CROSS ASSET TECHNICAL ANALYSIS

Tim McCullough Technical Strategist T: +44 (0)20 7158 8280 M: +44 (0)7500 227 060 E: tim.mccullough@lloydsbanking.com TUESDAY, 12TH JULY 2011

European risk: oversold and ready to recover for medium-term Sell 2 and 10 year German bonds Buy EUR/USD & EUR/CHF Buy Italian equities
Across European rates, FX and equities, the market has overshot its risk aversion. Yields and FX rates have fallen to long-term trend support levels, while short-term signals suggest that the recent declines are complete. These extreme levels offer opportunities to enter longer-term trends, although the volatility of recent days means that substantial risk parameters should be used in entering these positions. We remain bullish western equities as a whole, in some cases targeting a retest of 2007 highs before taking profit. It is striking therefore that Italian equities (FTSE MIB) have today completed both long and short-term buy signals. This is the first reversal signal on a monthly chart since the 2007 peak. It is certainly contrarian, but it is also a perfectly valid signal.

The European 2 year swap has fallen towards its 1.82% long-term trend support (see chart 1 below). The correction of the last 3 months from the 2.50% high in April should now be at en end, following a short-term sell signal on the Schatz future today (chart 2). This offers a relatively short-term opportunity to re-enter the longer term rising trend in the swap rate from 1.15% in August 2010. The next target should be more significant longerterm resistance at 3.36% The European 10 year swap has also fallen towards its equivalent long-term support at 3.14% (chart 3). The correction from the 3.79% high in April is also now complete, following a short-term sell signal on the Bund future today (chart 4). As in the 2 year, this offers a relatively short-term opportunity to re-enter the longer term rising trend. The next target is the April high of 3.79%. Our previous recommendation to pay fixed at 3.37% on 3rd June was stopped out at 3.23%, but the long-term trend remains intact. EUR/USD has medium-term trend support between 1.3903 1.3937 at a monthly close (chart 5 below), though it is impractical to consider managing risk on such an infrequent basis. But short-term charts show that the decline from the 1.4578 high on 3rd July is now completing exhaustion signals, just when the 1.3903 1.3937 medium-term support is being tested (chart 6 below). We therefore recommend buying EUR/USD at the current 1.3970 level, in order to buy into the mediumterm bull trend but with a more attractive short-term risk / reward ratio. In terms of an upside target, we see a weekly exhaustion pattern developing on the weekly chart (not shown). Although there are numerous permutations for these to complete, the minimum condition for a repeat sell signal is 1.4807. We note that the 1.6019 peak in 2008 was marked by a similar double trend exhaustion pattern on this weekly chart. EUR/CHF has exceeded the initial 1.1806 target of our sell recommendation (at 1.2230 on 5th July). Although there are no signs that the long-term decline from 1.6847 is complete, shorter-term signals now suggest not only taking profit, but reversing to go long. We therefore close our recommended short position (for a profit of 4.78%) and recommend going long at the current level of 1.1645. The daily chart (chart 7 below) today completes a buy signal. It also shows bullish divergence, ie stronger momentum versus weaker price since the 1.21 low in late May (similar to June August 2010, which led to an 8% rally). The 4 hour chart (chart 8 below) has also completed buy signals, similar to the previous 1.1806 low on 24th June. Corrective rallies in EUR/CHF over the last year or so have tended to be dramatic, so identifying appropriate opportunities in short-term charts has become more important.

CROSS ASSET TECHNICAL ANALYSIS

Tim McCullough Technical Strategist T: +44 (0)20 7158 8280 M: +44 (0)7500 227 060 E: tim.mccullough@lloydsbanking.com TUESDAY, 12TH JULY 2011

Recommendations

Pay fixed rate 2 year EUR swap at current level: 1.97% Stop-loss: daily close < 1.68% Initial target: 3.36%

Pay fixed rate 10 year EUR swap at current level: 3.18% Stop-loss: daily close < 2.94% Initial target: 3.79%

Buy EUR/USD at current spot level: 1.4000 Stop-loss: 3 hour close < 1.3712 (ie 10am, 1pm, 4pm etc London time) Initial target: 1.4807

Buy EUR/CHF at current spot level: 1.1670 Stop-loss: daily close < 1.1354 Initial target: 1.2398

Buy Italian equities (FTSE MIB) at current level: 18,510.53 Stop-loss: daily close < 16,267.47 Initial target: 28,348

Contents
Euro 2 year interest rate swap (charts 1 & 2) EUR/USD (charts 5 & 6) Italian equities (charts 9 & 10) Euro 10 year interest rate swap (charts 3 & 4) EUR/CHF (charts 7 & 8)

Pay fixed 2 year Euro interest rate swap

Latest: 1.98%

NewRecommendation: Payfixed2yEurointerestrateswap:1.98% Initialstoploss:dailyclose<1.68% Initialtarget:3.36% UnrealisedProfit/Loss:0%

