Grand Supercycle Degree

ROBERT D. MCHUGH, JR., Ph.D. FINANCIAL MARKETS FORECAST & ANALYSIS A Publication of Main Line Investors, Inc. Address: Email Address: P.O. Box 1026 Issue No. 261 [email protected] Kimberton, PA 19442

SUMMARYSUMMARY OF OFINDEX INDEX DAILY DAILY CLOSINGS CLOSINGS FOR FOR WEEK WEEK ENDING ENDING JANUARY SEP 12, 13,2003 2005 Dec 30 Yr Treas Date DJIA Transports S&P NASDAQ NASDAQ NASDAQ Dec 30Bonds Yr Treas Date DJIA Transports S&P COMPQ 100 Bonds Sep 8 9 2 9 1 1 JanSep 6 9 10959.31 9 4214.28 2 1 1285.45 1 2305.62 1 1734.99 114^03 JanSep 109 11011.90 9 4238.34 2 1 1290.15 1 2318.69 1 1741.90 114^04 JanSep 10 11 11011.58 9 4218.69 2 1 1289.69 1 2320.32 1 1744.02 113^17 JanSep 11 12 11043.44 9 4199.29 2 1294.189 1 2331.36 1 1758.24 113^06 Jan 12 10962.36 4148.38 1286.06 2316.69 1747.35 113^26 Jan 13 10959.87 4147.10 1287.61 2317.04 1746.78 114^22

Summary of McHugh’s Proprietary DJIA/S&P 500/NASDAQ Buy/Sell Signals

Fullest Extent of Index Term Signal Date Last Given Index Move Since Signal

Purchasing Power Indicator DJIA/S&P Short Buy Oct 31, 2005 DJIA Up 607 Points

DJIA 14 Day Stochastic DJIA Short Buy Jan 3, 2005 DJIA Up 200 Points

Secondary Trend Indicator DJIA/S&P Interm Neutral Oct 31, 2005 DJIA Up 520 Points

NDX 14 Day Stochastic NASDAQ 100 Short Sell Jan 12, 2005 NDX Down 9 Points

NDX Purchase Power Indic NASDAQ 100 Short Buy Jan 3, 2006 NDX Up 81 Points

RUT Purchase Power Indic RUT Short Buy Jan 3, 2006 RUT Up 27 Points

Gold Bugs 30 Day Stochastic HUI Short Buy Jan 3, 2006 HUI Up 11 Points

HUI Purchasing Power Indic HUI Short Buy Dec 22, 2005 HUI UP 40 Points

Note: Due to the Martin Luther King Holiday Monday, our publishing schedule next week will be a Midweek Wednesday, and a Weekend on Saturday. We will also publish a special update for any day that our signals change.

The Dow Industrials rose 84 points by Wednesday, then turned lower on our latest phi mate turn date, finishing up 56 cents for the week. More on that later. NYSE volume came in Friday at 96 percent of its 10 day average. Down volume was 55 percent, with declining issues at 45 percent. The McClellan Oscillator remained above zero at 74.65, but is down from its recent extreme high of 194.1 recorded on January 9th. NYSE New 52 week Highs were 120, above New Lows at 12. The VIX was essentially flat at 11.23. Our Intermediate-term Secondary Trend Indicator remained in neutral territory (which it has been since May 2005) at positive + 13.00.

Visit Our Website At www.technicalindicatorindex.com

Page 1 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

The Next Phi MateTurn Date in the Dow Jones

Industrial Average is 2/6/06 Based Upon

Fibonacci Ratios From 1/14/2000 The Most Recent phi Mate Turn Date Hit Exactly on a .618/.382 Ratio, January 11th, 2006's Top

13000 4/29/02 is 573 trading days from 1/14/00; 12/30/05 is 1,500 days from 1/14/00, a .382/.618 Ratio 12000 1/14/00 9/12/05 9/6/00 5/21/01 7/28/05 1/11/06 4/11 2/11/04 3/4 Top 11000 1/4/02 3/19 5/17/02 6/23 10/14 8/22/03 1/14/03 9/19 1/24 10000 3/24 3/7/00 10/18 4/29 11/6 6/17/03 8/12 10/25 12/30 1/29/02 3/22/01 11/27 11/20/03 Low 9000 4/20/05 3/21 9/30/03 8000 9/21/01 7/23/02 12/27 7000 10/9/02 3/11/03 6000 1/11/2007 is 1507 trading days from 1/14/00, and 9/30/03 is 932 TD's from 1/14/00, a .618 to .382 phi ratio. 9/12/05 is 1423 days from 1/14/00 and 878 days from 3/19/02's top, a .3829 to .6171 phi golden ratio 1/12/2000 1/12/2002 1/12/2004 1/12/2006 Closing Prices and Trading Days -- Chart Updated as ofJanuary 12th, 2005

Since the Dow Industrials hit their all-time top on January 14th, 2000, every single significant top or bottom has occurred a Fibonacci phi golden ratio with the number of trading days from that date and another top or bottom, using closing prices. These pairs of dates are referred to as phi mates. Because this has occurred in the past, we use this analysis to project likely turn date periods in the future. Because we are moving farther away from 1/14/00, the phi percentages are working out for more than one date, thus we now are identifying phi mate turn windows of days. For those of you un- familiar with Fibonacci numbers, they are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 610, 987, etc… The next number in sequence is equal to the sum of the immediate prior two, and the ratio of each of the prior addends to the sum is either .382 or .618. The golden ratio is of course .382 to .618, which makes this series and these relationships significant.

In issue no. 254, we noted that the next phi mate turn date window was scheduled to arrive from December 21st through December 29th +/- a day. In fact, the Dow Industrials hit a closing low on the last trading day of the year, December 30th at 10,717.50. In issue 259 we presented the phi mate turns for 2006, and noted the next turn is due on or with a day or so of January 12th, 2006. In fact, a closing top was reached on January 11th, 2006 and equities sold off hard for the first time in 2006 on January 12th. Here’s the math for our latest successful phi mate turn date: 1/11/2006 is 1,507 trading days from the Dow Industrial’s all-time top of 1/14/2000. Its phi mate is 9/30/03’s bottom, which came 932 trading days from the 1/14/00 all-time top. 1/11/2006 is 575 trading days away from 9/30/03. 932/1,507 = .618, and 575/1,507 = .382. The next scheduled phi mate turn has the best mathematical fit on February 6th, 2006. Here’s the math: 2/6/06 is 1,524 trading days from 1/14/00. Its phi mate is 10/14/03’s high, which is 942 trading days from 1/14/2000. February 6th, 2006 is 582 trading days from 10/14/03. 942/1,524 = .618, and 582/1,524 = .382.

Page 2 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

The window of days around February 6th where the percentages .618/.382 work runs from Feb- ruary 2nd, 2006 to February 7th, 2006, plus or minus a day or two. There is no Fibonacci cluster for the phi mate turn.

The next phi mate turn date after the February 6th window is late February, 2006.

