since 1991! The drawback is – as highlighted in the previous bullet point – the upturn was low on commitment. The break-neck speed signalled anxiousness by a fraction of the market; this can be taken as an advance LT sell signal.

The primary upcycle is starting to wilt. Any downside secondary reaction should be watched closely because it might mark the first leg of a primary bear market. • On the weekly chart, the Eurobund contract spent the initial part of 2009 tracing and then completing a double-top reversal. Following an initial correction, the second half of the year was devoted to a sluggish pullback.

This pullback is due to end soon via a consolidation wedge breakout. The pattern is located level with the distribution zone left over from the double-top, which heightens downside risk. Note distribution coming into play during the wedge’s formation –which worsens the bearish ramifications.

On this basis, we can estimate the contact falling back to 118.1 in the ST, 116.7 in the MT and 114.8 in the LT, equivalent to yields of 3.65%, 3.75% and 3.90%. • The overall status of open interest during each primary oscillation suggests that the market has been more involved in declines then advances since 2006. This signals that reversal of the primary upcycle in place since the 1980s is in the offing. It would not be overly cautious to consider this as a distinct possibility from the start of 2010.

SUMMING UP

• Clear upside trends for long-term yields in 2010. • No reversal to the upside of long-run yield trend at this juncture. This has a higher chance of materialising in 2011 or 2012. • Bearish impact on equities in the early part of 2010 because the peak in debt contacts dates from one year ago (late 2008/early 2009) - meaning that it should hit stocks around now. 24 No reference has been made to Elliott Wave Theory or any other esoteric methods.

Spot Short term Medium term Long term Impact on equity markets

T-Notes 3.85% - 110.0 (4.25%) - Bearish in early 2010

Eurobund 3.35% 118.1 (3.65%) 116.7 (3.75%) 114.8 (3.90%) Bearish in early 2010



25

II – Commodities a) Broad overview On the whole, commodities are starting the year in a relatively strong position. The Commodity Index from ICE Futures25 reflects uptrends in the majority (64.68%). Active downtrends account for 29.40% of the index composition and only a single underlying is has a neutral status. Broadly speaking, energy, industrial commodities, precious metals and softs are showing firm upside impetus. Trends are depressed for only two clusters: grains & oilseeds and livestock.

b) Continuous Commodity Index The index may be in great shape for now but the question is how long can this last. The answer has several components:

• The first point is a poignant reminder that entrenched trends are harder to reverse than their feeble counterparts. Generally speaking, strong advances are followed by a period of consolidation allowing for another extension, as opposed to a downside reversal in trend there and then. We should not underestimate the strength of the current bull market in commodities.

25 By far the most finely balanced commodities index. 26 Summary trends based on position of each index in the light of Dow Theory over the medium term.

Make-up of Continuous Commodity Index (ICE Futures)

Clusters Underlyings Medium term26

Crude Oil (WTI)

Heating Oil Energy (17.65%)

Natural Gas

Corn

Soybean = Grains & Oilseeds (17.65%)

Wheat

Copper Industrials (11.76%)

Cotton

Live Cattle Livestock (11.76%)

Lean Hogs

Gold

Platinum Precious Metals (17.65%)

Silver

Cocoa

Coffee

Orange Juice Soft Commodities (23.53%)

Sugar



26

• Second point: in the first section of this report (see the liquidity perspective), we saw that a LT buy signal had been issued on commodities. This means that the uptrend marks a primary cycle that will take considerable time to be reversed.

• Third point: the above points do not preclude temporary incursions into overbought territory, weakening the index for a time.

This seems to be happening right now. While a further

extension to the upside can be expected in the short term, analysis of open positions (which slipped constantly in 2009) and volumes (distribution underway since October 2009) indicates that the market is not substantially involved in this upturn. There is a high probability that the index will produce a downside secondary reaction in Q1 2010.

Altogether: • Overbought conditions over the short term and the lack in participation will probably foster a secondary reaction in Q1 2010. • Even so, this ST decline will be unable to reverse the LT uptrend to the downside on its own. It will simply produce a reversion to the mean marked by the uptrend line, paving the way for the emergence of another MT advance.

