12/12/2010
Table of Contents
- Status of Key Market Parameters
- Small-Cap Stocks Outperform Big-Caps
- Broad Stock Market in Uptrend Zone
- S&P 500 Index Broke Resistance of Cup-with-Handle Pattern
- 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)
Small-Cap Stocks Outperform Big Caps
The following chart shows the ratio of the Russell 2000 small-caps divided by the Russell 1000 big-caps for this year. Since September, the ratio has been in a uptrend, that indicates small-caps outperform big-caps. This trend should continue with the U.S. dollar strengthening and the “January Effect”.
Broad Stock Market in Uptrend Zone
The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, moved above the six-week horizontal channel with positive readings of both the trend and momentum indicators last week. The market currently is in the uptrend zone above 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, was positive too last week. Based on the forecast of the LWX indicator, the market could enter a neutral time-window that could last weeks until higher market volatility is released.
S&P 500 Index Broke Resistance of Cup-with-Handle Pattern
The S&P 500 index is forming a 8-month Cup with Handle pattern in the following weekly chart. This is a bullish continuation pattern having two parts: 1) a cup, and 2) a handle after the prior 13-month uptrend with 83% advance from March of 2009 to April of 2010 led to the cup. As the cup was completed, the market spent seven weeks in a horizontal trading range on the right hand side to form the handle. Last week, the upper resistance at 1225 was broken, and the uptrend should be resumed. An upside price target for the S&P 500 index could be projected at 1440, about 18% advance, measured by the hight of the cup. Correspondingly, it could be 15400 for the Wilshire 5000 index, and 13245 for the Dow Jones industrial Average index.
Broad Market Volatility below the Panic Threshold
The Broad Market Volatility (BIX), measured from over 8000 U.S. stocks, closed at 5 on Friday and it is still below the panic threshold level of 46. The volatility level of 5 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.
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 6.96% above the EMA89. Outperforming sectors are Internet (+13.06%), and Semiconductors (+12.18%), and Basic Materials (+10.93%). Underperforming sectors are Pharmaceuticals (+0.22%), Utilities (+0.24%), and Real Estate (+1.54%). The Russell 2000 (+11.07%) is outperforming the market, and the DJ-30 (+4.18%) 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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