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November 21, 2010 Leave a comment Go to comments
Table of Contents
  • Status of Key Market Parameters
  • U.S. Dollar Index Testing a Critical Level
  • Wilshire 5000 Index in Sideways
  • The Broad Market Volatility still below the Panic Threshold
  • Sector Ranking
  • Chinese Stock Market Testing the 17-Week Moving Average

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 Index Testing Critical Level
How the U.S. dollar moves now acts as an important leading indicator for price moves of broad financial markets.  In particular, the U.S. dollar has more direct impact on gold/silver and the stock market due to the recent strong inverse relationship between the dollar and gold and also between the dollar and the stock market.
Last week the U.S. dollar index had an upside break-out from 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 in a mature downtrend.  An upside price target of the dollar index is projected at 81.  After last week’s breakout, the dollar index pulled back to re-test the horizontal line at 78.30 which serves as an important short-term support level.
The current retrace from last week high could be setting up another bullish Measured-Move-Up pattern that is categorized as a continuation pattern corresponding to the previous bullish led-in move.  In addition to the price target of 81 derived from the broadening triangle pattern, we will have a price objective for the potential measured-move once this pullback ends. 

Wilshire 5000 Index in Sideways
The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, broke down the lower boundary of the 9-week uptrend channel with market weakness shown by negative readings from both the trend and momentum indicators last week. The index is forming a four-week horizontal channel that indicates a sideways market.  The Leading Wave Index (LWX) indicator, color coded in the price bars of the following daily chart of the Wilshire 5000 index, is bearish. Based on the forecast of the LWX indicator, the market is 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 16 on Friday and it is still below the panic threshold level of 46. The readings of the BIX have recently increased from single-digit to double-digit, that indicates the market volatility is going to increase. 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 4.71% above the EMA89. Outperforming sectors are Internet (+11.06%), Energy (+9.55%), and Semiconductors (+8.80%). Underperforming sectors are Banks (-0.94%), Pharmaceuticals (-0.16%), and Utilities (+0.25%). The Russell 2000 (+6.35%) is outperforming the market, and the DJ-30 (+3.36%) is underperforming.

Chinese Stock Market Testing the 17-Week Moving Average
The chart below is a weekly chart of China’s Shanghai Stock Exchange Composite Index.  The index retreated after China reported higher-than-expected inflation and renewing concerns that the China’s central bank will raise interest rates again.  Now the Shanghai index is testing the 17-week moving average (equivalent to the 89-day moving average).  
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