While we have had amazing success projecting turns using phi mate analysis, we are not able to determine whether those turns coming are going to be tops or bottoms, or whether or not they will be major or minor. That is left to our other TA tools. Further, tops and bottoms are not limited to phi mate turns. Some new tops or bottoms can arise that will have phi mates in the future. That is what we’ve seen since 2000.

* * *

If you are an expert on Elliott Wave, you might want to fast forward to the chart on page 6 while we go over some history, philosophy and basics of EW on pages 3 through 5 for our newest subscribers.

One of the technical tools we use at www.technicalindicatorindex.com is Elliott Wave analysis. Its founder, Ralph N. Elliott, was an accountant by trade, who in the 1930’s noted that stock market prices form repetitive patterns he called waves. He became quite ill and took that bedridden opportunity to study the Dow Jones averages since 1896, the results of which he originated as the Elliott Wave Prin- ciples. His body of work was expanded upon through the years by such noted technical analysts as A. Hamilton Bolton of the Bank Credit Analyst, A.J. Frost, Richard Russell, Robert Prechter, Glenn Neely, and Zoran Gayer.

Elliott Wave is a measure of mass human activity as applied most commonly to the financial markets — although evidence is being gathered by Robert R. Prechter, Jr. that the principle applies to socio patterns as well (see his book The Wave Principle of Human Social Behavior and the New Science of Socionomics, New Classics Library, 1999). Elliott Wave confirms what God said through the writer of Ecclesiastes, “That which has been is that which will be, and that which has been done is that which will be done.” The issue here is one of cycles, that all of nature repeats itself, which is especially true of the markets. These repetitive patterns can be recognized, and to some degree of success, antici- pated.

In a gross oversimplification, in a nutshell Elliott Wave analysis goes like this: Markets reflect all information, and all knowledge available to man. They have a language of their own, and com- municate where they are going next. Elliott Wave is one of many languages the markets use to tell us where they are headed next. Market moves are not reactive to news announcements, but rather inde- pendent of news. News comes as a result of the position of the Elliott Waves — the psychological state of man at that particular time. How news is interpreted depends upon the wave. If the wave formation indicates a Bullish move in progress, then bad news will be ignored or reacted to in a positive way, i.e.., markets will go up anyway. And, if the wave pattern is Bearish, then good news will be ignored or reacted to negatively — markets will sell off. Thus, it is helpful to investors if they are aware of the Elli- ott Wave position markets find themselves in, and which wave pattern is next expected to arrive.

Page 3 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

Again, oversimplifying, and using the stock market as an example, in Elliott Wave analysis equity prices move up or down with the primary trend impulsively. These impulsive (dramatic) moves come in stair-step fashion, five waves at a time. Waves 1, 3, and 5 progress and waves 2 and 4 regress (or correct). The total move in the direction of the primary trend progresses because the sum of waves 1, 3, and 5 exceeds the sum of waves 2 and 4. Waves 1, 3, and 5 move in the direction of the primary trend, while waves 2 and 4 can either move in the opposite direction or sideways.

There are five-wave counts at a smaller degree inside each of waves 1, 3, and 5. There are three- wave counts at smaller degree inside each wave 2 and 4. The five-wave counts are marked by numbers, 1 through 5. The three-wave counts are marked by letters, A-B-C. Inside the sub-waves A and C are five-wave waves of even smaller degree. Inside the B wave is a sub-wave set of three waves. To recap, waves 1, 3, 5, A, and C are themselves made up of five-wave lower degree waves. Waves 2, 4, and B are built from smaller degree three-wave patterns. Waves 1, 3, 5, A, and C, push the direction of prices forward and waves 2, 4, and B correct or reverse the progress of the other waves. An exception is that if a wave 5 is occurring inside a Triangle, then it will have a three-wave subset. Also, sometimes wave A will have a three-wave subset, not five, for example when part of a 3-3-5 Flat pattern.

Degrees of waves are distinguished based upon the time period they cover. Very long-term degrees of waves could cover hundreds of years, such as the Grand Supercycle degree. Very short-term degrees of waves might only cover a few weeks, or days. Elliott Waves can even be broken down and identified intraday by hour or minute.

There are certain rules that must not be violated for an accurate Elliott Wave count. There are three cardinal rules: 1) Wave 2, when it corrects wave 1, may never move prices beyond the starting point of wave 1. 2) Wave 3 may never be the shortest wave. 3) Wave 4 must never enter the price territory of the same degree wave 1. If any of these rules are violated, then the Elliott Wave count is wrong.

In addition to rules, what is extremely helpful is knowing the different personalities of each wave. Knowing personalities typical to each wave can sometimes clue us as to where we are in the count when it otherwise is unclear. I’ll cover just a few that I’ve noticed. 1) Wave 3’s are usually (not always) the most dramatic, most powerful, and extend the furthest. Usually. They usually show panic buying or selling where you see prices move almost vertical. Or, if prices move over long periods of time without corrections, oftentimes it means we are in a wave three of some degree. It might be a wave three inside a higher degree wave 1, 3, 5, A, or C. 2) Ending Diagonal patterns (Rising Bearish or De- clining Bullish Wedges are often seen in wave 5’s. These have a subset of five waves, each with its own subset of three waves. 3) Wave twos often reverse so sharply, and so much of the previous wave 1’s move, that it confuses the Elliottician as to whether in fact the trend has really changed or not. Retrace- ments of as much as 61.8 percent or 78.6 percent are not uncommon in wave twos. 4) Wave fours are often lackluster, more sideways or choppy than twos (not always). Often they will form triangle patterns. Wave B’s are often similar to fours. 5) When wave three’s extend, oftentimes waves one and five will tend to equality or some Fibonacci ratio of each other that lends a sense of proportionality to the wave pattern such that waves one and five look somewhat similar. 6) If wave 2 retraced (zigzagged) a measurable percentage of wave 1 — was not sideways — then wave four will likely be more of a flat or sideways move and vice versa (the principle of alteration). 7) After a sharp extended rally, which probably was a wave three, it is not uncommon for a sharp reversal to be the first of a five-wave

Page 4 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

sideways triangle that fakes out Elliotticians, giving the false illusion of a wave one reversal, but in fact is the “a” wave in the opposite direction of an a-b-c-d-e triangle, a corrective wave four sideways pattern, with another impulse wave five to follow in the same direction as the preceding larger degree extended wave.

Once we’ve seen a 1-2-3-4-5 sequence that looks complete, next we can expect a reversal of that five-wave impulse wave’s progress in the form of an A-B-C correction or partial reversal. Once both of these sequences have completed together, for example, once a 1-up, 2-down, 3-up, 4-down, 5-up, A- down, B-up, C-down sequence has completed, then we can expect this to repeat itself.

For a terrific book to study the elements of Elliott Wave, I suggest Elliott Wave Principle by Robert R. Prechter, Jr. and A. J. Frost, New Classics Library, 1978-2001. For a more advanced book on Elliott Wave, I suggest Mastering Elliott Wave, by Glenn Neely with Eric Hall, Windsor Books, 1990.

