Issue #370 30 July 2010

This newsletter is written on a weekly basis to help investors understand and learn the principles of market analysis for themselves. We don’t provide investment advice, but we do aim to provide a straight talking review of the market action over the previous days with a focus on how real life analysis techniques could be applied.

Editorial: Money and Holidays

Tom Scollon Chief Editor

It is about this time of year Australians start to think hard about the looming and not too far away Christmas holidays. For many lucky ones the tough decision is whether to go local or go overseas and it appears more and more are opting to head off overseas. Yes we are lucky inhabitants in one very lucky country. The next big question for many is when to buy your US dollars because even though the USA economy maybe on the long term skids it is still the currency of choice. I recall in Cambodia a few months ago all you could get from the ATM machine was US dollars and everything was quoted in US dollars. It was the de facto local currency. The trade off when buying overseas currency is that we don’t want to buy too far ahead as the further out you go the greater the uncertainty and for this reason if you were purchasing a US dollar contract say for export you would be paying a premium. So the further out the less clear we can be about where the currency might be at a time in the future. Furthermore you don’t want to hold US dollar for too long as you don’t receive interest on US dollars even if your currency was held in a US dollar account. Mind you this is not such a big deal. Sometimes we feel more comfortable about a forward view of markets – any market whether that be commodities, stocks or currencies. Other times it is far from clear. At the moment I believe the outlook is less clear. Let’s look at the short term picture: click to enlarge And now to the bigger picture on the weekly chart: click to enlarge The near term outlook suggests there may be some softening before the next move higher. I don’t subscribe to the view that we will see 80 cents by the second half of August. But the Elliott projection just warns us some softening could be ahead. The bigger picture says we could see almost parity for Christmas – what a bonanza that would be for travellers - and buyers of imported goods for Christmas. But much could happen between now and then. A pall of darkness still hovers near Europe. Enjoy the ride Tom Scollon Chief Analyst

From the Floor: Gann Price Targets, Fundamental Analysis & Elliott Wave

John Jeffery

By employing technical analysis a trader can create certain price targets which will go some way to help confirm or reject an Elliott Wave count. In addition to this, it is very easy (with the appropriate tools) to take a non technical indicator and use it to attach further credibility to the trade set up. This article will use an integrated approach to show how a reversal trade was spotted on Microsoft (MSFT:NASD) and explain how Gann analysis can be combined with Elliott Wave and Fundamental analysis to help pick better trades. click to enlarge By running a routine scan in early July, a ‘plain vanilla’ Elliott Wave 5 (reversal) trade makes it on to the short list. With so many trades regularly presenting themselves, the skill has always been to pick which Elliott Wave trade is most likely to succeed. There are some excellent courses to help in this regard, but the best and least expensive is the TradingKey course, which comes with a complete checklist for recognising and taking profitable trades. In the instance described here, Gann analysis also helps confirm the possibility of a reversal, reinforcing the fact that every piece of trading education can be used in combination for better results. There are no right or wrong methods in trading, just winning and losing! click to enlarge Gann suggested that ranges repeat regularly in the action and reaction of price and the ‘Wave Extension’ tool in your ProfitSource (or Integrated Investor) is perfect for measuring this. Looking at the first range down on MSFT (April to May) and projecting that range again from the double tops in June it is evident that the range has repeated (formulating a price target of around $22.70). A student of Elliott would also note that the 5th Wave is sitting at 61% extension of the W1-W3 range (an important Fibonacci level). On the smaller scale, the two double tops retrace close to the 200% price target which a technical analyst would expect. Using just technical analysis only gives the trader part of the total picture and that is why more and more people are turning to Integrated Investor and the skills taught in the Masterkey. By checking the fundamentals it becomes pretty obvious whether or not the rest of the market will find a reason to buy into MSFT. click to enlarge The blue line on the lower chart shows the current Price Earnings ratio – basically a measure of how much investors are willing to pay for the earnings of the company (again, something you can learn more about in the MasterKey. The historical ‘value’ of MSFT is given by the red line. As the current value drops below the historical value – there’s opportunity! On its own this would be enough to make an investor take note but put into the context of the technical analysis described above, and a savvy trader will be getting excited. All that needs to be done now is to look for an appropriate entry trigger and implement the usual risk mitigation practices – again, precisely what is taught in the TradingKey. Stay Sharp, John Jeffery

