THE CHAPMAN REPORT. Charts and commentary by David Chapman JULY 6, 2009

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1 THE CHAPMAN REPORT Charts and commentary by David Chapman JULY 6, 2009 MGI Securities, 26 Wellington Street East, Suite 900, Toronto, Ontario, M5E 1S2 phone (416) or (toll free) , fax (416) US INDICES S&P 500 Intermediate Trend: Up Short-term Trend: Down Week: Down S&P 500 STRATEGY: LONG HOLD - CAUTION (for definitions of terms, see end of report) - The S&P 500 fell 2.5% this past week the third consecutive weekly decline. - If we are to make a low and make our anticipated run to 1000 to 1100 then this week would be the week to do it. - As we have noted in past commentaries we continue to look for our high sometime around July While we certainly could see some sort of high then we are reminded that past cycles also indicate a potential high in September as well. - July s tend to be good months because of inflows of retirement funds. Strength is usually seen in the early part of the month and again at the end of the month. - Post election Julys also tend to be strong with 11 up and 3 down. - Other cycles in show in 1939 (70 years) a rally that started in early April and topped mid September; in 1949 (60 years) the market bottomed in June (a major low) an rallied through the end of the year; 1979 (30 years) saw an irregular rally begin in early March and rise irregularly to October then a sharp plunge; an early March low in 1989 (20 years) rose until October followed by the famous October massacre in October 1989; the key 19 year cycle (1990) saw a rally start in early March and rise until July before a sharp decline into October got underway. - So while cycles are mixed with the earliest high this month we noted we could continue on into September even after an August correction (or even into early October). So the cycles remain generally favourable. - Surprisingly we have heard a lot of pundits declare that this rally is nearly over so that often sets up a continuance of the rally fooling them. - Support for the S&P is here and down to 850. Below 850 the bear market would resume. - Interim support is at Resistance is clear at 933 and 948. Above 948 we would make our move to 1000/1100. The Chapman Report for July 6, 2009 page 1 of 21

2 - A small aside the state of California is issuing I.O.U. s a form of printing their own money. - We are barely clinging to the recent uptrend so a small break under that level would not be surprising subject to us holding above Weekly indicators remain positive with no negative divergences. Short term indicators have turned down and are not oversold yet. - While the short term picture is cloudy we would only be concerned if we break under 885 and especially under 850 and we would no longer want to be long. The Chapman Report for July 6, 2009 page 2 of 21

3 NASDAQ Intermediate Trend: Up Short-term Trend: Up Week: Down NASDAQ STRATEGY: LONG HOLD (for definitions of terms, see end of report) - The NASDAQ fell 2.3% this past week. - We have now been four weeks with no new highs. - Weekly indicators remain in an uptrend with no negative divergences. - Short term indicators are faltering and falling. There were no negative divergences at the recent highs. - We remain in a bull channel with support at Below 1800 support is at 1700 and 1600 with the latter being key at the rising 100 day and still falling 200 day MA. - Interim support is at 1760 and below that level we would certainly be taking profits. - Resistance is at 1855 to 1875 but above those levels we could rise to We remain positive near term but we would heed the breakdown points if they are broken. The Chapman Report for July 6, 2009 page 3 of 21

4 - BONDS US TREASURY BONDS Intermediate Trend: Down Short-term Trend: Neutral Week: Up US BOND STRATEGY: STAND ASIDE (for definitions of terms, see end of report) - US Treasury Bonds continued their recent near term rise although following the sharp up move the previous week the rise was pretty muted this past week. - While we bounced off of major support near 113^00 we ran into bear channel resistance at 120^10 and the falling 13 week MA at 120^05. - A break out over 120^10 would take us up to the 40 week MA near 125^00. - A break back under support near 115^20 would take us back to the 113^00 lows. - Weekly indicators remain in a downtrend with no positive divergences. - Short term indicators are rising although there were no positive divergences at the recent lows. The rising pattern appears as a rising flag or pennant formation which is bearish going forward. - The key economic numbers this past week saw the non-farm payrolls fall a much higher than expected 467 thousand the unemployment rate rose to 9.5% slightly under the expected 9.6%. More dropouts it seems and of course in the US they are no longer counted as unemployed. Coupled with part timers who would rather work full time the unemployment rate is closer to 19%. The Chapman Report for July 6, 2009 page 4 of 21

