11/14/2010
Table of Contents
- Status of Key Market Parameters
- U.S. Dollar Reversal Bottom Likely
- More Pullback Seen in Wilshire 5000 Index Next Week
- The Broad Market Volatility still below the Panic Threshold
- Sector Ranking
- Chinese Stock Market Retreated Last Week
Current Status of the LWX (Leading Wave Index)
The LWX Indicator in Last Four Weeks (Past)
The LWX Indicator in Next Four Weeks (Forecast)
U.S. Dollar Reversal Bottom Likely
The U.S. dollar index is forming a 6-week Broadening Descending Right-Triangle pattern bounded by an upper horizontal line and a lower downtrend line as shown in the chart below. This pattern is megaphone shaped with starting narrow fluctuations and then widening out between diverging boundary lines. The pattern usually acts as a bullish reversal if it occurs in a mature downtrend. But this bullish bias can be realized only if the price breaks out to the upside of the broadening pattern.
The U.S. dollar index has a short-term key resistance level of 78.30 which is the horizontal line of the broadening triangle pattern. Last week, the dollar rebounded from its new 52-week low, and reached the upper boundary of the broadening pattern. Once the horizontal resistance is breached, an upside price target could be projected at 81.
Due to current strong negative correlation between gold and the dollar and also between the stock market and the dollar, this potential bullish move of the dollar could generate corresponding technical corrections for gold and the stock market. Especially, it could impact gold to have a bearish potential for an approximately 90-point fall from the current price of 1368 to the projected price of 1278.
More Pullback Seen in Wilshire 5000 Index Next Week
The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, formed a short-term top peaked at 12970 just about 30 points shy of 13000 which is a price target projected by the Inverted Roof pattern. Last week the index pulled back off the 52-week high and reached the lower boundary of the 9-week uptrend channel with market weakness shown by negative readings from both the trend and momentum indicators. If the Wilshire 5000 index breaks through the support at the lower boundary of the channel, the stock market could enter a downside correction towards the 89-day exponential moving average near 12000, that implies a decline possibly near 5% from the current level.
The Leading Wave Index (LWX) indicator, color coded in the price bars of the following daily chart of the Wilshire 5000 index, has turned bearish. Based on the forecast of the LWX indicator, the market is now in the bearish time-window that could last weeks until higher market volatility is released.
Broad Market Volatility still below the Panic Threshold
The Broad Market Volatility (BIX), measured from over 8000 U.S. stocks, closed at 9 on Friday and it is still below the panic threshold level of 46. The volatility level of 9 is 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.
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 index, as an average or a benchmark of the total market, is 4.97% above the EMA89. Outperforming sectors are Internet (+11.99%), Precious Metals (+10.95%), and Energy (+9.93%). Underperforming sectors are pharmaceuticals (-0.21%), Banks (+0.24%), and Utilities (+0.92%). The NASDAQ 100 (+6.93%) is outperforming the market, and the DJ-30 (+3.58%) is underperforming.
Chinese Stock Market Retreated Last Week
The chart below is a weekly chart of China’s Shanghai Stock Exchange Composite Index. Following the bullish Golden Cross, 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, the Shanghai index is forming a potential uptrend channel (the orange lines) with the upper boundary projecting the price target around 4200 in the middle of 2011. Last week the index retreated after China reported higher-than-expected inflation. Renewing concerns that the China’s central bank will raise interest rates again may add some volatility into the market in the short-term.
The long-term “Three Peaks and Domed House” pattern of the Shanghai index is still on track and will be updated next week.
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