Breakout! Global technical research 9 August 2006

Chris Roberts Head of Asian Technical Research [email protected] (852) 26008576

India: Rope trick ending? Sensex (daily with 40-day WMA) 13,500 12,500

Michael Lee

Analyst [email protected] (852) 26008300

iii 12,671 •

11,500

2 4

1

62% retracement of 12,671-8,799 fall

B? 11,082 •

10,500

Tiara Fontanilla

• 8,799 5 A

8,500 7,500 Apr-06

• 9,875 Support

3

9,500

Analyst [email protected] (632) 8604011

May-06

Jun-06

Jul-06

Aug-06

C (Below 8,799) iv Sep-06

Source: CLSA Asia-Pacific Markets

The Sensex is vulnerable again following a 26% (one quarter) advance from the June low of 8,799, which has retraced a Fibonacci 62% of the decline from the 12,671 May peak.

The next edition of Breakout! will be issued week commencing 13 August

Our preferred view is that a break below 8,799 will occur before the secular bull market resumes. A break below support at 9,875 would indicate that wave C to sub 8,799 is well underway. There is a chance that wave B peaked at 11,082 - the Fibonacci 62% retracement (on a log-scale basis) of wave A. Further strength would find resistance at 11,192, the 62% retracement in points terms of the 12,6718,799 fall.

Endgame (see page 8) Brazil: Fibonacci barrier in Rio 44,000 42,000

The Sensex’s fall - although damaging - is an interruption, not an ending, to the secular bull market.

40,000 38,000 36,000 34,000 32,000 30,000 Mar-06

May-06

Jul-06

Also in this week’s Breakout!

The Bovespa’s advance from the June low has taken the index up to resistance at the 62% retracement of the 42,062-32,057 decline. There is chart resistance at the late May high of 38,734. Expect at least a test of the area of the July low.

Taiwan: Groundhog Day. The steep selloff from the May peak of 7,476 is not over, the Taiex should trade below 6,000 before a sustainable low is seen. The chart pattern developing from the peak is one we have seen a few times before in Taiwan. Taiwan: Short TSMC. Short 50% at market and 50% at NT$57.20. Use a close above NT$60.70 as an initial stop-loss (risk 7%).

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Breakout!

India: Rope trick ending? Sensex: Our preferred view is that a break below 8,799 will occur.

The Sensex is vulnerable again following a 26% (one quarter) advance from the June low of 8,799, which has retraced a Fibonacci 62% of the decline from the 12,671 May peak. Our preferred view is that a break below 8,799 will occur before the secular bull market resumes. Figure 1

Sensex (daily with 40-day WMA): A 62% retracement iii

13,500

12,671 •

12,500 11,500

2 4

1

62% retracement of 12,671-8,799 fall

B? 11,082 •

10,500 • 9,875 Support

3

9,500

• 8,799 5 A

8,500 7,500 Apr-06

May-06

Jun-06

Jul-06

C (Below 8,799) iv

Aug-06

Sep-06

Source: CLSA Asia-Pacific Markets

The Sensex’s (last 11,099) steep 30% decline from May’s all-time high of 12,671 unfolded in five waves and is viewed as the wave A of an A, B, C decline. There is a chance that wave B peaked at 11,082 - the Fibonacci 62% retracement (on a log-scale basis) of wave A. Further strength would find resistance at 11,192, the 62% retracement in points terms of the 12,6718,799 fall. A break below support at 9,875 would indicate that wave C to sub 8,799 is well underway. Figure 2

Sensex (weekly log with 40-week WMA): Not the end of the road iii 12,671 • 10,000 –

• 8,799 A

6,250 • i 3,758 •

2,500 –

•2,598 Sep 01

Jul-01

3,417 •

To v B? •11,082

C iv

38% retracement of wave iii

• 4,227

• • 2,828 2,904 ii Jul-02

Jul-03

Jul-04

Jul-05

Jul-06

Source: CLSA Asia-Pacific Markets

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2

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9 August 2006

Breakout!

