Monday November 24, 2014 ANATOMY OF A MARKET

* Source : Reuters.

* Source : Reuters.

Hermes Index; Yearly Chart (Bullish View) “The 5-Year Cycle ” The market is witnessing a major 5-Year cycle that has begun in 1992. The first cycle was a bullish one and it took place from 1993 to 1997. The second cycle was a bearish one and took place from 1998 to 2002. Then a renewed and strong bull market ensued from 2003 until 2007, followed by a sideways pattern that took five years from 2008 to 2012. Since 2013, the market began a new 5-Year bullish cycle. This cycle was confirmed during 2013 when the EGX30 broke above the 6,000 level (around 605.0 on the Hermes Index), which was the high of the previous year. Currently we are in the second year of this bullish cycle and we are expecting the market to continue its major uptrend for the next three years (2015, 2016, and 2017). This cycle has been valid since 1992, and we expect it to continue, unless the low of the previ-ous year is violated downwards which is a very unlikely scenario to occur before 2017.

EGX30 Index; Monthly Chart (Bullish View) “Uptrend clearly confirmed in early 2014 ” The major trend is clearly up. This was con-firmed after the higher lows that the market witnessed during June-July 2013, which was followed by a higher high during November of the same year. Since we are witnessing a major uptrend, we expect the peak that lies at 12,000 to be broken to the upside. We cannot clearly say when this peak will be broken; the timing of the breakout (above 12,000) depends mainly on two things: 1- Whether the market will witness a significant correction or not, and 2– The amplitude of this correction, if it takes place. If a strong corrective move occurs, the major upward breakout will probably be postponed. The indicator that lies below the price chart is the ratio of the 10/20 months Moving Averages. This price oscillator looks bullish and is confirming the major uptrend. The stochastic oscillator, that lies at the lower panel, also looks bullish as it is moving inside its overbought territory. This tells us that the major trend is expected to continue and that major market corrections will be consid-ered as good opportunities to enter in the direc-tion of the major uptrend.

EGX30 Index; Weekly Chart (Bearish View) “Major correction expected ” The intermediate-term trend is currently witness-ing a sideways period. This trading range is relatively wide, ranging from 8,450 to 9,800. If a clear breach to the upper boundary of this trad-ing range occurs, then the EGX30 will resume its current major uptrend, where next target will be set at 12,000. On the other hand, a violation below the 8,450 support level will reverse the intermediate-term trend to down. If this happens, we will be witnessing a major correction which will take the market to much lower levels. Our first target will be around 7,700, then the target of the breakout itself will be set at around 7,000. It is important to mention though that these targets will be expected to be reached only if a violation of the 8,450 level occurs. As long as the market is trading above this support, the chance of an upward breakout remains possible. Our view, however, is more biased to the bearish side for many reasons: 1– The market witnessed a sharp decline during October 2014. The rise that followed failed to reach the previous peak, creating a lower high formation. 2– Our leading indicators are showing clear weakness on the weekly chart. This shows that buyers are losing power and are unable to keep the momentum going. 3– Volatility is high and even the senti-ment of the crowd has been volatile lately; this is one of the signs of a market top. Our bearish view, however, will be confirmed only if the EGX30 breaks below 8,450. Such a breakout will be significant on the intermediate-term picture.

EGX30 Index; Daily Chart (Bearish View) “Bulls unable to exert control ” On the short-term, the index broke its minor support (9,350) and is currently witnessing a slight rebound that is not expected to surmount 9,350. Buying power is getting weaker by time, despite that prices are struggling to move north. We believe that if significant selling pressure appears in the market, a strong decline will follow. Our minor support lies at 9,100. Those who still have exposure to the market are recommended to place their stop below this level. Any con-firmed violation below 9,100 will lead the market to lower levels, initially 8,800, followed by the major support that lies at 8,450. Note that the short-term trend is currently down after the recent minor double top that took place. Our recommendation for those who want to build up a long position, is to wait for a break above 9,350. Positions held on margin are also not recommended, given the current market risk. Those who have any positions opened on mar-gin are recommended to close all of them.

In this report, we will analyze the EGX30 from the secular trend, to the minor trend. We will also have a look on the US market because of the important effect it has on other equity markets. It is important to know and to understand where we are. Even traders who are trading the market on short-term basis need to clearly know the overall situation of the long-term, medium-term, and short-term picture. This report does not precisely give a buy or sell recommendation (we already do that in our reports), but it analyzes the current situation of our market and our expectations for the future.

* Source : Reuters.

* Source : Reuters.

Saleh Nasser, CMT Chief Technical Strategist

AbdelRahman Metwalli, CMT, CETA, CFTe Senior Technical Analyst

Mohamed Radwan Head of Equities (+202) 27393680 Essam Abd El-Hafiz Local Institutional Sales (+202) 27393687 Ahmed Abutaleb Foreign Sales (+202) 27393684

* Source : Reuters, Bloomberg, Pharos Research.

Is The USA Market Broadening?

S&P500; Weekly Chart (Strong sentiment in the market) “Will the Broadening formation put an end to the current rise? ” The S&P500 index witnessed a bearish formation from May to October 2013 that failed. The market continued its rise and reached significantly higher levels. Lately, sentiment has been strong on both the bearish and bullish sides of the coin. Since July 2014, the market has been witnessing severe declines, followed by aggressive rises. These declines and rises resulted in creating lower lows and higher highs formation - a pattern that we do not see often - which tells us that there is a lot of strong sentiment in the market. Emotions are strong and the fight between bulls and bears is very intense. The last leg of this formation is a bullish leg and the overall sentiment is currently very bullish. Will the US equity market continue its rise, or will another bearish leg follow? It is difficult to answer this question while we have these strong emotions, but it is important to understand that such volatility and severe market movements usually appear at market peaks. Watching the US equity market nowadays is important, because it has a significant effect on many parts of the world. The MENA region is not an exception. Our setup for the bearish scenario is a violation of the lows of the past couple weeks at around 2,030. If this occurs, then we will probably see a renewed downward leg, which will take the S&P500 to much lower levels. First downward target lies at around 1,975. Note that we neglected the 2,010-2,020 support area which is the previous peak, which should (by definition) serve as support. But given the current market high volatility and strong sentiment, we believe that if we violate 2,030, the ensuing decline will probably violate 2,010 an reach 1,975 as our first important target; a decline of 4.5% from current levels. If this occurs, the market will be very vulnerable to more declines. For now, we cannot talk about lower targets unless the index violates the 2,030 level. As long as we are trading above this level, odds are in favor of a continuation to the current market rise. We should not try to outsmart the market because the market at the end, is always right.