The charts on pages 6 and 7 show the Big Picture, the long-term Elliott Wave counts of largest degrees for the Dow Jones Industrial Average. Page five covers from 1900 to now, and page 6 zones in on the period from 1960 to now. EW is a bit like owning a compass. It is a terrific navigational tool to help us get our bearings of where the markets have been and where they are in all probability headed. The chart on page 5 (courtesy of www.stockcharts.com) shows the five largest degrees of trend. Robert Prechter’s bestseller, Conquer the Crash, John Wiley & Sons, Ltd., 2002 does a great job taking us back to the long ago, faraway galaxy origins of the largest degree Elliott Waves (www.elliotttwave.com).

On the next page we see that the largest degree wave identified is the Grand Supercycle. For this degree we use Brownish-red large Roman Numerals with brackets. Wave {1} peaked in 1718. Wave {II} down completed in 1784. Wave {III} up is the major top what we expect to complete soon. The next largest degree of trend wave is the Supercycle wave, denoted by large purple Roman Numer- als with parentheses around them.

The Supercycle wave began in 1784 (the start of Grand Supercycle {III}. Supercycle wave (I) up completed in 1830, Supercycle wave (II) down completed in 1860, Supercycle wave (III) up completed with the stock market crash of 1929, Supercycle (IV) down included the 1929 crash and lasted through 1932. The last leg of the Supercycle wave, (V), should be ending within the next month or so, in early 2006. The next largest wave degree, a.k.a. the Cycle degree wave, began in 1932. Its first leg up finished in 1937. A corrective Cycle degree wave II down (denoted by large Roman numerals in red) completed in 1942. Cycle III up finished in 1966. Cycle degree IV down was a somewhat sideways affair, choppy, and ended in 1974. The greatest Bull market of all time, Cycle degree wave V up, should conclude soon — is already in, or within days, weeks, or at most a few months. The next largest degree Elliott Wave in U.S. history is the Primary degree wave. This showed up as a 1-2-3-4-5 sequence inside every larger degree mentioned to this point, and repeated each time there was an odd number wave of Cycle degree. Primary degree (1) up of V up (denoted in dark blue) began in 1974 and completed in 1976. Primary degree (2) finished in 1982. Here’s where confusion reigned recently, and opinions differed (and still differ) among Elliotticians. Primary degree (3) was thought by many to have ended in 1987, with primary degree (4) being the 1987 crash, and primary (5) ending in 2000. We felt differently and stated so back in issue no. 111, a year ago.

Page 5 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

The Big Picture Elliott Wave Long-term Count in the Dow Industrials 1900 to 2006

5 of (5) of V of (V) of {III}

(3) {III} Grand Supercycle Degree (from 1718) 5 (V) Supercycle Degree (from 1932) (4) V Cycle Degree (from 1974) (5) Primary Degree (from 2002) 5 Intermediate Degree (from Oct 2004)

4 1 III (1) (5) B 2 (3) A (2) C (III) 1929 (4) IV

I (1)

(2)

Logarithmic Scale

(IV) 1932

We believe the move up from October 10, 2002 argues that the 2000 top was really only primary degree (3), and that the choppy sideways to down move from January 2000 through October 2002 was primary degree (4) down. The impulsive thrust up through 12/2/2002 was Intermediate degree wave 1 — the first of five legs — of primary degree wave (5) up. That was followed by an Intermedi- ate degree corrective wave 2 down into March 2003 when the Iraq war started. Intermediate 3 of (5) was a huge impulsive rally that carried prices to a top on February 11th, 2004. Then we saw a double zigzag correction for Intermediate degree wave 4 that took the Dow to a low on October 25th 2004. Since October 2004 we have witnessed an Ending Diagonal Triangle for Intermediate wave 5.

Page 6 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

The Big Picture Per the Long-term Elliott Wave Count in the Dow Industrials 1960 to 2006

5 of (5) of V 5 of 5 of (3) 3 3 1 4 2 4 (4) Oct 2002

3 1

2 Minor Degree

4 Stock Market Crash of 1987 Cycle Degree 1 III Primary Degree (1) 2 Intermediate Degree

(2)

Clearly we are approaching a major top for all equities, and that further supports our view that the top in 2000 was only primary degree wave (3) up, not (5). The NYSE, Russell 2000, Trannies, and several international and other U.S. indices have all made new all-time tops recently. The Dow is within striking distance of one. The S&P 500 and NASDAQ indices are far from confirming, however this sort of non-confirmation among major indices is to be expected at a long-term historic top. In fact, Ending Diagonal Triangles have cropped up all over the place, and they are reliable termination patterns.

Page 7 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

(3) 5 of B B e (5) X a X 3 c b x b d a c a b A c, 4 C B 1 Alt. c d e A

The DJIA’s 2000 to 2002 Down-leg Note the Bullish Divergence at the End of the Primary Was an Extremely C Rare Triple Three Degree wave (4) Decline Wave Pattern (See Neely’s A 2 Between Price and the MACD.

Mastering Elliott Wave, page C of (4) 8-15) for Primary Degree (4)

The above chart shows the Elliott Wave labeling for the Dow Industrials since January 14th, 2000. The choppy decline from then through October 10th, 2002 is an extremely rare Triple Three wave pattern. Glen Neely identified such a pattern in his book, Mastering Elliott Wave, page 8-15. What is interesting about this pattern is that as it approached final descent, prices diverged for a year with its Moving Average Convergence Divergence (MACD). We annotated that divergence with red arrows above. In other words, the approaching bottom was foretold months earlier.

Had January 14th, 2000 been the wave (5) of V, we should have expected the rally from Octo- ber 2002 to be shorter in duration. In fact, it looked like a normal corrective rally of the decline from January 2000 through October 2002 until February 11th, 2004’s top. That should have been it — right there — for the rally if it was simply a correction of a new Cycle degree Bear market from 2000 — in- stead of being an extension of the Bull market from 1974. The first clue something else was happen- ing was the choppy nature of the decline from February 2004 through October 25th, 2004. There was simply too much overlap to be a reversing wave 1 down of (3) down within a new Bear market. Then, the sharp election rally from October 2004 through December 2nd, 2004, followed by a new high on March 7th, 2005 clarified — for us anyway — that this was in fact a wave (5) up. The final fifth of a long-term rally can truncate. So it doesn’t matter whether or not the Dow Industrials hit a new all- time high in 2006. The pattern is clearly an Ending Diagonal Triangle, and they often end in spikes above the upper boundary at the very end of the move. So, the Dow could truncate and fail to exceed its January 2000 top, or it could spike into a “throw-over,” new all time top, and still be following the normal pattern for these terminating patterns — could still be wrapping up a Cycle degree wave V historic top.