The Sensex’s fall - although damaging - is an interruption, not an ending, to the secular bull market. The May peak marks the end of the major wave iii advance - given the size and duration of that move it is unlikely that the Sensex has finished the corrective wave iv. A modest Fibonacci 38% retracement of wave iii would lead to approximately 7,300. There are three other sub 8,000 targets to bear in mind: 7,831 - a Fibonacci 38% decline from the 12,671 peak. 7,750 - where wave C of iv is approximately equal to wave A (12,6718,799) of iv. 7,210 - where wave C of iv is equal in points to wave A of iv. The minimum objective under the road map featured in figures one and two is a decline below 8,799, some 20% below current levels. Figure 3

Sensex (daily with 40-day WMA): The triangle option 13,500 12,500

iii To v

12,671 • B? 11,082 •

11,500

D

10,500 9,500

C • 8,799 A

8,500 7,500 Apr-06

E iv

May-06

Jun-06

Jul-06

Aug-06

Sep-06

Source: CLSA Asia-Pacific Markets

Sensex: The bullish triangle option

One alternate view is that the Sensex is forming a contracting triangle pattern from the peak; this is a much more bullish option since it means that the low is already in place at 8,799. Wave C of the triangle would likely find support at 9,200-9,600. This remains an alternate view for us but, if the Sensex refuses to a set a new low by mid-September, we will revisit this option.

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9 August 2006

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Breakout!

Figure 4

BSE 200 (daily with 40-day WMA): Less impressive recovery in broader indices 1,700 1,600 1,500

1,575 • 2

1,400

4

1

1,300 1,200

50% retracement of 1,575-1,059 fall

3

• 1,167

1,100 1,059 • 5 A

1,000 900 Apr-06

B 1,312 •

May-06

Jun-06

To C Jul-06

Aug-06

Sep-06

Source: CLSA Asia-Pacific Markets

India: The BSE 200 has retraced 50% versus the Sensex’s 62%

The strong recovery in the Indian market has been driven by a relatively small number of stocks. The broader the index you look at the less impressive the retracement of the losses. The BSE 200 (last 1,306) has retraced 50% (logscale basis) of the May/June decline versus the Sensex’s 62% retracement.

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9 August 2006

Breakout!

Taiwan: Groundhog Day The steep selloff from the May peak of 7,476 is not over, the Taiex should trade below 6,000 before a sustainable low is seen. The chart pattern developing from the peak is one we’ve seen a few times before in Taiwan. Figure 5

Taiex (weekly log with 40-week WMA): Same pattern, different year

7,500 –

Jan 03 5,142 •

4,000 –

2002

May 06 7,476 •

Mar 04 7,135 •

• 4,413

• 5,718 +

• 4,045 -May 03 (-21%)

2003

• 6,789 • 6,345

+ • 5,255 Aug 04 (-26%)

2004

• 5,619 Oct 05

2005

2006

2005

2006

To below 6,000

MACD - Buy version 600 400 200 0

+

+

(200) (400) (600) 2002

2003

2004

Source: CLSA Asia-Pacific Markets

Taiwan: We still expect the Taiex to trade below 6,000 before a sustainable advance can unfold

We have been anticipating a Taiex (last 6,573) test of 6,000 before the chance of a sustainable advance can occur. Revisiting the index’s weekly chart has not changed that view. The initial selloff that followed the false break above important resistance at the March-2004 peak at 7,135 should be followed by another leg down to complete a cyclical decline. A pattern seems to be developing that is very similar those that preceded important lows in 2002-03 and 2004. On both those occasions the market moved higher following multi-week flag formations but peaked and reversed sharply lower soon after. The declines then broke key support at the bottom of the flag formations, signalling a period of volatile price swings before another fall to a final low. The 2006 pattern is very similar; a flag formed in January/March followed by a move to new highs, then a sharp reversal from the 7,476 May peak. The break of key support at 6,345 led to volatile trading and a rebound to 6,789. Another leg down from 6,789 is unfolding and should see a break below 6,000 to complete the Groundhog Day effect. Ideally a low will be set in September/October.