DAILY - CONTINUOUS COMMODITY INDEX



27

c) WTI The WTI is heading into 2010 powered by an uptrend. This upwards cycle:

• … was strengthened in Q3 2009 by an inverted head and shoulders continuation. • … was recently bolstered, in Q4 2009, by a so-called "descending scallop", allowing for a conventional secondary reaction that aborted in a sell-off. The ensuing short-squeeze has fuelled a solid rising heading for the ST target at USD 86.50.

Even though the chart configuration is broadly positive for the time being, we advise not projecting the trend going beyond USD 86.50. The trend is situated in late stages – with a correspondingly low risk/reward –and the market is only fractionally involved in the upturn these days.27 Once the ST target at USD 86.50 is hit, we would not be surprised to see the WTI enter into a sideways transition during which the medium-term trend will be redefined.

27 The most recent upturn took place amid low volumes, meaning that the short-squeeze is the main driver behind the rise, not the bullish consensus reiterated in September/October 2009.

DAILY - WTI



28

d) Gold ounce No worries for gold at this juncture:

• A major uptrend spanning the medium, long and very long terms is developing. The next target on the upside is located at USD 1295 per troy ounce but this may well not mark the top of the VLT upcycle initiated at the start of the current century28. • Over the short term, the market recently got overexcited and experienced a blow-off rally. This has produced a standard consolidation period with the spot price dropping down to USD 1100. We expect a sideways transition to form around this point before the precious metal surges again.

Note the sharp decrease in volumes during the price decline, between the blow-off point (3 December) and now. This indicates that the market is not heavily involved in driving down the price of gold (even though everyone was trying to buy into the earlier rally, culminating in the state of euphoria in Q4 2009). As such, the correction seen in December is probably only a ST secondary reaction, with the MT/LT/VLT uptrend set to continue. Note furthermore that the downswing in late 2009 produced a pullback down to close to the top limit of the arithmetic VLT ascending channel in force since 1976. This threshold (USD 1063) has helped rally round buyers again.

28 For more details consult our Focus report from 22 Sept. 2009 devoted to the long-term prospects for gold: Gold ounce seen from every angle.

DAILY – GOLD PER TROY OUNCE IN USD



29

SUMMING UP

• The commodity index is still gaining ground but under stressed short-term conditions. It is unlikely to be able to sidestep a sharp secondary reaction in Q1 2010. • Oil is still heading upwards but the trend is tailing off. A transition period is expected once the target has been hit. • Gold ounce is consolidating healthily over the short term to prepare for a more solid upturn over the medium/long term. • Prospects for commodities are likely to mirror the outlook for equity markets. In theory, trends driving commodities will have a neutral impact on equities. • Over the short term, the ongoing rise on the Continuous Commodity Index will quicken the upturn on the EUR/USD pair but the secondary reaction expected over the MT is then likely to cool off the euro’s appreciation against the US dollar. III – Currencies

• The EUR/USD pair has been following an uptrend since Q1 2009. Our suspicion is that the correction seen in the dying moments of 2009 is nothing other than a secondary correction judging by its features: oversold territory hit quickly, trend-following indicators reversing, high-speed decline, intense volumes at the end of the decline, downside target of minor double-top already hit, and so forth. We have reverted to a ST upside target at 1.5030 combined with a stop loss at 1.4030.

Underlying Short term Medium term Long term

Commodity Index (513) (440)

WTI (86.50) =

Gold per ounce = (1295)

DAILY – EUR / GBPDAILY – EUR / USD



30

• Over the long term, once the likely MT transition has run its course, the EUR/USD pair is set to start rising again based on long-term indicators (as with commodities).

• EUR/GBP is still ascending under the strong impetus of a measured move up. Given that the associated consolidation period was long and ample (in the guise of a consolidation wedge built up over the first eight months of 2009), we can expect a long-run upcycle to emerge. We have therefore set targets at 0.9460 ST, 0.9790 MT and 1.0500 LT.