Page 8 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

Alt. a b c of c d e

c, c, e of 5 of (5) of V

c, a a c, a a c, y , c b a b e, w b b a c b b a a b a a b c, x d c, d A Decisive Break Below b the Lower Boundary of c, b the Rising Bearish Wedge, Below 10,300, 4 Would Confirm a Major Intermediate-term Trend Change Down

MACD Rolling Over

Here’s why Bulls are not likely to see anything like they saw from 1982 through 2000 again for many years to come: The rally from 1987 to 2000 happened during three degrees of trend of wave threes up — all at the same time. Remember, we characterized wave threes as the most dramatic, ex- plosive, longest-lasting moves. Well, in the 1990s, we had an Intermediate degree wave 3 inside a Pri- mary degree wave (3), inside a Grand Supercycle degree wave {III}. Grand Supercycle {IV} down is next, taking all lower degrees of waves with it. All the PPT market intervention suspected over the past three years has only served to postpone — not eliminate — the day of reckoning.

Above we see a close-up of this final termination pattern, the Rising Bearish Wedge in the Dow Industrials. January 11th’s top is Micro degree wave a-up of an eventual a-up, b-down, c-up. The c- up move should be it for this Bull market rally from October 2002. There is an outside chance that where we have marked Minor degree e will in fact only be Minor degree wave c. That alternate count suggests the Dow could rally into late February — maybe March before turning over in earnest.

At the top of the next page we show an even closer view of the Dow. The current decline is a Micro degree wave b, a sub-wave of Minuette c up. Within the construct of that wave b down, we see the first leg is complete, Submicro degree {a} down, and {b} up is unfolding now. To follow would be a wave {c} down to complete b, then a rally into a final top.

The bottom chart shows a 10 minute bar chart of the DJIA from Monday in order to capture the sub-waves of small degree playing out here.

Page 9 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

c, c of e of 5 of (5) of V

a c, a b b

a c, b

a Wave b down formed an a-b-c, 3-3-5 Flat. The final wave c up b to a major top is c, d about half way to completion.

c of c {ii}

{i} {iv}

{c} of {b} {a}

{ii}

{b}

{v} of {a} {c}, b

Page 10 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

The Elliott Wave Long-term Big Picture in the S&P 500 1960 to 2006

5 of (5) of V 5 of 5 of (3)

v, 3 B 3 4 4 A 1 iii 2 iv C, (4)

ii Minuette Degree 3 1 5 2 3

4 4

1 Cycle Degree 1 Primary 2 Minor Degree III Degree (1)

2 Intermediate Degree (2)

The long-term view of the S&P 500 is similar to the Dow Industrials with a few exceptions. Notable is that the decline from 2000 to October 2002 is a clean A-B-C Primary degree (4) down, not the complex Triple Three the DJIA formed. Also notable is that the S&P 500 fell 50 percent from 2000 through 2002 and has only made up a little over half of this loss in five years. It remains 17 percent below its all-time high and likely is not going to get there for some time. We believe either the Grand Supercycle top is in now, or will be in early 2006. This leaves the S&P 500 with a truncated 5th wave Primary degree top, diverging with several other indices — a Bearish omen one would expect at an historic centuries-long top.

Page 11 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

v of 5 of 5 of (5) of V

iii v, 3 b v, 1 iv iii 5, iii 3 i b a i 1 4 iv ii 3 a i iv 2 c, 4

c, 2 ii

Above we see the S&P 500 sports a similar pattern as the Dow Industrials, but its Rising Bearish Wedge started a bit sooner, in August 2004. The S&P 500 is completing a five-wave count for minor degree wave 5 up, has finished Minuette subwave iv down, has completed Micro degree waves 1 up, 2 down, and wave 3 up of an eventual five-wave up, down, up, down, up sequence for wave v of 5. At the top of the next page we show the subdivisions of the S&P 500 on a 60 minute bar chart since mid-December, 2005.

At the bottom of the next page is the daily chart of Trannies from November 2004. The Tran- nies are completing, mind you, finishing, an intermediate degree 5th wave of primary (5) up. Trannies have tracked the {a}-up and {b}-down of an {a}-{b}-{c} final rally leg for the Megaphone topping pattern shown above, needing only one more thrust higher to complete a major top. The alternate labeling considers that {c} up is over, therefore Trannies have topped. Here’s the thing about the Trannies’ Megaphone pattern: Afterwards, it retraces more than 100 percent. It means Trannies are going to drop under 3,377. Further, the minimum downside target is equal to the widest portion of the pattern, subtracted from the breakout point. That suggests Trannies are heading back under 3,000. The Micro degree wave c up has gone parabolic, which means it will come back down at a steep angle.

Page 12 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

5, v, of 5 of 5 of (5)

{b}

{a} {c}, 4 1 5, iii {b} {c}, b {a} Wave iv down was 2 {a} an Elliott 3-3-5, a-b-c Flat Pattern, Being Followed By a {2} Wave v Thrust {b} To a Top. Waves 1 up and 2 {c}, a {1} {4} down and 3 up are complete, with wave v underway. {3} {5}, c, iv

RSI Neutral

{c}, c of 5 of 5 of (5)

{a}

{b} 3 b a Alt {c} a x a c, 3 c b 1 b b a b

a 2 c, 4 c, 4

MACD Falling

Page 13 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

Percent Of DJIA Stocks Above 30 Day MA % STKS DJIA When More than 80% of DJIA Stocks are Above Their 30 Day Moving Average, The > 30 DMA DJIA is Overbought and Likely to Reverse in Near Term. Under 15% indicates Oversold. 11500 200 January 13, 2006's Indicator is Approx. 53.33% 180 11000 160 10500 140 DJIA Bearish Divergence 120 10000 100 Bullish Divergence Overbought > 80% 80 9500 60 9000 40 20 8500 30 DMA Oversold < 15% 0 1/13/2005 4/13/2005 7/13/2005 10/13/2005 1/13/2006

Percent Of DJIA Stocks Above 10 Day MA % STKS DJIA When More than 80% of DJIA Stocks are Above Their 10 Day Moving Average, or > 10 DMA Less than 15% are Above, The DJIA is Likely Approaching a Short-term Reversal. 11500 200 January 13th, 2006's Indicator is Approx. 56.67% 180 11000 DJIA 160 10500 140 120 10000 100 Overbought > 80% 80 9500 60 9000 40 20 10 DMA Oversold < 15% 8500 0 1/13/2005 4/13/2005 7/13/2005 10/13/2005 1/13/2006

Percent Of DJIA Stocks Above 5 Day MA % STKS When More than 80% of DJIA Stocks are Above Their 5 Day Moving Average, DJIA > 5 DMA 11500 The DJIA is Very Short-term Overbought. Under 15% indicates Oversold. 200 January 13th, 2006's Indicator is Approx. 43.33% 180 11000 160 10500 140 DJIA 120 10000 100 Overbought > 80% 80 9500 60 9000 40 20

8500 5 DMA Oversold < 15% 0

1/13/2005 4/13/2005 7/13/2005 10/13/2005 1/13/2006

Page 14 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

14 Day Stochastic DJIA % STKS DJIA A Short-term Measure of Momentum Changes Comparing the Percent of > 14 DMA DJIA Stocks AboveTheir 14 Day MA With a Slower 5 Day MA of Same 11500 200.00 For January 13th, 2006: Fast 66.67 Slow 73.33 . Buy Signal Sell Signal DJIA 180.00 11000 A Buy Signal Was Generated 1/3/2006 160.00

10500 140.00 120.00

10000 100.00 Overbought > 80% 80.00 9500 60.00 40.00 9000 20.00 Oversold < 15% 8500 0.00

7/13/2005 9/13/2005 11/13/2005 1/13/2006

The percent of DJIA stocks above their 30 day moving average remained at 53.33 Friday, and the Bearish Divergence between it and price remains intact. The percent of DJIA stocks above their

10 day moving average fell to 56.67 from 66.67, without much price damage. The overbought condition of the market may get worked off with a minor correction here. The percent above their 5 day remained the same at 43.33.