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iii

Breakout!

•

In 2002-03 and 2004, buy signals from the MACD - buy version, from below the zero line, following the index lows confirmed the Taiex’s turn up. Figure 6

Taiex (daily with 40-day WMA): Falling again after an almost 50% retracement 7,800 7,400

7,476 •

50% retracement of 7,476-6,291 fall 2

7,000

B? • 6,789

1

6,600 6,200

4

3

5,800 Apr-06

May-06

Jun-06

• 6,291 5 A Jul-06

• 6,309 Support Aug-06

C Sub 6,000 Sep-06

Source: CLSA Asia-Pacific Markets

Taiex: A break below minor support at 6,309 signals sub 6,000

The short-term road map above shows our preferred view (strongly influenced by the cleaner wave count on the Taiex Electronic sector - see Breakout! of 5 July). The recovery rally most likely peaked at 6,789, just below the 50% retracement resistance for the wave A decline. A break below minor support at 6,309 would indicate that wave C to sub 6,000 was well underway. We think it unlikely that wave C will break the October-2005 low of 5,619.

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9 August 2006

Breakout!

Taiwan: Short TSMC As discussed in Taiwan: Groundhog Day, we continue to anticipate that the Taiex will go sub 6,000 before a sustainable advance occurs. In line with this negative view, we recommend a short on TSMC. TSMC (last NT$55.80 - 2330 TW) Figure 7

TSMC (daily with 40-day WMA) Apr 06 67.86 •

70 65

Resistance • 58.80

60 55 50

• 47.77 Oct 05

45 40 35

• 57.28 Key support broken

•37.82 - Jul 04

Jul-04

Nov-04

Mar-05

Jul-05

Nov-05

Mar-06

Jul-06

Source: CLSA Asia-Pacific Markets

The stock advanced 79% (three-quarters) from the July-2004 low in an orderly series of higher highs and higher lows. The stock peaked at NT$67.86 in April, finding resistance around the area of the 2002 peaks. The break below key support at NT$57.28 has been followed by the stock rolling over into a downtrend. Short 50% at market and 50% at NT$57.20. Use a close above NT$60.70 as an initial stop-loss (risk 7%).

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7

Breakout!

Endgame: Brazil: Fibonacci barrier in Rio The Bovespa’s (last 37,600) 19% advance from the June low has taken the index up to resistance at the 62% retracement of the 42,062-32,057 decline. There is chart resistance at the late May high of 38,734. The May/June decline and June/August advance both look like “Elliott threes”, indicating a more complex correction than we expect in most Asian markets. It is possible that the low is in and further weakness could be limited to testing the area of the June or, even more optimistically, the July lows. The recent highs occurred on poor momentum - note the negative divergence on the MACD- Rapid version, which looks like it is rolling over. We still see market risk globally from now through to September/November (but particularly through end-September) and expect resistance to continue to be a barrier. Expect at least a test of the area of the July low. Figure 8

Bovespa (daily with 40-day WMA): 44,000

42,062 •

42,000

Resistance 38,734 •

40,000 38,000

62% retracement of 42,062-32,057 fall

(+19%) • 38,172

36,000

• 34,591 Support

34,000 32,000

32,057 • (-24%)

30,000 Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

May-06

Jun-06

Jul-06

Aug-06

MACD - Rapid version 2000 1000 0 (1000) (2000) (3000) Mar-06

Apr-06

Source: CLSA Asia-Pacific Markets

©2006 CLSA Asia-Pacific Markets (“CLSA”).

Note: In the interests of timeliness, this document has not been edited.

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9 August 2006