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Update for Wednesday, April 1, 2009; 4:40 PM, Eastern.

[Bottom Line]: A Primary degree rally remains underway from early March and should carry prices higher in
the coming weeks. The main stock indexes retain several options over the near term.

The stock market made a Primary-degree low, Primary 1 (circle), on March 6 (intraday) and 9 (close).
Primary wave 2 (circle) started from 666 in the S&P and 6470 in the DJIA. With March now over, we can
state conclusively that stocks recorded a bullish reversal month, the first of Cycle wave c from t he October
2007 high. This is exactly the type of behavior one would expect at a Primary wave 1 (circle) low. The bear
market rally should last weeks and likely months and correct the decline from the October 2007 peak. The

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news remains grim now, but by the time wave 2 (circle) up enters its latter stages, optimism should be back
and in full bloom.

EWFF properly cited the waning downside momentum (see chart p.4 March issue), as well as the record
extreme in pessimism (DSI and AAII) as evidence that the stock market was in the latter stages of wave 1
(circle). The burst through the two-four line confirmed the bottom and as long as prices do not delve too
deeply back into the previous channel, our confidence remains strong that wave 2 (circle) up should carry
prices higher.

Near term, there is simply no way to finesse this, it’s a very tough call as to what will unfold in the coming
day or two. The market still has varied options, as it did Monday night. We had been expecting an “up-down”
sequence to draw prices to new lows, which would complete the downward correction, wave 2. Yesterday’s
rally looked like the “up” portion, and today’s weak open held the promise of being the “down” portion. But
the only index to make a new low, at least so far, was the MidCap 400, which leaves open several differing

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views of the exact short-term wave structure. All the options are imperfect, with varying degrees of
drawback. But the top two counts that likely explain the near-term market action are the following:

Monday’s low could mark the bottom of a shallow wave 2 decline, which traced out a flat (see EWP, pp.45-
46). Wave c (circle) was 1.618 times the length of wave a (circle), a common relationship, and the rally from
this low looks like a “five,” at least in the NASDAQ. This view implies that this morning’s early sharp drop was
a second wave and the rise throughout the afternoon was the start of a third wave up. Any break of this
morning’s low, 783.32 in the S&P and 7484 in the DJIA, would eliminate this option.

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The second option is that the wave 2 (or B) pullback could be unfolding as a double three (see EWP, p.52),
whereby the decline to Monday’s low was the end of a flat, labeled w (circle), the rise to today’s high was an
intervening x (circle) wave, and another (a)-(b)-(c) decline, a zigzag, will be wave y (circle). Under this view,
the S&P should decline into the 750-766 area, from which we’ll look at the evidence to determine if a low is
at hand or if prices will slip a bit lower prior to a near-term bottom.

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Unfortunately, I don’t have a strong handle on the odds between the two wave counts just described. My
sense is that one should go with the most straight-forward and simplest of the interpretations, which is the
first one: wave 3 up is underway. NYSE Ticks were solid all day with an exceptionally strong close, breadth
was positive, as well as up/down volume, and the first two weeks of April tend to be strong on a seasonal
basis and the one larger degree trend, Primary wave 2 (circle), is up, which is the direction that prices should
be pulled. Yet, I’m bothered by the relative shallowness of the pullback so far, with prices not coming down
to ‘test’ the two-four line of the previous channel, although this is not a requirement. Moreover, the above
chart shows that today’s 813.62 high in the S&P tagged the upper line of a parallel channel formed by the
rally from Monday’s low and there are two equal legs up from this low, which is common in an “ABC”
corrective pattern.

Here’s how I am approaching the analysis of tomorrow’s session: a strong rally above 821.50 in the S&P, in
conjunction with the Dow (above 7825) and NASDAQ (above 1565), will raise the odds considerably that
wave 3 up is indeed underway. The reason is that pushing above this level will carry the index above the
.786 retracement of the decline from last Thursday, as well as negate the parallel channel and fill the gap
from Friday. I reserve the right to change my mind based on the evidence (breadth, volume, Ticks, other
indexes, etc…), but for now, this is what I’m looking at. As long as the index remains in the channel and
doesn’t materially breach today’s high (813.62), prices could still come down toward the two-four line in a
deeper downward correction.

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The NASDAQ closed up today but lagged the blue chips all day. W here as the Dow and S&P both pushed
above yesterday’s highs, the NASDAQ did not, creating a possible inter-market bearish divergence. This
could easily be erased with a quick burst above 1554, yesterday’s high, but as of now, it’s there. At the top I
mentioned that the rise from Monday’s low looks like a “five” in the NASDAQ and the 15-minute chart above
shows this form. IF the rally is wave i (circle) up with this morning’s sharp drop wave ii (circle), we should
now fairly early tomorrow as prices push strongly higher in wave three of three. Rallying through 1565 in
conjunction with the S&P and Dow would raise the odds to high for this view. Otherwise, we cannot rule out
a deeper pullback, one that draws prices back under 1485 prior to a low.

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There is nothing new to add to Monday’s comments with respect to the [June U.S. 30-year Bond]. “Prices
have yet to start its next leg down. A break of the support shelf formed at 124-10 should elicit strong selling
pressure and even lower prices.”

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The [U.S. Dollar Index] appears to be consolidating Friday’s sharp third-wave rise with a fourth-wave since
Monday’s 86.13 high. Once complete, prices should push higher to complete “five up” from the wave (C) low.
As long as prices do not close under 84.36, this pattern will remain our near-term forecast.

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The small sideways consolation since the 1.3117 low in the [Euro], should lead to more selling pressure and
lower prices. The goal of wave (3) is to make strong progress toward 1.2458 in the coming weeks, and
possibly lower. A solid close above 1.3420 would suggest that something other than wave (3) down was
underway.

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Thus far, [Gold] has remained resistant to the pull of iii (circle) of 3 down. But each short-term upward spike
counts much better as a “three,” while each downward move looks more like a “five.” This pattern implies
that the one larger-degree trend remains down for gold prices. At some point that is quickly approaching,
gold will run out of the gas need for these brief but sharp spikes, which should lead to a strong leg lower. Our
stance remains that wave (C) down started on February 20 ($1007.20) and should eventually draw prices
beneath the wave (A) low of $680.75. Any push above $967.95 would indicate that a more complex upward
correction was unfolding.

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[Silver] remains in the early stages of Primary wave C (circle) down, which started at $14.68 (Feb. 23). Here
too, a series of sharp but brief upward spikes is keeping the bears on edge. Yet note the series of lower lows
and lower highs on the above chart. This defines the trend as down. The next significant move should be a
third wave down, which will be dramatic and draw silver prices toward the October low ($8.39). Eventually,
wave C (circle) should break well beneath this low before it completes. While not expected, a rise above
$13.79 would temporarily postpone the next leg down.

Next Update: Friday, April 3, 2009

—Steven Hochberg, Editor.

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