5 - Other economic numbers this past week saw the Case-Shiller Housing Index for the largest cities fall 18.1% year over year. This was a slight improvement from the 18.7% fall recorded the previous month. The Chicago PMI was 39.9 vs. 34.9; consumer confidence was 49.3 vs. 54.8; the ISM Manufacturing Index was 44.8 vs. 42.8; pending home sales rose.1% vs. 7.1%. - This week is a quiet week for economic numbers. Key ones are ISM Services expected 46 vs. 44; and the trade numbers expecting a deficit of $30 billion vs. a deficit of $29.2 billion. International trade continues to falter year US Treasuries fell to 3.51% vs. 3.52% and the 2 year Treasury note fell from 1.1% to.98%. - Flows into US Treasuries from official foreign and international institutions rose only $2.1 billion in the latest week. - Our bond model indicator for US Treasury Bonds remains in stand aside. Investors should be out of long bonds and in Treasury Bills or short term bonds no longer than 3 years. The Chapman Report for July 6, 2009 page 5 of 21

6 CANADIAN BONDS Intermediate Trend: Down Short-term Trend: Down Week: Up CANADIAN BONDS STRATEGY: STAND ASIDE (for definitions of terms, see end of report) - Cdn bonds rose on the week but remain within the context of a bear channel. - Cdn bonds rebounded off of rising trendline support near 119. A break under that level would target major support near Resistance in the bear channel can be seen at 122 and above that the 40 week MA near Weekly indicators remain in a downtrend with no positive divergences. - Daily indicators are in an uptrend although there were no particular positive divergences at the recent lows. The pattern is appearing as a bear flag formation. A break under would target us back to the 119 support zone. - Economic numbers remain weak. Canada s GDP fell.1% in April following a.3% decline in March. Industrial Production for May fell 1% following a.5% decline in April. - Key numbers this week are the employment numbers where consensus is looking for a decline of 50,000 jobs and a rise in unemployment to 8.7%. The trade numbers are also out and they are looking for a small deficit of $.6 billion to a small rise of $.1 billion. June Cdn housing starts are also out and they are expecting 130 thousand up slightly from May s 128 thousand. The Chapman Report for July 6, 2009 page 6 of 21

7 - Our bond model is in a stand aside mode and investors should be out of long bonds and in Treasury Bills or short term bonds no longer then 3 years. The Chapman Report for July 6, 2009 page 7 of 21

8 PRECIOUS METALS AND CURRENCIES Intermediate term trend Short-term trend week trend strategy Gold up down down long caution Gold Bugs Index (HUI) up down down long caution Silver up down down long - caution TSX Gold Index up neutral down long caution US$ Index down down up stand aside CDN$ up down down long - caution (for definitions of terms, see end of report) Gold & Silver - Gold fell 1% and silver fell 5.1% on the week. - Gold is clinging to both the 50 and 100 day MA. Major support lies below near the 200 day MA at $876. The Chapman Report for July 6, 2009 page 8 of 21

