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8/7/2011

Table of Contents
  • Status of Key Market Parameters
  • Broad Market Instability Index Surged up to a Historical Level
  • Comparison of October 2008 and August 2011
  • Broad Market Broke to the Downside of 7-Month Trading Range
  • S&P 500 Index is Forming a “Three-Peaks and a Domed House” Pattern
  • Silver Index is Still in “Bump-and-Run” Pattern
  • Gold Index is in “Three-Peaks and Domed House” Pattern
  • US Dollar is above the Upper Boundary of 14-Month “Falling Wedge” Pattern
  • Asset Class Performance Ranking with Gold Leading
  • Sector Performance Ranking with Utilities Sector Leading
  • BRIC Stock Market Performance Ranking with Chinese Market Leading

Current Status of the LWX (Leading Wave Index)

The LWX Indicator in Last Four Weeks (Past)


The LWX Indicator in Next Four Weeks (Forecast)


Broad Market Instability Index Surged up to a Historical Level

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 1082 on Friday, above the panic threshold level of 45. This is the highest reading in more than two years, and it can be only compared to the monster spike of the market instability that occurred in October of 2008. This is a very bearish warning sign to the stock market. The BIX is plotted in the following chart as compared with the Wilshire 5000 index in a four-year time span.


Comparison of October 2008 and August 2011

The broad market has reacted negatively since Congress passed “Budget Control Act” on 8/2/2011. The market instability index (BIX) surged up to the level of that in October 2008 when the market reacted negatively after Congress passed “Emergency Economic Stabilization Act” on 10/3/2008. This time the market behaved much like it did in October of 2008, if we carefully compare the daily percentage changes of the Wilshire 5000 index and the BIX readings in the first five days right after Congress passed the bills, as shown in the following two charts.

In the five-day period of 2008, the day had the most loss (-7.44%) was 10/9/2008 which corresponds to this time 8/8/2011 — tomorrow, Monday! You can see how precise timing the credit rating agency Standard & Poor chose to downgrade U.S. credit rating. It could cause collateral damage not only to the U.S. financial market but also to global financial markets.

Please note that G7 finance ministers held an emergency conference this weekend to take coordinated action to support the financial markets in the aftermath. The broad market could bounce some time in the coming week. You may check out what happened on 10/13/2008: the broad market jumped up 11% in one day!


Broad Stock Market Broke down to the Downside of 7-Month Trading Range

With all major market indexes broke down both the 200-day moving average and the 2.5-year uptrend line last week, the Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, has broken to the downside of the 7-month horizontal channel (i.e. a trading range). Currently the market is below the 89-day moving average and it is in the downtrend zone below the horizontal channel 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 bearish on Friday. However, the LWX forecasts that next four weeks are in a bullish time-window for the broad equity market.


S&P 500 Index Could Forming “Three-Peaks and a Domed House” Pattern

The S&P 500 index could be in an early process to potentially form a “Three-Peaks and a Domed House” pattern as shown in the chart below. Last seven months the S&P 500 index went through the “Three Peaks” phase, and it now is in the sharp “separating decline” with wave 8 (or wave 10) towards the “Basement” phase.



Silver Index is Still in Bump-and-Run Pattern

The silver index last week was in the way to returns to the Lead-in Trendline. The downside price target is projected at around $32/oz by the target line which is parallel to the lead-in trendline and is distant from the lead-in trendline with the same lead-in height.



Gold Index is in a 10-Month “Three-Peaks and Domed-House” Pattern

The gold index now is in the “Roof” phase and faces a potential risk of the “Plunge” phase sooner or later. Recently the gold index has re-established an inverse relationship with the S&P 500 index.


U.S. Dollar is above the upper boundary of 14-Month Falling Wedge Pattern

The US dollar index is above the upper boundary of the 14-month “Falling Wedge” (see here) pattern which could be a bullish reversal pattern. Now the upper boundary of the falling wedge becomes a support line.


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 and treasury bond are outperforming. Oil and the equity market are underperforming.


Sector Performance Ranking with Utilities 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 8.70% below the EMA89. Outperforming sectors are Utilities (-4.02%), Consumer Goods (-4.37%), and Precious Metals (-5.77%). Underperforming sectors are Banks (-14.20%), Basic Materials (-12.52%), and Semiconductors (-11.65%). The NASDAQ 100 (-5.37%) is outperforming the market, and the S&P 400 Mid-cap (-11.86%) is underperforming.


BRIC Stock Market Performance Ranking with Chinese Market Leading

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

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