ramcem

Dear all,

A newsletter I received regularly from Dr. Alexander Elder, one of the world's most reowned trader. He shares his insights on the HK market in this issue but I think it's equally relavant to S'pore market as well.

You will, however, need to be fairly competent in the jaragons of technical analysis to fully appreciate his insights below.


~Ramcem

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Dear Trader,

At first, I was going to write after returning to New York in June, but so much interesting information has come up on this trip to Asia that I decided to use the time during one of my flights in Asia to write you this letter.

Looking at the immense richness and dynamism of Asia, it pays to remind yourself that just 50 years ago much of it was a burned-out slum. I still remember Asia being called a sleepy continent. I began coming here in the 80s, and caught the tail-end of the old textile economy, huge crowds of people riding stinky motorbikes on potholed roads, and soldiers with rifles patrolling the streets at night.

Today many Asian cities outshine the European ones. What has allowed so many countries to make this huge leap forward? Two factors bear the lion share of responsibility for this progress – the rule of law and the unleashing of private enterprise. It is amazing how the Asian elites have changed their course, turning from centuries of heavy authoritarianism to the current, reasonably relaxed regimes, respectful of property rights and the legal process.

They have proven that there is a recipe for building a successful society. Perhaps there is hope for depressed areas of the globe. Perhaps their elites will also recognize that they would be better off if they follow the Asian example.

Reading the Financial Times on the plane the other day, two articles caught my eye. One was about how for the first time in history, more people in Asia than in the US are taking the prestigious CFA (chartered financial analyst) exam. The other described a shortage of unskilled labor in some Chinese cities, as maids and dishwashers abandon their jobs to day-trade stocks!

I thought I could hear someone ringing a bell – this is the top of the bull market! On Thursday morning in Singapore I borrowed a bell and rang it during my presentation for a large group of institutional money managers. Let me show you a few of the charts I shared with them at that meeting.




Whenever I approach a stock or an index, I want to compress its entire history into a single screen. It shows whether that market is cheap or expensive, relative to its own history. Here you can see that Hang Seng is trading near the very top of its 20 year range. Cheap or expensive?

I could not resist putting an oval around the Crash of 1987, near the left edge. In the days following that crash many newspapers saw it as the end of Western financial system as we knew it. Now, in retrospect, it looks like a mere hiccup.



Moving on to the weekly chart of Hang Seng, we see that it broke to a new high three weeks ago. That breakout had no follow-through as prices have stalled. One of the most important things I've learned from David Weis (whose work is described later in this letter) is the value of failed breakouts. Trading against them provides some of the best entries into important trend reversals.

Notice the severe bearish divergences of MACD-Lines, MACD-Histogram, and Force Index. They all show that the bulls are much weaker at the right edge of the chart than they were at the beginning of 2007. With the market at a new high, the bulls are the weakest they have been in a long time!

The daily chart looks even weaker than the weekly. I suggest you look it up using your software and apply similar tools. I used a very simple TC-2000 to draw the charts shown above. Many other key Asian markets also look extremely toppy. That, coupled with the article about the unskilled workers quitting their jobs to day-trade stocks rang the bell for me. That's why I borrowed a bell at the Mandarin Oriental Hotel in Singapore this morning and rang it for my audience. I told the people who control vast quantities of stocks: "Do what your father told you long time ago. Use protection!" Of course the sharper ones will go much farther - they will sell short. Also, once a major unpleasantness starts in Asia, it will impact the overheated stock markets of the US and Europe. Please consider this email as my friendly tap on your shoulder.

PS - I thought I was alone 'crying wolf' but I have just heard that Alan Greenspan has recently called for 'severe contraction' in China.

"The reasonable person accepts the world it is. The unreasonable person insists on changing the world to suit his own requirements. This is why all progress depends upon the unreasonable person."

~Anonymous

"To be able to stand in the midst of darkness and live as though all about you is light, is the final test of the human spirit."

"The soul of man is immortal, and its future is the future of a thing whose growth and splendour have no limit."