9 - Silver is currently at a rising trendline support of $ Below that major support is near $12 and the 200 day MA. - Gold is forming a potentially bullish head and shoulders bottom reversal pattern. We are currently forming the right shoulder. - Key is that Gold holds above $885 which is just above the $875 major support. - A breakout over $983 neckline could project up to $ A potentially larger head and shoulders reversal pattern is also forming from the top seen in March The neckline for that potential H&S pattern is at $1000. The potential H&S pattern could on breaking out over that level project up to $1, Silver remains in a bull channel and its breakout level is at $15.60 and could project up to $28. - Resistance for silver above $15.60 is seen at $16.50 and $ Short term indicators are somewhat oversold with some positive divergences forming. - Silver s weekly indicators remain in an uptrend and Gold s weekly indicators are mixed but generally holding up. - We are moving into the seasonally positive phase for precious metals. This period runs from July to December although there is typically an interruption in the September to November period with a final rush into December and even as long as February. In other words the seasonally weak period for Gold is coming to an end. Silver s seasonally weak period ends in August so we are warned that weakness could hang for another month or so. But key is the potential H&S patterns forming above and if these are taken out then we will embark on a potentially strong rise. - The commercial COT for Gold is at 23% up from 22%. A slight rise. - The commercial COT for silver is at 28% up from 27%. - Key for Gold is breaking above the potential H&S patterns. If we do so successfully on some volume then the potential for a strong rise during a seasonally strong period becomes more compelling. Key of course is the US$ (below) which continues to look bearish. The Chapman Report for July 6, 2009 page 9 of 21

10 - Gold Bugs Index (HUI) and TSX Gold Index - The Gold Bugs Index (HUI) fell 3% and the TSX Gold Index fell 1.5% this past week. - We continue to see a potential head and shoulders bottoming pattern forming on the TSX Gold Index over the past several weeks. - Key is we see no break of 295 and especially not under 275 (the low of the left shoulder). - A break out over 340 would potentially target up to A larger potential head and shoulders pattern can be seen to be forming since the March 2008 highs. - Key here is the head low of the smaller H&S pattern at 267 must hold. - The larger potential head and shoulder pattern breaks out above 350 and has potential measuring implications to The HUI remains in a bull channel uptrend. - Support is at 325 and down to Resistance is at 380 and up to The potential head and shoulder patterns on the TSX Gold Index are compelling but it is important that the neckline levels be taken out and the key support levels hold. The Chapman Report for July 6, 2009 page 10 of 21

11 - Canadian Dollar - The Cdn$ has fallen hard in the past five weeks since reaching a high of We are now at support of the rising bull channel line, the breakout line from the long downtrend line from the November 2007 highs and the 13 week MA. - Odds therefore favour that the Cdn$ could rise from these levels. - A further breakdown would tell us that the recent up move of the Cdn$ was over and that a test of the October/March lows is underway. - Weekly indicators remain in an uptrend with no negative divergences. - On the daily charts the Cdn$ is finding support around the 50 day MA. - Short term indicators are in a downtrend but are approaching oversold levels. There were some small negative divergences at the recent highs. - Support can be seen at 86 but a further break would target next level of support near 84. Below 84 we would embark on a test of the lows. - Regaining back above 88 would be positive and target higher. - Our outlook remains positive subject to the above support points holding. The Chapman Report for July 6, 2009 page 11 of 21

12 - US Dollar Index - The US$ rose.5% on the week. - Since hitting lows at some five weeks ago the US$ has been trading in a narrow range of roughly to The high was seen four weeks ago. - Since then we have seen lower highs and lower lows. - Despite an up week we did not take out the previous weeks high and we saw new lows. - If we continue to fail we should eventually break to new lows below Last week s high was so it is important that this high is not taken out this week. - If it is then we would have to focus on the high of four weeks ago at The short term trend has been trying to turn up but the indicators are rolling over. We are also at resistance of the 50 day MA and we are threatening to roll over at that key MA level. - Weekly indicators are pointed down with positive divergences. - Our expectations are that this current up move in the US$ will fail and we will soon see new lows. The Chapman Report for July 6, 2009 page 12 of 21

13 ENERGY Intermediate term trend Short-term trend week trend strategy Oil up up down long hold Natural Gas down down down stand aside bottoming XOI Index neutral down down long - caution TSX Energy Index up down down long - caution (for definitions of terms, see end of report) Oil & Gas - Both oil and gas fell this past week. Oil prices fell 3.5% and Natural Gas (NG) fell a sharp 8.5%. - After hitting its highs on June 11 at $72.92 and trading for the past few weeks in a range from $67.50 to $72 oil broke support and closed below that level. That tells us that we will now test next support at $61/$63. - NG broke triangular support and now appears poised to test the lows at $3.25. We note that Oil made a similar move as it tried to find its lows back in December/February when we broke above $42 only to fall The Chapman Report for July 6, 2009 page 13 of 21