Above we see the DJIA 14 day stochastic remains on its “buy” signal from January 3rd, however last night we pointed out that if you care to interpret yesterday’s reading as a “sell,” you could as the Fast fell below the Slow by about the amount we need to consider it a “decisive” cross-under. It technically missed the mark by less than a point, so we are keeping it officially on a “buy” for now.

Friday’s Fast measure came in at 66.67, below the Slow at 73.33, but not as far below as Thursday.

At the top of the next page, the S&P 500/DJIA Purchasing Power Indicator TM came in Friday at 87.78, and would need to drop under 83.30 to generate a “sell.” Thus both key trend-finder indicators remain on a “buy,” at least for now. Any decent selling next week could push this to a “sideways” signal.

At the bottom of the next page we see that the S&P 500 versus the 10 day average NYSE Ad- vance/Decline Line shows no divergences at this time.

Page 15 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

S&P/DJIA Purchasing Power Indicator TM

S&P 500 PPI is a Short-term Momentum Measure of Purchasing Power, Generating Buy and Sell PPI Signals When Changes Suggest Sustainable Multi-Week Moves are Likely. 1300 120 The PPI Issued a "Buy" Signal on October 31st, 2005 1280 1/13/06's PPI 87.78 110 Sell Signal 1260 Buy Signal S&P 500 100 1240 90 1220

NYSE 10 Day Moving Average Advance/Decline

Line vs. the S&P 500 NYSE S&P 500 Oftentimes Trend Reversals are Forew arned By Bullish and Bearish Divergences A/D Betw een the NYSE 10 Day MA Adv/Dec Line and the Prices of of Equities. 1350 3000

No Divergences at this time. 2500 1300

2000 1250 1500 1200 S&P 500 1000 1150 500 1100 A/D 0

1050 -500 Bullish Divergence Bearish Divergence 1000 -1000

8/13/2005 9/13/2005 10/13/2005 11/13/2005 12/13/2005 1/13/2006

Page 16 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

The Dow Industrials vs. The 10 Day Average CBOE

Call/Put Ratio DJIA Call/Put Typically, Major Bottoms Occur When Ratio is Below 1.0, Tops When Above 1.4 Ratio 12000 The 10 Day Call/Put Ratio 1/13/2006 is at 1.41 2.4

11000

2.2 Failure Here is an Aberration 10000 2

9000 1.8 8000 1.6 Tops Above Here

7000 1.4

6000 1.2 Support at 1.20 5000 1 M ajor Bottom s Occur Be low He r e 4000 0.8 1/13/2002 1/13/2003 1/13/2004 1/13/2005 1/13/2006

Above we see that Bullish sentiment has pushed the 10 day average CBOE Call/Put Ratio to an extreme Bullish reading at 1.41 on Friday. This creates a potential Bearish set up as we will get a “sell” signal should this ratio drop decisively below 1.40. This bears watching as the correlation has been very good whenever we get “buy” or “sell” signals. A “buy” signal is triggered when this ratio falls below the 1.00 level, and then rises decisively above 1.00. A “sell” occurs when this ratio rises to a Bullish extreme — above 1.40 — then declines decisively below 1.40.

Page 17 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

Russell 2000 Purchasing Power Indicator PPI is a Short-term Momentum Measure of Purchasing Power, Generating Buy and Sell RUT Signals When Changes Suggest Sustainable Multi-w eek Moves are Likely. PPI 725.00 150.00 January 13th, 2006's HUI PPI is 90.04

700.00 130.00 675.00 110.00 RUT Sell Signal 650.00 Buy Signal 90.00 625.00 70.00 600.00 PPI

50.00 575.00 A Buy Signal Was Registered on 1//3/05

550.00 30.00 9/13/2005 10/13/2005 11/13/2005 12/13/2005 1/13/2006

RUT 10 Day Moving Average Advance/Decline Line vs. the Russell 2000 Russell Oftentimes Trend Reversals are Forew arned By Bullish and Bearish Divergences RUT 2000 Betw een the NYSE 10 Day MA Adv/Dec Line and the Prices of of Equities. A/D

A Large Bearish Divergence Has 1750 700.00 Developed --Warning A Decline Is Coming.

1250

650.00 Russell 2000 750

A/D 250

600.00 0 -250

Bearish Divergence Bullish Divergence 550.00 -750

9/13/2005 10/13/2005 11/13/2005 12/13/2005 1/13/2006

Page 18 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

5, c, e of 5 of (5) 3 c of c top 4 1

5 of a 2 {5} a c of b {b} 3 {a} b

2 1 4 a {c}, b 1 4 2 3 Alt. b c of e of 5 of (5) 5 of c of d

The Russell 2000 small caps index rose 1.65 Friday to close the week at 708.44. Volume came in Friday at a pre-holiday light 84 percent, with upside volume at a weak 53 percent and advancing issues a mild 54 percent.

There is a large Bearish Divergence between the Russell 2000’s price action and its 10 day average Advance/Decline line. This divergence is now two months old. The longer and larger this divergence, the more likely the coming decline will be sharp.

Above we see the Russell 2000 completing its Intermediate-term Rising Bearish Wedge, a.k.a. Ending Diagonal Triangle. Our top labeling suggests the first of five final sub-waves for Minuette c of e to an all-time major top, Micro degree wave 1, has completed. Now underway is wave 2-down, to be followed by 3-up, then 4-down, and finally 5-up spiking above the upper boundary line. The alternate count considers that wave c is disproportionate to waves a and b, and the major top is in, or will be in a few days. However, we do not have high confidence in disproportionate EW wave counts. Failure of our PPI to generate a new “sell” signal any time soon would add to probability that our top count is correct, and the current decline is a minor correction of the uptrend.

