11/28/2010
Table of Contents
- Status of Key Market Parameters
- U.S. Dollar Rebound Continues
- Stock Market in Sideways
- Market Volatility below the Panic Threshold
- Sector Ranking with Internet Sector Leading
- 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 Rebound Continues
The U.S. dollar had a magic bullish reversal in the early of November when anti-dollar crowd sentiment went too far towards the extreme while the Fed’s QE2 program was announced, and then the dollar strengthened on eurozone debt jitters and Korean tension. The dollar’s rebound caught my attention for a third week as it developed two major bullish patterns: 1) broadening descending right-triangle pattern, and 2) measured move up pattern.
1. Broadening Descending Right-Triangle Pattern (Bullish Reversal)
Since the beginning of October, the U.S. dollar index has formed 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, a megaphone shape with starting narrow fluctuations and then widening out between diverging boundary lines, usually acts as a bullish reversal in a mature downtrend. The hight of this pattern suggests the dollar index has an upside price target at 81. After the horizontal line of the broadening triangle got broken and re-tested, the reversal process is successfully completed. The dollar index now is approaching the projected price level of 81 soon.
2. Measured Move Up Pattern (Bullish Continuation)
For last three weeks, the U.S. dollar index has been developing a Measured Move Up pattern that consists of three parts: 1) a reversal advance, 2) a pullback, and 3) a continuation advance as shown in the following chart. This chart pattern typically begins when prices bottom out after a downtrend. The initial reversal advance acts as a led-in move to form the first upleg of the pattern. After a brief pullback ends, the second upleg could be projected at the same angle and length as the first upleg, that gives the optimum price target and maximum anticipated time to reach the target. For the ongoing measured move up pattern of the dollar index, the current continuation advance should reach the price objective to 82 by the early of December.
Under pressure from dollar strengthening, gold and stock markets have gone nowhere but sideways. With this weekend new events of Irish bailout deal and US Navy aircraft carrier into the Yellow Sea, we will see how the U.S. dollar moves as well as its impact to gold and stock markets next week.
Stock Market in Sideways
The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, has been in a five-week horizontal channel in sideways with market weakness shown by negative readings from both the trend and momentum indicators. The market currently is in the choppy zone of the horizontal channel. The Leading Wave Index (LWX) indicator, color coded in the price bars of the following daily chart of the Wilshire 5000 index, turned neutral last Friday. 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 below the Panic Threshold
The Broad Market Volatility (BIX), measured from over 8000 U.S. stocks, closed at 6 on Friday and it is still below the panic threshold level of 46. The volatility level of 6 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 with Internet Sector Leading
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 3.82% above the EMA89. Outperforming sectors are Internet (+12.32%), Semiconductors (+9.88%), and Energy (+6.97%). Underperforming sectors are Banks (-4.02%), Pharmaceuticals (-1.50%), and Financials (-0.93%). The Russell 2000 (+6.92%) is outperforming the market, and the DJ-30 (+2.10%) 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. Currently the Shanghai index is testing the 17-week moving average (equivalent to the 89-day moving average).
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