14 back in February to test the $32.40 lows. It was successful test and then Oil began its rise to $72. We would not be surprised to see NG do the same thing as we continue to believe that NG is forming a bottom of some significance. - We had thought the pattern forming on NG was more bullish and appeared as an ascending triangle. The triangle pattern failed and we now appear poised for a potential double bottom. - Oil prices remain in a bull channel with the bottom of the channel as noted in the $61/$63 area. A break below that level would turn the situation more bearish and we would test down to next major level of support near $55. - Short term indicators for oil are currently oversold suggesting we could soon see a bounce. - Similarly with NG the short term indicators are somewhat oversold but are diverging positively. - Weekly indicators for NG are in an up mode and are also diverging positively. - Weekly indicators for oil are in an up mode and there are no signs of any negative divergences. - Weekly EIA numbers showed oil supplies fell 3.8 million barrels but they are 50.4 million barrels above last year s levels; gasoline supplies rose 2.3 million barrels and are.3 million barrels above last year; distillates rose 2.9 million barrels and are 34.3 million barrels above last year. - NG in storage is 2,651 Bcf and the injection was 94 Bcf. The storage level is 22.2% above the 5 year average. - The commercial COT for oil was steady at 48%. The commercial COT for NG was also steady at 61%. - Targets for oil prices remain at $80/$85 but the short term correction may continue for a week or so. - NG prices continue to try and find a bottom and we remain in accumulative mode. The Chapman Report for July 6, 2009 page 14 of 21

15 Amex Oil & Gas Index (XOI) and TSX Energy Index - Both the XOI Index and the TSX Energy Index fell on the week. The XOI fell 2.4% for the third consecutive weekly decline. The TSX Energy Index fell 3.4% and appears to be breaking support at the13 week MA. - The short term trends of both the XOI and the TSX Energy Index have turned down. The intermediate trend for the XOI has turned neutral. Investors should be aware of this and exercise caution going forward. - Our simple rule of thumb is to watch a former weekly low. For the TSX Energy Index this is at 243. For the XOI it is at 825 although in we note the XOI has broken both support at the 13 and 40 week MA a negative sign. - Despite the recent weakness in the energy stocks major weekly indicators remain in an up mode. - Daily indicators are in a down mode although not particularly oversold. - The XOI continues to make what appears as a bottoming pattern. The TSX Energy Index has been in an up mode diverging with the apparent weakness of the XOI. - This is of concern as only one of them is right. - We have turned cautious on the sector as a result of the mixed signals. A further break in the XOI Index will set up a test of the lows near 760. A break of 250 on the TSX Energy Index will set up a test of major support at 240. Below 240 we would have to focus on the lows near 175. The Chapman Report for July 6, 2009 page 15 of 21

16 TSX INDICES - The TSX Composite fell 1% on the week. A disappointment that followed the previous week s strong up move. - In line with the mixed weak closing on the week 7 of the 14 sub indices were down on the week led by the TSX Energy group who fell 3.4%. Other areas of weakness were seen in Income Trusts (-1.8%), Industrials (-1.6%) and Gold (-1.5%). Of the 7 up sub indices the leader was Metals and Mining (+2.9%) and Information Technology (+1.2%). There are some who believe that Information Technology will be the new leader to the upside. Financials were down.8% as credit card delinquencies rose at the big banks. - The big cap stocks were the weakest as the TSX 60 fell 1.1% slightly weaker than the composite itself. - The TSX Venture Exchange fell 1.7% on the week. - The previous week s rebound started with support at the 13 week MA a potential sign of strength. - The rebound failed, however, to take out the previous high at 10,726 and we closed below the opening level a sign of weakness. Failure to take out previous highs will now have us turn our focus to the recent lows at 9,727. If that level were to fall we would test down to the 200 day MA near 9,344 or the 40 week MA near 9, Daily indicators are falling and there were negative divergences at the recent top. - Weekly indicators are still rising and there are no negative divergences. Normally we will have to see negative divergences in the weekly indicators before we see a final top. - The recent pause is the first significant pause since this rally got underway back in the first week of March. - Intermediate trends: Health Care changed from down to neutral. - Short term trends: Gold changed from up to neutral, Telecommunications from neutral to down, TSX Composite from up to neutral, TSX 60 from up to neutral, TSX Venture Exchange from up to down. - Despite the recent weakness overall we remain positive on the market. This week should determine the near term direction. A break of the recent lows will target zones mentioned above. A break above the earlier highs will point the market higher. - Major resistance is seen at 12,000 and that remains at best our overall target zone. - Key could be the financials which are diverging negatively on the daily charts and the weekly charts are becoming overbought. This past week saw the financials fall after making new highs for the current move a potential negative sign. The Chapman Report for July 6, 2009 page 16 of 21