Page 19 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

14 Day Stochastic NASDAQ 100 Index A Short-term Measure of Momentum Changes Comparing the Percent of NASDAQ 100 Stocks Above Their 14 Day MA With a Slow er 5 Day MA of Same 1800 200.00

For January 13th, 2006: Fast 61.00 Slow 72.00 180.00 1700 160.00 1600 140.00 A Sell Signal Was Generated on 1/12/2006 120.00 1500 100.00 Overbought > 80% 80.00 1400 60.00 Buy Signal 1300 40.00 Sell Signal 20.00

1200 Oversold < 15% 0.00

9/13/2005 10/13/2005 11/13/2005 12/13/2005 1/13/2006

NASDAQ 100 Purchasing Power Indicator TM

NDX 100 PPI is a Short-term Momentum Measure of Purchasing Power, Generating Buy and Sell PPI Signals When Changes Suggest Sustainable Multi-Week Moves Are Likely 1800 Sell Signal 1750 January 13th, 2006's PPI is at 122.52 140 Buy Signal 1700 120 1650

1600 100 1550 1500 80 1450 60 1400 A Buy Signal w as Generated on January 3rd, 2006 1350 40 9/13/2005 10/13/2005 11/13/2005 12/13/2005 1/13/2006

The NASDAQ 100 comes in Friday on a “sideways” signal, as our key trend-finder indicators are in opposition to one another. The NASDAQ 100 14 day Stochastic Fast measure comes in Friday at 61.00, decisively below the Slow at 72.00, thus generated a “sell” on January 12th, 2006, as reported in our special email market update. However, the NDX Purchasing Power Indicator TM remains on a “buy” from January 3rd, coming in Friday at 122.52 and needing to drop below 118.70 to trigger a confirming “sell.” Volume was at 95 percent of its 10 day average with downside volume at a weak 44 percent and declining issue an unconvincing 47 percent.

On page 23 we see that there is a major Bearish Divergence between the NASDAQ 100’s price trend and the trend of its 10 day average Advance/Decline line, warning of a significant decline once this topping pattern completes.

Page 20 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

The Elliott Wave Long-term Big Picture in the NASDAQ Composite 1978 to 2006

(5) of I

II Cycle Degree (from 1974) (B) Primary Degree (from Oct 2002) C Intermediate Degree (from Aug 2004) C, (B)

A (3) B (4)

(A)

(C ), II (1)

(2)

If you’ve been trying to get your bearings on the long-term picture for the NASDAQ, here’s an annotated chart of the Composite index, which is similar to the NASDAQ 100. The NASDAQ began trading on February 8th, 1971. The 29 year rally to the NASDAQ Composite’s March 10th, 2000 top at 5,132.52 (March 24th, 2000 at 4,816.35 for the NASDAQ 100) completed Cycle degree wave I up, and since has been the start of a primary degree wave (A)-down, (B)-up, and (C )-down. The Compos- ite’s (A) down completed on October 10th, 2002 at 1,108.49. Primary degree wave (B) up is nearing completion now. Next is a nasty primary degree wave (C ) down to complete Cycle degree II down.

Page 21 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

c, e, C, (B) c, c, c

a b a c, a c, a b b a b a b a c, d c, b a a b

b c, b

The above chart of the NASDAQ 100 shows that prices have risen to the top boundary of the Rising Bearish Wedge pattern. The NASDAQ 100 finished up Micro degree wave c of Minuette c up, of Minor degree wave c up, with waves d down and e up left. The alternate count suggests the NDX is completing the final wave c of c of e to a major primary degree wave (B) top. We give this alternate labeling a near equal weighting to the top count. We will lift it to our top count if the next decline generates a “sell” signal from both our key trend-finder indicators.

The top chart on the next page shows a five-wave small degree impulse rally completed with a small Rising Bearish Wedge. That is either a completed Micro degree wave c, or is the first wave {a} of a three-wave {a}-up, {b}-down, {c}-up of Micro c.

Once this pattern finishes, the third leg of the corrective Bear market that started in March of 2000 will begin, primary degree wave (C ).

Page 22 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

{5} , c, c, c, b

{3}

b a {4}

{1} Alt. {v} of {a} of c of c of c c, a {2}

b c, d

NASDAQ 100 10 Day Moving Average

Advance/Decline Line vs. the NASDAQ 100 NASDAQ $NDX 100 Oftentimes Trend Reversals are Forew arned By Bullish and Bearish Divergences A/D Betw een the $NDX 10 Day MA Adv/Dec Line and the Prices of $NDX Equities. 1750 100 A Major Bearish Divergence Warns of a Coming Decline. 1700 75 1650 1600 50

1550 NASDAQ 100 25 1500 1450 0 A/D Line 1400 -25 1350 Bullish Divergence Bearish Divergence 1300 -50 8/13/2005 9/13/2005 10/13/2005 11/13/2005 12/13/2005 1/13/2006

Page 23 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

The Economy:

Boy, I don’t know, read the following and tell me this economy is not headed for trouble. This is the admitted condition by the “don’t show, won’t know” Master Planners.

First the good news. The Commerce Department reported that the Trade Gap in November was $64.2 billion (that annualizes to 3/4 of a $trillion), below October’s 68.1 billion monthly deficit. Now some perspective on this fabulous news. November’s Trade Gap was the third worst since Washington, Jefferson and Adams decided over lamb chops to tell King George the 1st he can take his oppressive civil rights policies and . . .

Okay. Now the bad. The White House Budget Office announced, ahem, it looks like, cough cough, the Budget Deficit won’t be the $341 billion we thought back in the summer, but, a, well, ahem, sniffle, it looks like it is now gonna rise to $400 billion. What was that? It is gonna rise to $400 billion. $400 billion you say? Did I hear that right? Yes, but it was those darned hurricanes that made it happen. You mean the same hurricanes you said wouldn’t amount to much of an impact on the economy?

The Commerce Department reported that Retail Sales increased 0.7 percent in December, less than expected. The American Machine Tool Distributors’ Association (AMTDA) and the Association for Manufacturing Technology (AMT) announced that November’s Tool Demand was 2.5 percent below October’s, and was down 6.9 percent from a year earlier, according to a story by Reuters at www.cnnmoney.com on Monday. The Philly Fed revised lower its Mid-Atlantic region Factory Activ- ity Index to a 10.9 reading.

Inflation, as measured and admitted to by the Labor Department in their Producer Price Index, rose 0.9 percent in December (a 10.8 percent annualized rate). If this continues, somebody is going to have to buy Treasuries with both hands and have an unlimited stash of cash to do it with. If that somebody is the PPT, the Fed better hide the M-3 figures, and soon.

The Labor Department counted 309,000 Initial Jobless Claims for the latest reporting week. Lundquist Consulting announced that 1 out of every 53 households filed for bankruptcy protection in 2005, 2.04 million. This explains why credit card companies have doubled their minimum monthly pay- ments and call to harass people who are not delinquent, but in their dreams might be, for what seems like the pure pleasure of it all.

Money Supply, the Dollar, & Gold:

M-3 rose $25.8 billion last week — and we are starting to become conditioned that this 13.1 percent annual rate of growth is not such a big deal. Rest assured, it is. M-3 is up an amazing $82.3 billion in just two weeks (that was a lot harder to do with printing presses before computers came along), is up $118.1 billion the past 3 weeks, and is up an astonishing, unbelievable, incredible — pick your adjec- tive — $145 billion over the past month. It is up $203.5 billion the past two months and up $238.9 billion the past three months. These are annualized rates of growth of 13.1 percent, 21.0 percent, 20.2 percent, 18.6 percent, 13.1 percent, and 10.3 percent respectively. Why? Why, prey tell?