SUMMING UP

As currency movements reflect a whole range of transactions for various underlying assets, they cannot yield advance signals. Instead, we use them as confirmation tools. As a result: • The ST upturn on the EUR/USD pair will henceforth coincide with the last-ditch upturn on equities. • The MT period of stability in the EUR/USD is most likely to mark the time when equity markets and commodities will initiate a secondary reaction. IV – ROUND UP: Intermarket links

• Bearish fallout from higher long-term yields always hits equity markets with a certain time lag. However, the peaks on long-term debt date back to late 2008/early 2009. As such, with the latest upcycle on long-term yields underway, it is likely that the negative impact will materialise in early 2010. • The late-stage uptrend driving commodities in early 2010 will probably prevent decoupling on a par with the move in H1 200829. This time round, the secondary reaction expected to push down share prices will probably go hand in hand with a sharp correction on commodities. • The euro’s subsequent course should help confirm the onset of the secondary reaction on equities. In the meantime, the euro looks able to perk up again – against both the dollar and sterling – by moving in tandem with the last-remaining upturn on equities at the moment.

29 During which commodities continued to surge ahead whereas equities had started to collapse.

Pair Short term Medium term Long term

EUR/USD (1.5030) =

EUR/GBP (0.9460) (0.9790) (1.0500)

Underlying Short term Medium term Long term Impact on equities

Long-term yields Bearish impact in early 2010

Commodities Neutral impact (moving concurrently)

Currencies = Neutral impact (lagging behind)



31

Part IV – Sectors and stocks I – Sectors’ status in late 2009/early 2010 The following table summarises the technical status of each DJ Stoxx 600 sector relative to the market30 and by itself. Prospective relative performance is shown over two timeframes. The absolute-performance columns indicate whether a chart configuration can be validated and, if so, specifies its implications. Configurations are considered neutral if charts do not show reliable patterns.

Based on the above findings, there are some essential sector plays to implement in early 2010:

• Media, oil & gas, tech and utilities are all in a strong position to outperform over the short and medium terms with dependable “absolute” chart patterns in support of these trends. • Chemicals, industrials and retail should be avoided. Some weighty bear signals have been issued in terms of relative performance. Neither is there technical proof of renewed upside impetus to follow on from the measured move ups that are coming to an end on specific price charts.

30 All relative performances have been calculated in reference to the DJ Stoxx 600.

Relative performance Sector

Short term Medium term Absolute

performance Dominant chart configuration

Automobile = = n.a.

Banks = n.a.

Basic Resources Measured move up ending

Chemicals Measured move up ending

Construction Upside break from diamond

Consumer Goods ? Ascending broadening wedge?

Financial Services = n.a.

Food & Beverage = n.a.

Healthcare Distribution area

Industrial Goods = Measured move up ending

Insurance = n.a.

Medias Quadruple bottom

Oil & Gas Uptrend line

Real Estate = = n.a.

Retail Measured move up ending

Technology Measured move up starting

Telecoms = = = n.a.

Travel & Leisure = Inverted head and shoulders

Utilities Ascending channel



32

One may rightly question the absence of certain sectors in our picks. The above table summarises prospective trends but does not go into detail. If a given sector is not selected for our priority list it is because there may be hostile technical data31, or the trends seen in late 2009 are likely to abort or lack support from absolute price charts. II – Sector picks and overview of momentum As recently shown in our regular sector review32, the following roadmap indicates the status of each sector by short/medium-term momentum in their performance relative to the DJ Stoxx 600. . Blue marks our favourite sectors and red those worth giving a wide berth. Some additional considerations:

• The chemicals sector recently exited extremely overbought territory (where it was located at the time of our most recent sector update on 3 December). The growth rate is set to continue slowing in the weeks ahead. • Industrials is situated in a broadly neutral momentum configuration, which is undermining the sector: in absolute terms the sector is testing key resistances. Poor momentum conveys the absence of a broad bullish consensus and suggests that the attempted extension will end in tears, leading the sector to underperform in the near future.

