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Update for Wednesday, February 17, 2010; 5:25 PM, Eastern.

[Bottom Line]: A second-wave rally is quickly maturing, as the blue-chip indexes quickly approach
resistance. Once this push is complete, the next strong phase of selling pressure will begin.

Today's follow-through in the blue-chip stock indexes was muted. Both the Dow and S&P closed higher, but
NYSE breadth contracted from 4.89:1 to 1.99:1, as did NYSE up/down volume, which went from 8.14
yesterday to 3.36 today. Total NYSE volume contracted from yesterday, ending the session at about 1 billion
shares traded. Most important, we had time today to delve into the various potentials of the near-term wave
structure and we think we have a solid handle on what is unfolding.

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The above two Dow charts detail the wave pattern moving into the Primary wave 2 (circle) high and the initial
leg off it (see 240-minute chart), and then zooming into the wave 2 rally from the February 5 low (see 15-
minute chart) at 9835.10. It appears that the move from this morning's 10,320.10 high (1101 in the S&P) is
wave (iv), as detailed on the 15-minute chart. Either a triangle is unfolding, or a flat, both acceptable
interpretations of the near-term structure. The triangle could be either a barrier or running triangle (see EWP,
p.49). It portends a few more sideways subdivisions prior to wave (v) up to complete Minor wave 2. The
other potential, that of a flat (see EWP, p.45), means that prices will pull back a bit further rather than move
sideways to complete wave (iv). Thereafter, wave (v) will carry the index up to complete Minor 2.

Now, it's a bit tricky near term, because there are variations in corrective patterns. The index could just move
straight up to complete wave 2 from current levels. That's fine because the opportunity is not in trying to pick
off the final leg of this countertrend rally but in identifying the end of the advance in anticipation of Minor
wave 3 down. A possible stopping area for wave 3 is 10,345-10,390 (1104-1115 in the S&P), but this may

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change depending upon the final shape of wave (iv). A decline beneath 10,161.60 (1080 in the S&P), a
previous first wave high, will be the initial signal that wave 3 is underway. With the metals potentially turning
down now as well as a continuation of the U.S. dollar rally, we are watching this previous first wave high
carefully.

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(February 17, 2010)
The NASDAQ pushed into the initial target range of 2219-2228 today, but as the 30 minute chart shows, it
doesn't appear that all the subdivisions are yet in place to consider wave 2 complete. Prices are likely tracing
out wave (iv), similar to the Dow chart, which, when complete, should lead to wave (v) up to end Minor wave
2. The daily chart shows that the past two sessions have opened with an up gap, as investors rush into what
they believe is a rise back to new highs. Based on the subdivisions however, the rise is quickly maturing.
The maximum upward retracement is likely to be 2265-2277, the bottom end of which is an open chart gap
and the top end of which is the .786 retracement of wave 1. A break of 2179, a previous first wave high,
would signal that wave 2 was complete.

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(February 17, 2010)
The yield on the [30-year U.S. Treasury Bond] rose to 4.73% today, as wave v (circle) of 5 up continues to
subdivide higher. This wave should carry above the wave 3 high at 4.84% before it ends. As long as yields
remain above 4.47%, the wave iv (circle) low, this forecast will remain intact.

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(February 17, 2010)
Several of the various credit spreads that we monitor have violated uptrend lines that have been intact for
the entirety of the Primary wave 2 (circle) rally in stocks. One of the lower-grade to higher-grade spread is
plotted on the above chart. The turn toward widening is in line with EWFF's forecast from our January issue
that calls for a move toward record widening before Primary wave 3 (circle) is over. It's only been 5 weeks of
widening, but if this trend continues, and we think it will, it constitutes another piece of evidence that the
"flight from risk" that will encompass Primary 3 (circle) down has begun.