Chart 1: Monthly Euro 2 year swap, 2005 2011

Currently testing medium-term trend support between 1.82% - 2.04% (at monthly close) Coincides with shorter-term pay signal in chart 2 below

Chart 2: daily Schatz future, Apr 2011 Jul 2011

Now completing trend reversal pattern TD Combo 13 sell Risk level: daily close > 109.28 (to be confirmed at todays close) Momentum holding below 70 pivot level (RSI) Coincides with monthly trend support in 2 year swap above

Pay fixed 10 year Euro interest rate swap

Latest: 3.19%

NewRecommendation: Payfixed10yEurointerestrateswap:3.19% Initialstoploss:dailyclose<2.94% Initialtarget:3.79% UnrealisedProfit/Loss:0%

Chart 3: Euro 10 year swap, monthly, 2004 2011

Currently testing medium-term trend support between 3.19% - 3.28% (at monthly close) Coincides with shorter-term sell signal in chart 4 below

Chart 4: Bund future, daily, Apr 2011 Jul 2011

Now completing trend reversal pattern TD Combo 13 sell Risk level: daily close > 133.23 (to be confirmed at todays close) Coincides with monthly trend support on 10 year interest rate swap above (chart 3)

Buy EUR/USD
Latest: 1.4000

NewRecommendation: BuyEUR/USD16July2012:1.4000spot (0.0132=1.386812monthforward) Initialstoploss:3hourclose<1.3712spot Initialtarget:1.4807spot UnrealisedProfit/Loss:0%

Chart 5: Monthly, 2000 2011

Currently testing medium-term trend support between 1.3903 1.3937 (at monthly close) Coincides with shorter-term sell signal in chart 6 below

Chart 6: 3 hourly, 1 Jul 2011 12 Jul 2011

Completed double trend reversal signals TD Combo 13 & TD Sequential 13 buy Risk level: 3 hour close < 1.3712 Potential target: 1.4807 (minimum required for TD Sequential 13 sell signal on weekly chart, see above)

Buy EUR/CHF
Latest: 1.1670

NewRecommendation: BuyEUR/CHF13July2012:1.1670spot (0.0166=1.150412monthforward) Initialstoploss:dailyclose<1.1354spot Initialtarget:1.2398spot UnrealisedProfit/Loss:0%

Chart 7: daily, Nov 2010 Jul 2011

Now completing trend reversal pattern TD Sequential 13 buy Risk level: daily close < 1.1354 Bullish divergence in momentum versus price Potential target: 1.2398 (Ichimoku Base Line resistance on weekly chart, not shown)

Chart 8: 4 hourly , 21 June 2011 12 Jul 2011

Completed trend reversal patterns TD Sequential & Combo 13 buy Risk level: 4 hour close < 1.1549 Coincides with buy signal on daily chart (chart 7above)

Buy Italian Equities

FTSE MIB
Latest: 18,510.53

NewRecommendation: BuyFTSEMIB:18510.53 Initialstoploss:dailyclose<16,267.47 Initialtarget:28,348 UnrealisedProfit/Loss:0%

Chart 9: monthly, 2002 2011

Now completing trend reversal pattern TD Sequential 13 buy Risk level: impractical Potential target: 28,348 (Ichimoku cloud resistance) Coincides with short-term buy signal on daily chart below (chart 10)

Chart 10: daily, Jan 2011 Jul 2011

Now completing trend reversal pattern TD Combo 13 buy Risk level: daily close < 16,267.47 Coincides with longer-term signal on monthly chart above (chart 9)

Methodology
Combination of trend-following with contrarian disciplines

Trend-following Five Ichimoku lines illustrate various depths of trend via multiple comparisons of layers of current and historical prices.

Contrarian DeMark Indicators (principally TD Combo & TD Sequential) offer market-timing disciplines for identifying potential trend exhaustion areas. These contrarian investing opportunities can be psychologically hard to implement at the time, but they offer attractive risk-reward opportunities. Both initial and terminal stages of each trend (together with any intermediate consolidation) are identified in an objective manner. TD Indicators do not however comprise a trading system; their interpretation is personal. Settings and applications used here may vary from those recommended by Tom DeMark at Market Studies LLC, who owns their trademark.

Both methodologies use consistent settings on all time-frames. Great emphasis is placed on comparing charts over multiple time-frames, in order to identify short-term trends within the context of longer-term trends and ranges.

Momentum A simple momentum indicator (RSI, 14 bars) is often added to identify divergence of price versus momentum.

Risk Management Where specific medium-term trading recommendations are offered (with initial stop-loss and target), regular updates are provided with ongoing risk management suggestions.

Accountability All current and previous recommendations are documented.

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