31 Thresholds and resistances, chart configurations, indicators, etc. 32 Active sector allocation.

29 Dec 2009

AUT

BK

BR

CH

CO

CGD

FSV

F&B

HEA

IND

INS

MED

OIL

IMM

RTL

TEL

TPLUTI

TEC

-50.00

-40.00

-30.00

-20.00

-10.00

+0.00

+10.00

+20.00

+30.00

+40.00

+50.00

-100.00 -75.00 -50.00 -25.00 +0.00 +25.00 +50.00 +75.00 +100.00

Entering outperformance cycle

Entering underperformance cycle

Confirmed / excessive underperformance

Confirmed / excessive outperformance

29 Dec 2009

AUT

BK

BR

CH

CO

CGD

FSV

F&B

HEA

IND

INS

MED

OIL

IMM

RTL

TEL

TPLUTI

TEC

-50.00

-40.00

-30.00

-20.00

-10.00

+0.00

+10.00

+20.00

+30.00

+40.00

+50.00

-100.00 -75.00 -50.00 -25.00 +0.00 +25.00 +50.00 +75.00 +100.00

Entering outperformance cycle

Entering underperformance cycle

Confirmed / excessive underperformance

Confirmed / excessive outperformance



33

• Retail has produced a solid uptrend but this is nearing an end. The resistance area at 246.4-258.8 is unlikely to be breached on the upside.

• Media is situated at the centre of the uptrend arising from a quadruple bottom, a major bull pattern completed in late August 2009.

• Utilities is moving up in tandem with the DJ Utilities (US), which recently reverted to an uptrend. There is no point forecasting the end of the uptrend on Europe’s DJ Stoxx Utilities so long as the DJ Utilities is also trending upwards.

• Oil & gas is slowly but surely gaining ground. Prospects suggest further outperformance relative to the DJ Stoxx 600 and, for a few weeks, relative to banks.

• Tech is being driven by a substantial measured move up on its chart. Interestingly, the sector recently terminated a pullback to the middle-section accumulation area and is only now entering into the final upcycle. The sector’s growth rate is likely to pick up pace as we head into the new year – especially under the positive impetus of Nasdaq.

III – Sector clusters and business cycle Another thread we can consider is the behaviour of the four sector clusters (leading, core, lagging and defensive), which provide useful additional information about the stage in which equity market trends are currently situated. Our observations are as follows:

Some important points worth noting:

• Obviously, leading sectors outperform at the outset of a primary upcycle, as between March and May 2009. At the apex of the cycle, this cluster tends to trend in line with the market before underperforming in the last stage. That this cluster is currently underperforming is a sign that the primary uptrend is waning. It is likely that two-thirds of the upside has already been expressed.

• The performance in line with the market exhibited by the core cluster increases the probability of the market experiencing some form of consolidation (deeply to the downside or sideways) during Q1 2010. Incidentally, if this sector cluster is no longer managing to outperform now, it will take several months before it can begin to do so again.

Sector cluster Direction Remarks

Leading sectors Over 60% of the primary cycle has been completed.

Core sectors = Performance in line with broad market signals that indices are about to shift from mid-trend to end-of-trend. The two phases will be separated by a downside secondary reaction or a sideways period of consolidation.

Lagging sectors A sell signal will emerge once this cluster reverses to the downside.

Defensive sectors The market is aware of the risks incurred by the upside extension in late 2009 and is expecting a correction in early 2010 – tying in with our forecast for a downside secondary reaction in Q1 2010.



34

• Lagging sectors are outperforming in style. This, by itself, is not a warning sign threatening the primary upcycle. In fact, the sell signal will materialise once this cluster has stopped outperforming and has reversed to the downside. • The market has retained a defensive stance amid the uptrends, resulting from recent lessons learnt. The crash of 2008 has shaken investors’ confidence in upturns. To all appearances, the extended upturn in late 2009/early 2010 is being read as a temporary extension that is bound to end in a correction. This is also our opinion.33

The above observations tally with the outlook we have on equity markets:

33 Granted, but for such a move to emerge, no one must be expecting a decline, right? That partly applies when trends top out, just prior to reversals. But it is much less certain at the heart of a primary upcycle, in the run-up to a downside secondary reaction that may be strong but only temporary. Furthermore, for example, the long period representing the formation of a textbook head and shoulders in 2007 afforded plenty of time to sell up or make the necessary hedging arrangements. This did not prevent its downside target being hit the very same month in which it was triggered, in January 2008.