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(February 17, 2010)
The [U.S. Dollar Index] appears to have completed a flat correction (see EWP, p. 45) at today's 79.56 low.
Today's rally was impressive in that it retraced all of yesterday's selloff. Our top view is that a push above
Friday's 80.75 high will mark a fifth wave, the final up leg of a five-wave rally that started last November 26 at
74.17. Once this fifth wave is complete, the dollar should undergo its largest downward correction since the
November low. One possible stopping range for the fifth wave is 81.47-82.20. But currencies tend to trend
and similar to commodities, fifth waves can be extended. Do you remember how virtually no one had
anything positive to say about the U.S. dollar late last year? The Daily Sentiment Index showed just 7%
dollar bulls in late November and we said that these were the psychological conditions that attend a bottom.
Now, just the opposite is occurring, with various rationalizations on why the dollar bottomed (of course,
everyone saw it!) and why it should continue to go up. The DSI just pushed to 90% bulls. So while we think
the larger picture remains "up" for the dollar, it's possible that the "easy money," if there ever is such a thing,
has already been made for the initial impulse wave from the low. We'll see how far this leg up carries.

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(February 17, 2010)
The [Euro] rose in three waves from last Friday's 1.3530 low to today's 1.3791 high. This pattern is
countertrend, meaning that the one-larger degree trend should still be down. However, the decline that
started at the November 25 high at 1.5147 is getting mature and optimism is nearly non-existent. Friday's
Daily Sentiment Index of euro traders was just 9% bulls, the same level as was registered on March 2, 2009,
two days prior to the wave (B) low at 1.2458. The ideal scenario will have the euro decline beneath Friday's
1.3530 low for a fifth wave, which will then lead to the largest upward retracement since the November top.
We had listed the next potential target zone at 1.3033-1.3078, the bottom of which is the .786 retracement of
wave (C) up. But with sentiment extreme, we are not sure that the euro can make it all the way to this range.
We will give the selloff plenty of leeway to extend lower, but on any drop under 1.3530 we will also be
attentive for signs that the decline may be ending.

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(February 17, 2010)
[Gold] countertrend rally has carried the percentage of gold bulls from 13% on February 8 to 45% yesterday,
relieving a pessimistic extreme. Prices rose from $1043.80 on February 5 to a high today at $1127.91. There
are two valid ways to interpret the near-term subdivisions. One way places gold at the top of an expanded
flat upward correction that started at $1073.85 on January 28. In this scenario, prices should be at the
forefront of the next phase of decline. A selloff beneath $1098.35 will signal the onset of the next leg lower.
Another way to interpret price behavior is to consider a larger upward expanded flat (see EWP, p.46)
underway, one that started at $1074 on December 22. If this scenario is unfolding, gold will continue up to
just above $1162.45, the January 11 high. The push will complete the upward flat pattern and lead directly to
a strong third-wave decline. We listed this labeling under "Alt:" on the chart. Last Friday we said we'd move
this latter view to top status with today's rally, but we are for now keeping it as the alternate because prices
are again bumping up beneath the broken uptrend line from October 2008, which has previously acted as
resistance. In addition, gold pushed above the February 3 high ($1126.20) by a few ticks intraday,
unconfirmed by silver, and then sold off toward the close, creating a small inter-market non-confirmation.
This behavior favors the first scenario described above. Both interpretations should eventually result in gold
declining into the $950-$970 area, the apex of the wave (B) triangle, which remains the next downside target
within Primary wave C (circle).

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(February 17, 2010)
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(February 17, 2010)
The shift from extreme pessimism to neutral is just as swift in [Silver] and even more dramatic. In just 7
trading days, silver bulls, as measured in the Daily Sentiment Index (trade-futures.com), have gone from just
8% at the February 5 low to 49% at yesterday's close. So the countertrend push from $14.65 (Feb. 5) has
"worked off" the pessimistic extreme. Spot prices came up to the 38.2% retracement of the decline from
January 11 at $18.92 and then reversed lower. A decline beneath $15.75, a small degree previous first wave
high, will be the initial signal that the next leg down to new lows is already underway. Breaking $15.19 will
confirm it. The next potential downside target is $13.75-$13.94. Any rise above today's $16.36 high will mean
that the next phase of selling is delayed by another day or so.

Next Update: Friday, February 19, 2010.

--Steven Hochberg, Editor.

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(February 17, 2010)
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(February 17, 2010)