Market Review: Trading Technicals and Elliott Wave

Lachlan McPherson

Many of those readers new to HUBB are currently using the HUBB Investor software. We are constantly receiving feedback from users commending the ease of use and effectiveness of charting with this FREE investment software. Whether you are a long term investor, a short term trader or completely green to the share market, this the best tool to cut your teeth on - in what is a very large and exciting path to becoming successful in the markets. What many don’t know, is there are several paths you can take, to further your knowledge in both trading and investing, as well as getting the most from your trading software. Today we will talk about one of two channels that you, as a long term investor or a trader may take on your path to self directed success. The first is the trading path, which consists of the Elliott Wave Webinar. The second channel is our fundamental investment channel, designed for the long term investor. More on this next week. The Elliott Wave Webinar: The Elliott Wave webinar is a two-part webinar covering not just Elliott Wave, but basic technical analysis and key trading strategies to get you underway as a trader with HUBB. We split the webinar into two one hour sessions for a number of reasons. The first is simple because there is so much content to cover to allow students to build the foundations required to be a successful trader. Technical Analysis requires more than a simple Elliott Wave pattern or moving Average pattern on a daily bar chart. This is why the most successful Elliott Wave traders often spend years mastering their trade. These traders have a sharp understanding of just a few major indicators which can achieve consistent results and in turn, grow their trading account. The additional indicators we cover in the Elliott Wave Webinar are MACD, Oscillators and Fibonacci Ratios alongside basic technical analysis to achieve consistency in results. These indicators are all a trader needs in their tool kit to grow a very healthy trading account. The education doesn’t stop there... In session two, we look at LIVE trade examples taken during session one, we than analyse these examples and monitor profits and success rates of our Elliott Wave Analysis. This gives students an opportunity to view the success of Elliott Wave in a live trading environment, as well as experience the process we go through to filter from literally thousands of trades on US and Australian markets. We also look at pre-computed scanning functionalities using ProfitSource and applying Elliott Wave Analysis as well as demonstrating key trading systems that you can use in your day to day trading and analysis. So far, the Elliott Wave Webinar has given hundreds of students the guidance and motivation they need to get their trading accounts moving in the right direction. Whether you’re green to the markets or a seasoned technical analyst, the Elliott Wave Webinar provides a wealth of knowledge for all traders young and old. Seats are limited so email Ben Shaw and enrol in the next Elliott Wave Webinar today. Happy Trading Lachlan McPherson

Fundamental Focus: The Magic Box Part 2

Andrew Page

Last week we saw how the value of a cash producing ‘magic money box’ was something that was difficult to ascertain. Nevertheless the value of the box, purchased at $1,500, was certainly evident when one looked at the income that was produced, but the question posed was: could you not have done better with a higher yielding, yet safer, investment in a bond. Consider the following... A seller’s market For some bizarre reason you feel as though you no longer want to own this box (it would be like selling a goose that lays golden eggs). In a fit of temporary insanity, you place the item on eBay along with a certified history of its production. In effect, because of the cash you have already received, you could sell it for only $921 and still break even. The bidding process sees your magic box sold for $3,000, and you couldn’t be happier. Not only have you doubled your initial outlay, but you have received $579 in cold hard cash along the way! That’s a total investment return of $2,079 or 140%, which is great for a five year time frame. With the benefit of hindsight, we can see that the initial cost of $1500 was an absolute steal; you could well have paid much more than that and still done well. Such is the worth of assets that work in perpetuity and that offer rising income returns. Now you can see why even a higher yielding bond or term deposit doesn’t even compare. Imagine you instead invested in a bond paying out 9% per annum. That is $135 every year for 5 years, giving you $675 in total. That’s more than what the box produced, but at the end of the period you only get back the $1500 you initially invested. That’s a total return of 45%, well away from the 140% gain received from the magic box. Yield can be a very deceptive thing, and often acts to mislead investors. This is a key concept of the DividendKey course. You could, however, argue that it is unreasonable to expect the punters on eBay to pay $3000 for the magic box, but I don't think so. Consider the following... Seller’s remorse Should the new owner receive $135 in the first year that will represent a yield of 4.5%. And chances are that the box will continue spitting out cash over time, indeed ever increasing amounts of cash, and this will not only provide a growing income return but it will ensure the box itself grows in value. Fast forward another five years and assume the same growth in income (approximately 6%), and the eBay buyer would have a total income return of $763. Plus, if they sell the box to someone else expecting a similar initial yield of 4.5%, they could expect to sell the box for over $3800. Hardly reason to be disappointed, and certainly you could say that they paid a fair price for a quality asset. So it would be understandable that, having sold the box, you would feel some remorse. You could have just kept it under the bed and continued to collect your cash. As a matter of fact, should the output of the box continue to appreciate at the same rate, you would be receiving about $182 in another 5 years hence, and could have every collected a tidy $1,511 in total over the total ten year period. In effect, your original capital would have been returned to you and each year after that you would be getting money for nothing; money that would continue to come in at an ever increasing amount. Next week But what is the relevance of all of this? Of what use is the discussion of a magic box to investors in the real world? Next week, the third and final instalment will demonstrate that you too can buy your own magic money box, and show you why DividendKey students are so enamoured with things that produce steady and rising cash flows. Make the markets work for you Andrew Page