17 TSX COMPOSITE trend close on Jul 3 52-week high 52-week low intermediate trend shortterm trend Week trend strategy TSX Composite 10, , , up neutral down long hold TSX up neutral up long hold TSX CDNX Venture 1, , up down down long hold Energy up down down long hold - caution Financials up up down long hold Information Technology up Uupp up long hold Consumer Discretionary up up down Long hold Consumer Staples up up up long hold Healthcare neutral up up stand aside bottoming? Industrials up up up long hold Materials up neutral up long hold Telecommunications down down up stand aside - bottoming Utilities up up down buy Gold up neutral down long hold Metals & Mining up up up long hold Real Estate up up up Long hold Income Trusts up down down Long hold - caution (for definitions of terms, see end of report) The Chapman Report for July 6, 2009 page 17 of 21

18 EXCHANGE TRADED FUNDS - New buys, new sells none - Changes Intermediate trend none - Changes Short term trend XGD up to neutral, XBB down to neutral, XIC up to neutral, XMD up to neutral, QQQQ up to neutral, SPY up to down, EEM up to neutral, GLD up to neutral. - Other comments most intermediate trends remain to the upside but once again some of the short term trends weakened suggesting a possible top could be coming. The coming week could be important. Our long term buy strategy is based off of intermediate signals only. More aggressive investors can follow the short term trend signals but definitely use stops. ETF intermediate trend short-term trend intermediate strategy XGD/T Gold up neutral long hold topping? XMA/T Materials up neutral long hold XIT/T Technology up neutral long hold XFN/T Financials up up long hold XEG/T Energy up down long hold - caution XRE/T REIT up up Long hold XIU/T TSX 60 up up long hold XSP/T S&P 500 neutral down Long hold - caution XBB/T Bonds up neutral long hold - topping XSB/T Short Bonds up down long hold topping? XRB/T Real Return Bonds up up Long hold XIC/T Composite up neutral long hold XMD/T Mid-Cap up neutral long hold QQQQ NASDAQ up neutral long hold SPY/NY S&P 500 up down Long hold EWJ/NY Japan up up Long hold FXI/NY China 25 up up long hold EEM/NY Emerging Markets up neutral long hold GLD/NY Gold up neutral long hold topping? IEV/NY Europe up down long hold IFN/NY India up up long hold The Chapman Report for July 6, 2009 page 18 of 21

19 TLT/NY 20-year bond down neutral stand aside (for definitions of terms, see end of report) The Chapman Report for July 6, 2009 page 19 of 21