Page 24 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261 The more I stare at these figures, and read of the reasons why, and digest that they are about to hide the M-3 figures, etcetera, the more I conclude that we just might be witnessing an intended stealth devaluation of the Dollar. Why? It just may be the Master Planners have decided to begin the process of repudiation of all debts. If the Fed were to suddenly double the money supply, say over a two year period, most debts would be worth half what they are now. If the Fed would triple the money supply, debts would drop to a third of the burden they are now — if, if, if someone can figure out how to get three times the amount of income into everyone’s hands. That’s the part I don’t get. How are the Mas- ter Planners going to increase income for indebted Americans in a hyperinflationary world?

There are other, more sinister plots I suppose. Hyperinflation leads to depression leads to fascist dictatorship. Nah, not in America. Maybe in Nazi Germany in the early 20th century, but not now, not here. Dismiss that rogue thought.

We’ve already discussed the Iran Oil Bourse threat to the Dollar, and the possibility that declara- tion of economic war against the United States could necessitate caverns full of Dollars to buy U.S. financial assets dumped left and right as the Euro gains international prominence starting in March. That would essentially monetize the U.S. debt. We’ve all read stuff where a military event could necessitate boatloads of liquidity to protect financial markets.

Regardless of your politics or your poison, M-3’s growth is simply nutty at this time. There is no other way to describe what is going on here by the Fed. Kiss transparency good-bye. We are at their mercy. The Fed has said, with all the warmth of dear grandma serving hot apple pie, “Trust us, you are sheep. You do not need to know.” Maybe we don’t want to know.

C, (2) c, A

b C a

a b c, B

A X

B 5,(1)

Page 25 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

5 of 5 of (1)

3 5 of 3 b 1 1 3 4 1 a 2 4 c of 4

2 2

Momentum is Up.

The U.S. Dollar completed its second wave A up and second B down of a Double Flat/Zigzag corrective intermediate-term rally. The first leg of a final wave C is underway. We can estimate the timing of the start of the Dollar’s coming collapse into the 60s (probably even lower) by doubling the time the first A-B-C (a Flat 3-3-5 pattern) took for corrective Primary degree wave (2) up. From the time the U.S. Dollar’s Primary (1) bottomed on December 31st at 80.39, to the time the first of what will be two A-B-C patterns topped at C on July 8th at 90.77, was about seven months. Then the divid- ing wave, X, took the Dollar down to 86.02 on September 2nd. That timing says the start of the decline should arrive coincident with the March/April period when M-3 is hidden and Iran starts selling oil on its bourse in euros.

Gold thrust higher this week, hitting another new rally high Friday. Gold is responding to the insane growth of the money supply, and if this keeps up, Gold could hit $600 before correcting.

Silver completed Minuette degree wave i up on October 11th, at 7.91, then traced out an Elliott Wave a-b-c, 3-3-5 Flat for corrective wave ii down, bottoming on November 1st. It has since completed waves iii up and iv down and is rising in wave v of Minor degree 3. Silver should be heading toward 9.75, as an upside measure is available from the widest portion of the Symmetrical Triangle, added to the point of the breakout.

West Texas Intermediate Crude is shown at the bottom of page 23. Wave d traced out a small Bullish Declining Wedge, leading to wave e up, which could challenge $70 a barrel before oil heads toward $40, the point where the large Rising Bearish Wedge began. Waves a-up and b-down are complete, and a final thrust wave c higher is well underway. Oil hit 64.56 intraday Friday.

Page 26 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

Gold Hit a New Rally High, v, 5 of 5 of (1) Reaching 557.89 on Friday January 13th, 2005, a 19.6% two month rise since the Fed 5, iii announced it would hide M-3.

3 iv Preceding 3 1 Move Was Up i 4

2 Symmetrical Triangle Pattern Suggested a 4 ii Breakout from the Point of Convergence in the Same Direction as the Preceding Move — Which Was Up — Gold Busts Out, Above the Upper Boundary Which we Got. of the Symmetrical Triangle.

MACD is Up

{3} of 3

A Close-up of Gold

{1}

{5}, 1 {2}

{3} 2

b {4} {1}

{2} a c, iv

Page 27 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

Silver Best’s its previous Wave 3 April 2, 2004 Top of 8.51, Hitting 9.27 on Monday, December 12th, 2005. 5, 5, (1) v, 3 iii 3 4 b i 1 b iv ii a c c 2 Silver’s Upside Target is Equal to the 4 Widest Portion of the 1 a Symmetrical Triangle Added to the Point of the Breakout, Which Projects Silver to 2 Rise Toward 9.75 .

RSI is Neutral

c of c c, e of 5 of (1) b

a a a c, a b A Large Degree 3 x b Rising Bearish Wedge b Warns that b c of d a Oil is Due to Decline. b {b} c However, a Small a a c of b Bullish Declining Wedge Formed, a {c} of b Suggesting There is Another Up-leg {a} Coming First. c of 4

MACD Rolling Over, or a Bear Trap?

Page 28 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

30 Day Stochastic HUI GOLD BUGS % STKS DJIA A Short-term Measure of Momentum Changes Comparing the Percent of > 14 DMA HUI Stocks AboveTheir 30 Day MA With a Slow er 9 Day MA of Same 220 For January 13th, 2006: Fast 100.00 Slow 100.00 . 300 200 A Signal Cross Over/Under Requires a 20 point Fast/Slow Spread Move 275 180 A Buy Signal Was Generated January 3rd, 2006 250 160 Buy Signal 225 140 HUI Sell Signal 200 120 100 175 Overbought > 80% 80 150 60 125 40 100 20 75 Oversold < 15% 0

7/13/2005 9/13/2005 11/13/2005 1/13/2006

HUI Gold Bugs Purchasing Power Indicator PPI is a Short-term Momentum Measure of Purchasing Power, Generating Buy and Sell HUI PPI Signals When Changes Suggest Sustainable Multi-w eek Moves are Likely. 250 January 13th, 2006's HUI PPI is 210.49 300 230

250 Sell Signal 210 Buy Signal 190 200 HUI 170 150 150

100 130 110 50 90 PPI A Buy Signal Was Registered on 12/22/05 0 70 8/13/2005 9/13/2005 10/13/2005 11/13/2005 12/13/2005 1/13/2006

Both HUI key trend-finder indicators remain on “buy” signals Friday evening, the HUI 30 day Stochastic Fast measure remaining at 100.00, joined by the Slow, also at 100.00. The HUI Purchas- ing Power Indicator TM rose to a new high for the rally, to 210.49, as demand outpaces supply.

The HUI Amex Gold Bugs Index reacted sharply to the Fed’s release Thursday evening of the latest monetary aggregates, rising 11.02, or 3.68 percent Friday, to a new high of 310.34. Volume was solid, coming in at its 10 day average, with all issues advancing. The HUI closed on its high for the day, which is Bullish.

Since the HUI PPI indicator generated a “buy” signal on December 22nd, the HUI is up 14.8 percent.

