5/8/2011

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5/8/2011

May 8, 2011 Leave a comment Go to comments

Table of Contents

Status of Key Market Parameter
Silver Index Fell from Top of “Bump-and-Run Reversal” Pattern
Gold Index Fell from “Roof” of “Three-Peaks and Domed House” Pattern
US Dollar Started to Bounce inside a 11-Month “Falling Wedge” Pattern
Broad Stock Market Broke Forming a 7-Week “Rising Wedge” Pattern
Market Volatility is below the Panic Threshold
Asset Class Performance Ranking with Gold Leading
Sector Performance Ranking with Biotech Sector Leading
BRIC Stock Market Performance Ranking with all BRIC Markets Lagging

Current Status of the LWX (Leading Wave Index)

The LWX Indicator in Last Four Weeks (Past)

The LWX Indicator in Next Four Weeks (Forecast)

Silver Index Fell from Bump-and-Run Reversal Top

In my last weekly update of on 5/1/2011, a “Bump-and-Run Reversal Top” pattern on the silver index was identified (see here) that was a warning sign right before a cliff. As shown in the daily chart of the silver index below, this last week the silver index dramatically rolled over from its multi-year high and had a massive waterfall from $47.87/oz to $35.60/oz with a loss of about 25% in a week. Is this nightmare decline over? To answer this question, we need to exam the current status of the silver “Bump-and-Run Reversal” pattern.

This pattern typically occurs when excessive speculation drives prices up steeply, especially in a parabolic rise. After carefully checked with Thomas Bulkowski’s theory (see here), I found that the “Run Phase” I mentioned before was not accurate. The correct version of the “Bump-and-Run Reversal Top” pattern should consist of three main phases as follows:

1. A lead-in phase in which a lead-in trend line connecting the lows has a slope angle of about 30 degrees. Prices move in an orderly manner and the range of price oscillation defines the lead-in hight between the lead-in trend line and the warning line which is parallel to the lead-in trend line. The daily chart of the silver index in the 8-month time span speaks itself to meet those characteristics in this phase.

2. A bump phase where, after prices cross above the warning line, excessive speculation kicks in and the bump phase starts with fast rising prices following a sharp trend line slope with 45 degrees or more until prices reach a bump height with at least twice the lead-in height. Once the second parallel line gets crossed over, it serves as a sell line. When prices break below the sell line, it causes a bearish reversal to happen. Prices begin to decline towards the lead-in trendline, and the right side of the bump forms.

3. A run phase in which prices break support from the lead-in trendline to start a downhill run. The decline continues.

In comparison with this chart pattern model, the silver index decisively broke through the “Sell Line” at the $46/oz level on 5/2/201 and plunged to the first price target of $39/oz on 5/4/2011. It did not take any pauses at the “Warning Line” and declined to the current level of $35.60/oz. The silver index now is still in the second phase, the”Bump” phase. It is going to complete the right side of the bump, with testing the “Lead-in Trendline” to find technical support.

Around $32/oz level, the silver index may hesitate or could bounce off the “Lead-in Trendline” to form another bump before breaking through the “Lead-in Trendline”. So this “Bump-and-Run” pattern has not finished yet because there is still a lot of volatile changes ahead.

As shown below, it might be interesting to compare the silver chart with a fantastic graph of “Main Stages in a Bubble” posted by Dr. Jean-Paul Rodrigue on 1/18/2006 (see here). You may figure out where the silver index is on his graph.

Gold Index Fell from Roof of a 7-Month “Three-Peaks and Domed-House” Pattern

On both 4/23/2011 (see here) and 5/1/2011 (see here), I discussed an intermediate term “Three Peaks and the Domed House“ pattern on the gold index, and indicated that gold index was forming the “Roof” phase of the “Domed House”. This last week the gold index retreated from it’s all time high of $1563.20/oz to the Friday’s close level of $1495.10/oz with about 4.4% loss in a week.

The gold index just stepped in the very early part of the “Plunge” phase in my modified version of George Lindsay’s basic model, “Three Peaks and the Domed House” pattern, that was divided into five major phases: 1) Three Peaks phase, 2) Basement phase, 3) First Floor phase, 4) Roof phase, and 5) Plunge phase. Please note that 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 “wave-counting” from waves 1 to 28.

It looks like that the gold index is struggling to get into the “Plunge” phase. It may re-test the $1500/oz level that is the top border of the “Plunge” phase. Based on the model, the “Plunge” phase suggests a potential risk of two consecutive severe down waves. As the model projected, the gold index could fall to $1290/oz with a potential correction of about 17% from its all time high close. This amount of potential correction may character gold differently from silver. Although it may take time for the “Plunge” phase to develop, it should mature before Fed’s QE2 program ends.

Please note that the model stands true until proven otherwise, and the model itself has no further projection after the “Plunge” phase. Additionally, we should pay attention to the tightening monetary policies of China, India, and Brazil central banks for fighting their “critical” inflations. You may check my “BRIC Stock Market Performance” section to see how the stock markets of those countries are doing recently.

U.S. Dollar is Forming a 11-Month Falling Wedge Pattern

The US dollar has formed a 11-month “Falling Wedge” (see here) pattern which is a potential bullish reversal pattern sooner or later as it matures. It had a first bounce from the lower boundary of the wedge last week. This could be a counter-trend move towards the upper boundary of the wedge. It is still to early to determine if the US dollar is in a bullish reversal before it breaks above the top boundary of the wedge. But we need to closely watch its development.

Broad Stock Market Index is in a 7-Week Rising Wedge Pattern

The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, is forming a 7-week short-term “Rising Wedge” (see here) pattern which is a potential bearish pattern when it matures. Currently the market is above the 89-day moving average and it is in the choppy zone of the rising wedge with negative readings of both the trend and momentum. The Leading Wave Index (LWX) indicator, color coded in the price bars of the following daily chart of the Wilshire 5000 index, closed in neutral on Friday. The sell-off in last week reset the LWX in the neutral time-window for next four weeks.

Broad Market Volatility is below the Panic Threshold

The Broad Market Volatility (BIX), measured from over 8000 U.S. stocks, closed at 15 on Friday and it is below the panic threshold level of 44. The BIX below the panic threshold indicates that the current market is bullish. The BIX is plotted in the following chart as compared with the Wilshire 5000 index.

Asset Class Performance Ranking with Gold Leading

The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently gold is outperforming the stock market. The oil, food, and the US dollar are underperforming the stock market.

Sector Performance Ranking with Biotech 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 2.89% above the EMA89. Outperforming sectors are Biotech (+7.74%), Healthcare (+7.47%), and Pharmaceuticals (+6.35%). Underperforming sectors are Precious Metals (-4.60%), Banks (-2.99%), and Financials (+0.07%). The Dow 30 (+4.24%) is outperforming the market, and the Russell 2000 Small-cap (+2.74%) is underperforming.

BRIC Stock Market Performance Ranking with All BRIC Markets Lagging

The table below is the percentage change of the BRIC stock market indexes against the 89-day exponential moving average (EMA89). The Brazilian, India, Chinese, and Russian markets are underperforming the U.S. market.