20 DEFINITIONS OF TERMS Intermediate-term trend (weekly trend): Of interest to conservative long term investors. As long as the intermediate trend is up, conservative long term investors can continue to hold. But watch the short-term trend for possible trend changes coming. Short-term trend (daily trend): Of interest to more aggressive investors and traders. When the short term trend turns up more aggressive investors and traders may wish to go long. Note though that all strategy signals are based on the intermediate trend only. Strategy: Buy: All buy signals relate solely to the intermediate trend. A buy signal is issued when the intermediate trend turns up. Sell: All sell signals relate solely to the intermediate trend. A sell signal is issued when the intermediate trend turns down. Stand aside: intermediate strategy is in stand aside mode following a sell signal. Long or long hold: intermediate trend is up following a buy signal and investors can continue to remain long. Long or long hold topping or caution: short term indicators are diverging negatively and there are other indicators indicating to us that the market may be topping out. Confirmation will only come when the intermediate trend turns down and issues a sell signal. Stand aside - bottoming: short term indicators are diverging positively and there are other indicators indicating to us that the market may be about to change from stand aside to buy. Confirmation will only come when the intermediate trend turns up and issues a buy signal. Stand aside accumulate: similar to stand aside bottoming above except investors may wish to consider accumulating. Confirmation will only come when the intermediate trend turns up and issues a buy. (New highs, new lows): market or index is making new highs or new lows. Trend Signals: Up Trend is up. Down Trend is down. Neutral Trend has entered a transition phase before either resuming the current trend or changing trend. This is a caution zone and signals that a trend change may be in the offing. Copyright 2009 All Rights Reserved David Chapman The Chapman Report for July 6, 2009 page 20 of 21

21 General Disclosures The information and opinions contained in this report were prepared by MGI Securities. MGI Securities is owned by Jovian Capital Corporation ( Jovian ) and its employees. Jovian is a TSX Exchange listed company and as such, MGI Securities is an affiliate of Jovian. The opinions, estimates and projections contained in this report are those of MGI Securities as of the date of this report and are subject to change without notice. MGI Securities endeavours to ensure that the contents have been compiled or derived from sources that we believe to be reliable and contain information and opinions that are accurate and complete. However, MGI Securities makes no representations or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to MGI Securities that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. The reader should not rely solely on this report in evaluating whether or not to buy or sell securities of the subject company. Definitions Technical Strategist means any partner, director, officer, employee or agent of MGI Securities who is held out to the public as a strategist or whose responsibilities to MGI Securities include the preparation of any written technical market report for distribution to clients or prospective clients of MGI Securities which does not include a recommendation with respect to a security. Technical Market Report means any written or electronic communication that MGI Securities has distributed or will distribute to its clients or the general public, which contains an strategist s comments concerning current market technical indicators. Conflicts of Interest The technical strategist and or associates who prepared this report are compensated based upon (among other factors) the overall profitability of MGI Securities, which may include the profitability of investment banking and related services. In the normal course of its business, MGI Securities may provide financial advisory services for issuers. MGI Securities will include any further issuer related disclosures as needed. Technical Strategists Certification Each MGI Securities technical strategist whose name appears on the front page of this technical market report hereby certifies that (i) the opinions expressed in the technical market report accurately reflect the technical strategist s personal views about the marketplace and are the subject of this report and all strategies mentioned in this report that are covered by such technical strategist and (ii) no part of the technical strategist s compensation was, is, or will be directly or indirectly, related to the specific views expressed by such technical strategies in this report. Technical Strategists Trading MGI Securities permits technical strategists to own and trade in the securities and or the derivatives of the sectors discussed herein. Dissemination of Reports MGI Securities uses its best efforts to disseminate its technical market reports to all clients who are entitled to receive the firm s technical market reports, contemporaneously on a timely and effective basis in electronic form, via fax or mail. Selected technical market reports may also be posted on the MGI Securities website and davidchapman.com. For Canadian Residents: This report has been approved by MGI Securities which accepts responsibility for this report and its dissemination in Canada. Canadian clients wishing to effect transactions should do so through a qualified salesperson of MGI Securities in their particular jurisdiction where their IA is licensed. For US Residents: This report is not intended for distribution in the United States. Intellectual Property Notice The materials contained herein are protected by copyright, trademark and other forms of proprietary rights and are owned or controlled by MGI Securities or the party credited as the provider of the information. Regulatory MGI SECURIITES is a member of the Canadian Investor Protection Fund ( CIPF ) and the Investment Industry Regulatory Organization of Canada ( IIROC ). Copyright All rights reserved. All material presented in this document may not be reproduced in whole or in part, or further published or distributed or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of MGI Securities Inc. The Chapman Report for July 6, 2009 page 21 of 21