Page 29 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

5, v of 1 of 1

3 b 5, iii a c of B 4 ii 3 1 i c of 2 4 c, 2 1 iv 2 a a i iv iii ii v of 1 iv 2 b i 4 ii

Left Shoulder iii Right Shoulder b v, 3 A The Bullish Head & 5 of C of (2) Shoulders Minimum Upside Target of $275 Was The HUI Bullish Head Head & Shoulders Achieved. Bottom

Above we see the HUI Amex Gold Bugs Index is wrapping up Intermediate degree wave 1 up, inside a long-term primary degree wave (3) up that should take this index to the stratosphere. But before that happens, a corrective Intermediate-degree wave 2 down is due. The HUI has already achieved its minimum upside projection of $275 based upon the Bullish Head & Shoulders pattern we identified months ago, and in doing so set an all-time record high. If wave (3) decides to equal 1.618 times the length of wave (1), it means we can define stratosphere as at least $526 over the next few years, as wave (3) would cover 360 points from the May 2005 165 low.

At the top of the next page we see a Broadening Top, a.k.a. Megaphone pattern, calling for Bonds to tank over the intermediate term. A wave 1 bottom will arrive after the final Minuette wave v down. Once Minor Degree wave 2 up corrects the recent decline, a Bearish Head & Shoulders pattern warns a wave 3 down should hurt Bondholders — about the time the Fed stops reporting M-3 in March/April.

The Treasury Yield Curve is a normal upward sloping curve from the 2 year out to the 20 year, however, from the 2 year to the 10 year is nearly flat on Friday. See chart on page 33.

Page 30 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

RSI Declines from Overbought

(5) e of v of c of 2 Megaphone Pattern Suggests A Top a c ii iv Is in For Bonds iii a i

iv b i d iii v, 1 of 3 ii

1 b

MACD is Up

Bearish Head & Shoulders Top Pattern Suggests Bonds Should Head Decline Hard e of v of c of 2 Once Wave 2 Up Completes Left Shoulder ii c Right Shoulder

i iv iii a 2

iv b iii d v, 1 ii

3 of 3

Page 31 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

Equities Markets

Technical Indicator Index (TII) TM

Short Intermediate Term Term Week Ended Index Index Scale

Dec 16, 2005 19.00 (25.50) (100) to + 100 Dec 22, 2005 25.00 (17.38) (Negative) Bearish Jan 6, 2005 39.40 (14.63) Positive Bullish Jan 13, 2006 22.20 (10.04)

SHORT TERM TII RISK FORECAST (Next Two Weeks) Legend

TREND PROBABILITY Substantial Rise Low Very High 80% Market Rise Medium High 60% Sideways High Medium 40% Market Decline Medium Low 20% Substantial Decline Medium Very Low Under 20%

INTERMEDIATE TERM TII RISK FORECAST (Next 12 Weeks) Substantial 800 points+ (DJIA) Market Move 200 to 800 points (DJIA) TREND PROBABILITY Sideways Up or Down 200 (DJIA) Substantial Rise Low Market Rise Medium Sideways High Market Decline Medium Substantial Decline Medium

This week the Short-term Technical Indicator Index comes in at positive 22.20. The maximum score is –100, or +100 on the upside. This indicator is a useful measure of the risk of equity market moves over the next week, both as to direction and to a lesser extent strength of move. It is a risk indicator, not a buy/sell indicator. In other words, nothing has been triggered, but rather it early warns of

future trends. For example, readings near zero indicate narrow sideways moves are probable. Readings closer to +/-100 indicate with a higher degree of confidence that an impulsive move up or down is likely over the short run. Market conditions can change on a dime, or the Plunge Protection Team can come in and temporarily stop market slides, so it may be unwise to trade off this weekly measured indicator.

The Intermediate-term Technical Indicator Index is a risk indicator, useful for monitoring what’s over the horizon — over the next twelve weeks. It serves as an early warning system for un- foreseen trend changes of considerable magnitude. This week the Intermediate-term TII risk indicator is at negative (10.04).

Note: The TII Indicators are derived from a weighting of the relative measures of a basket of technical tools we find to be highly correlative with equity market moves.

Page 32 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 7 Key Economic Statistics

Bonds and Interest Rates: 1 Week Avg. Date VIX U.S. $ Euro CRB Gold Silver Crude Oil M-3

11/04/05 13.17 91.26 118.20 318.80 456.7 7.54 60.58 10075.9 b 11/11/05 11.63 91.90 117.07 315.59 468.7 7.74 58.48 10062.6 b 11/18/05 11.12 91.90 117.60 312.70 485.8 8.05 57.20 10071.5 b 11/25/05 11.34 92.04 116.90 314.67 496.1 8.21 58.71 10117.9 b 12/02/05 11.01 91.92 117.10 323.40 503.4 8.55 59.32 10119.5 b 12/09/05 11.09 91.26 118.20 327.80 526.4 9.00 59.39 10121.1 b 12/16/05 10.68 89.71 120.00 326.40 503.2 8.52 59.05 10148.0 b 12/22/05 10.29 90.78 118.80 326.80 504.4 8.52 58.90 10183.8 b 12/30/05 12.07 91.16 118.27 331.83 517.0 8.82 60.23 10240.3 b 01/06/06 11.00 88.86 121.60 339.50 539.8 9.13 62.86 10266.1 b 01/13/06 11.23 88.90 121.40 336.80 557.2 9.11 64.42 —

Note: CRB Down, Gold up big, Oil up, the rest are flat.

Bottom Line: Huge injections of M-3 feed markets hungry for the stuff. Rising Bearish Wedges warn the party will be over before long. Caution is warranted.

“Yet for us there is but one God, the Father, from whom are all things, and we exist for Him; And one Lord Jesus Christ, by whom are all things, and we exist through Him.”

1 Corinthians 8:6

We are running a Renewal Special at $169 for 12 months, a 42 percent discount off the regular rate, good through January 31st, 2005.

Treasury Yield Curve for January 13th, 2006

4.7 Source: U.S. Treasury 4.6 4.5 4.4 4.3 4.2 Normal Upw ard Sloping Curve 4.1 4 4.13 4.33 4.43 4.40 4.34 4.29 4.28 4.30 4.36 4.59 3.9 Page 6 of 6 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr

Page 33 MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 261

MCHUGH’S FINANCIAL MARKETS FORECAST & ANALYSIS Issue No. 7

RobertBonds and McHugh Interest Ph.D. Rates: is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only. Opin- ions, buy and sell signals, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are sub- ject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Copyright 2006, Main Line Investors, Inc. All Rights Reserved.

Here’s the color coded, legend we use for our Elliott Wave count symbols, starting from the largest degree waves to the smallest: Impulse Waves Corrections Grand Supercycle {1} to {V} {A} to {C} Supercycle (I) to (V) (A) to (C) Cycle I to V A to C Primary (1) to (5) (A) to (C) Intermediate 1 to 5 A to C Minor 1 to 5 a to c Minuette i to v a to c Micro 1 to 5 a to c Subnmicro {1} to {5} {a} to {c} Nano {1} to {5} {a} to {c}

Page 6 of 6

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