INDEX OUTLOOK FOR EARLY 2010 FROM STANDPOINT OF DOW THEORY

MT Resistance Area


(Q1 2010)



Diamond


Phase 1Accumulation



Q3 2009 to Q1 2010


Q2 & Q3 2010

MT Resistance Area


(Q1 2010)



Diamond


Phase 1Accumulation



Q3 2009 to Q1 2010


Q2 & Q3 2010



35

As a result: • It is normal for the leading cluster to underperform at the end of a primary mid-cycle advance (phase 2). • Performance in line by core sectors heralds the onset of a secondary reaction in the near future. • Ongoing outperformance by lagging sectors indicates that the market is not yet situated in phase 3 (the final instalment of a primary uptrend). • Outperformance by defensive sectors conveys a lack of confidence among investors about the very last phase-2 extension, further underscoring the threat of a downside secondary reaction.

IV – Sector and stock prospects34 a) Stock picks in line with sector-based analysis Although we will provide more details of the charts for each of the cited stocks in our Technical Overview, here is a list that we advise buying or selling at the onset of 2010. These findings supersede the conclusions of our Active sector allocation document dated 3 December 2009.

b) Stock-picking independently of sector considerations Without the backing of strong sector-wide impetus, the chance of a successful trade using one the stocks below is much lower. Here, however, is a list of stocks with their own particular circumstances.

34 Each stock we note has its own recommended buy/sell zones, targets and a stop-loss. Should this information be missing from our website or upcoming publications (it is impossible to update our whole coverage at the same time), please do not hesitate to request essential money management information from us so that signals can be acted upon in the right way. Not all stocks are necessarily located inside optimal buy or sell zones on the same day. Likewise, a signal is voided in the event of an end target being hit or a stop-loss being triggered.

STANCE SECTOR STOCKS TO AVOID STOCK PICKS CAUTION (Pronounced or excessive outperformance)

- - -

AVOID (Underperformance emerging or underway)

Chemicals Retail Industrial Goods

Air Liquide, Akzo Nobel, Bayer, Syngenta, Carrefour, Areva, Siemens, Suez Environnement

Casino, Delhaize, BAE Systems, Tha-les, Thyssen, Vallourec

GIVE PRIORITY (Outperformance cycle emerging or underway)

Technology Utilities

Medias Oil & Gas

Logica, Nokia, SAP, Lagardère, BG Group, Technip

Alcatel, Atos, Cap Gemini, Iliad, E.ON, EDF, EDF Energies Nouvelles, GDF, Veolia, B Sky B, JC Decaux, Pearson, TF1, Vivendi, ENI, Royal Dutch, Total

POSSIBLE OPPORTUNITIES (pronounced or excessive underperformance)

- - -

STOCKS TO AVOID STOCK PICKS Daimler, Crédit-Agricole, Deutsche Bank, AngloAmerican, Randgold, Adidas, Ubi Soft, Saint-Gobain, Nestlé, Julius Baer, L.S.E., Aegon, ING Group, Cable & Wireless

BHP-Billiton, Salzgitter, Imerys, Danone, Unilever, MAN Group, AstraZeneca, Roche, Sanofi, British Land, Axa, British Telecom, Deutsche Telekom, Vodafone, Air France



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Appendix: bibliography Books Thomas Bulkowski, Encyclopedia of chart patterns, 2000, 2005 Mickaël Mangot, Les comportements en Bourse, 2004 Martin Pring, Active Asset Allocation, 2006 Martin Pring, L'analyse technique expliquée, 2003 Robert Rhea, The Dow theory, 1932 Richard Schabacker, Technical analysis and stock market profits, 1932 Article Paul F. Desmond, An exploration of the nature of bull market tops, Lowry's Report, February 2006

Analisis Tecnico

Business

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