10/16/2010
The LWX Indicator in Last Four Weeks (Past)
The LWX Indicator in Next Four Weeks (Forecast)
The Broad Market Volatility is below the Panic Threshold
The Broad Market Volatility (BIX), measured from over 8000 U.S. stocks, closed at 2 on Friday and it is below the panic threshold level of 47. The volatility level of 2 is very low and it indicates that the current market is bullish. The BIX is plotted in the following chart as compared with the Wilshire 5000 index.
Broad Stock Market Continues Rally
The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, continues the rally that has been led by the internet and the basic materials sectors since September 1. In the short-term scale, the Wilshire 5000 index has established a 6-week uptrend channel (orange lines). The 6-month Inverted Roof or Complex Head-and-Shoulders Bottom pattern (blue lines) suggests there would be potentially another 5% upside measured move from the present price to the target price of 13000. With the strong support from either the neckline of this pattern or the 89-day exponential moving average, the midterm election year bottom should be behind us.
The Leading Wave Index (LWX) indicator, color coded into the price bars of the following daily chart of the Wilshire 5000 index for easy reference, has been bullish since September 1. Based on the forecast of the LWX indicator, the bullish time-window for the market extends to the early of November that coincides with the time of the midterm elections. For last two months, the bullish projection of the LWX has been in sharp contrast to the popular bearish and scary opinions of “Head-and-Shoulder“, “Hindenburg Omen“, and “September-October-Bearish–Season“. So far, the market seems to favor the bullish projection of the LWX.
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Trend indicator: up
Momentum indicator: positive
Sector Ranking
The following table is the percentage change of sectors and major market indexes against the 89-day exponential moving average (EMA89). The Dow Jones Wilshire 5000, as an average or a benchmark of the total market, is 5.57% above the EMA89. Outperforming sectors are Internet (+11.75%), Materials (+10.21%), and Precious Metals (+9.99%). Underperforming sectors are Banks (-6.64%), Financials (-0.31%), and Semiconductors (+3.16%). The NASDAQ 100 (+9.33%) is outperforming the market, and the Dow (+4.69%) is underperforming.
Gold is Building up a Bearish Potential in the Intermediate-Term
The following chart is a weekly chart of the gold continuous futures contract index in 8-year span. At this point when the gold price is sitting on a near all-time high, it has developed two major patterns that should draw our attention.
The first pattern is a 7-year Ascending Broadening Wedge or megaphone formation confined by line A and line B. This pattern is similar to a rising wedge but with a broadening price pattern, and it tends to appear in a bull market with a bearish bias. The most important feature of this pattern is that the swing amplitude between two boundaries becomes larger and larger, and price movement gets more and more volatile. This feature indicates that price sooner or later will have a downward swing to re-touch or re-test the lower boundary (line B), although the big upward swing generates a great attraction like fireworks. Gold currently has a very broadening range between 900 and 1400. Once a downward swing happens, a drawdown could be very significant, even no mention of any potential downside breakout.
The second pattern is a 2-year Rising Wedge formation confined by line A and line C. This pattern also typically has a bearish bias. But this bearish bias can be realized only when a downside breakout happens at the lower boundary of the wedge. It looks like that two boundary lines of the current rising wedge on gold will merge at near the price of 1500. It indicates there is a big potential for price, before reaching 1500, to test the lower boundary line C of the rising wedge in the next three to six months.
A combination of an ascending broadening wedge and a rising wedge is a typical characteristic when asset prices get into positive feedback which means interring a state of increased disequilibrium driven by overconfidence of optimistic beliefs from market participants. It is a sign of setting up a potential powerful volatility storm for the near future.
Chinese Market in a Sharp Advance after Golden Cross
The following chart is a weekly chart of China’s Shanghai Stock Exchange Composite Index. Since the bearish death cross in the beginning of this year, the Chinese market has been depressed in a downtrend channel for 14 months. However, a new uptrend should start after the bullish Golden Cross which is defined by a successful breaking through both the 17-week moving average (equivalent to the 89-day moving average) and the median line of the 14-month downtrend channel around 2650. Please note that my definition of the Golden Cross is different from the traditional golden-cross definition using a crossover of the 50-day and 200-day moving averages. On October 8, right after the “National Day Golden Week holidays”, the Chinese stock market had a 3% big jump, and decisively confirmed the Golden Cross. Then just in a week the Shanghai index had an over 10% explosive surge. Now the index sharply approaches the first price target of 3000 at the upper boundary of the 14-month downtrend channel. The 14-month downtrend line may not have enough strength to resist this oncoming fierce advance.
Emerging “Three Peaks and Domed House” Pattern in Chinese Stock Market
A special chart pattern, “Three Peaks and Domed House“, is emerging from China’s Shanghai Stock Exchange Composite Index. With my modified version of George Lindsay’s basic model, the “Three Peaks and Domed House” pattern can be characterized to five major phases: 1) Three Peaks phase, 2) Basement phase, 3) First Floor phase, 4) Roof phase, and 5) Plunge phase. This modified version using “phase-counting” is a macro approach to Lindsay’s basic model, and it is different from the classical micro approach using “number-counting” from 1 to 28. In the following chart, the Shanghai Index is plotted as a red line against George Lindsay’s idealized model in a black line. From June of 2009 to April of 2010, the Shanghai index developed the “Three Peaks” phase. Then it had a sharp separating decline to reach the July 2010 low at 2320 and formed the “Basement” phase during this summer. Now it just started a rapid advance in order to build the “First Floor” of the Domed House. It should reach the “First Floor” phase near 3300 with a 10% upward move from the present price by the end of this year. The target “Roof” phase of the Domed House is projected at 4200. A total of 81% upward measured move is expected from the low of the “Basement” at 2320 to the high of the “Roof” at 4200 by the middle of next year. Based on this projection, the Chinese stock market should be in a strong bullish uptrend for the next six to nine months.
Just a couple of days ago, on October 14, a new China ETF named as Market Vectors China ETF (PEK) was launched by Van Eck Global. PEK claims to be the first and only U.S. listed ETF designed to give investors exposure to China’s A-Shares market.
To find previous weekly reports, click dates marked with blue color in the calendar on the right side, or just click the following link “Older Entries” :
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