10/23/2011
Table of Contents
- Status of Key Market Parameters
- Broad Stock Market is Forming a Broadening Pattern
- Broad Market Instability Index is below the Panic Threshold
- S&P 500 Index Broke Upward from the “Basement” Phase
- Gold is in the “Plunge” Phase
- Gold Forming a “Bump-and-Run” Pattern
- Silver is in the “Run” Phase with “Dead-Cat Bounce”
- US Dollar is in a Retracement
- 30-Year US Treasury Bond Down from “Ascending Broadening Wedge”
- Asset Class Performance Ranking with Bond Leading
- Sector Performance Ranking with Utilities Sector Leading
- BRIC Stock Market Performance Ranking with Chinese Market 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)
Broad Stock Market is Forming a Broadening Pattern
The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, has formed an 11-week “Right-Angled and Descending Broadening” pattern (see here) confined by an upper horizontal resistance line and a lower down-sloping trend line. Usually, an upward breakout from the upper horizontal resistance here would be a bullish continuation of the uptrend. However, this type of broadening pattern generally gives lackluster performance, according to Thomas Bulkowski:
The right-angled and descending broadening chart pattern is the worst performing chart pattern in a bull market. The break even failure rate is high and the average rise is meager. This is not a chart pattern you’ll want to curl up with at night and dream about unless you like losing money.
Currently the Wilshire 5000 index is still testing the 89-day moving average and it is in the choppy zone of the broadening pattern with positive 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 bullish on Friday. The LWX forecasts that the current bullish time-window may have a couple of day extension followed by a two-week bearish time-window. Be cautious.
Broad Market Instability Index is below the Panic Threshold
The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 1 on Friday. This reading is far below the panic threshold level of 46, and it indicates that the current market is bullish. The next minor instability spike is expected to be 60 trading days away from October 4, which will occur on December 29. This projection could give the broad equity market a near three-month “instability-quiet” period with relative low volatility. The BIX is plotted in the following chart as compared with the Wilshire 5000 index.
S&P 500 Index Broke Upward from the “Basement” Phase
The S&P 500 index is in the progress of potentially forming a “Three-Peaks and a Domed House” pattern as shown in the chart below. After spent almost ten weeks in the very choppy “Basement” phase (bear trap), the index broke upward last Friday from the “Basement” phase. The market has started a sharp advance wave from point 14 toward point 15 for a phase transition from the “Basement” phase to the “First Floor” phase. The “First Floor” phase is projected around 1360 for the S&P 500 index.
Please note that the market may behave quite differently in the phase transition period than in the “Basement” phase, which means that the technical indicators or trading systems worked in the “Basement” phase may not work very well in the “Phase Transition” period.
Gold is in the “Plunge” Phase
The gold index is still in the “Plunge” phase of the “Three-Peaks and a Domed House” pattern. According to George Lindsay’s original model, the “Plunge” phase typically comprises two powerful down-waves. The first down-wave from point 25 to point 26 has finished. Now gold should be starting the second powerful, also most severe, down-wave from point 27 toward point 28. The price target is projected at 1300 which is the lowest price of the entire pattern. Be cautious about the likely impact of such an unusual move. Also it is the time to re-check fundamentals, reality, and risk for gold as the Fed implements Operation Twist. (Click the chart to see a large image)
Gold is in “Bump-and-Run Reversal Top” Pattern
The gold index is forming an intermediate-term “Bump-and-Run Reversal Top” pattern and it now is in the “Bump” phase. The next target prices: 1) 1520 at the Lead-in Trend Line, and 2) 1350 at the Target Line.
Silver is in the “Run” Phase with “Dead-Cat Bounce”
The silver index is still in the “Run” phase of the “Bump-and-Run Reversal Top” pattern and it may re-test 26 at the second target line. After a “Dead-Cat Bounce”, now silver should be in a post-bounce decline driving prices gradually lower. The last price target is project at 21 on the third target line, which is close to the price level when this pattern originally started on the left side of the following chart.
U.S. Dollar is in a Retracement
The US dollar index is in a retracement after it reached the price target of 79. Now the upper boundary at 76 of the 5-month rectangle bottom pattern should be a support line.
U.S. Treasury Bond is Down from Ascending Broadening Wedge
The 30-Year US Treasury Bond index stays below the lower boundary of the 8-week “Ascending Broadening Wedge” pattern (see here) after the downward breakout. The downside price target is projected at 132 which is the lowest price of the wedge. Please note that the bond market currently has an inverse relationship with the stock market. The bearish projection on the bond also supports the bullish projection on the S&P 500 index.
Asset Class Performance Ranking with Bond Leading
The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently the Treasury bond and the equity market are outperforming. Food and oil 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 1.27% above the EMA89. Outperforming sectors are Utilities (4.63%), Consumer Services (3.75%), and Semiconductors (3.71%). Underperforming sectors are Precious Metals (-7.99%), Materials (-5.54%), and Banks (-3.85%). The NASDAQ 100 (3.52%) is outperforming the market, and the Russell 2000 Small-cap (-1.26%) is underperforming.
BRIC Stock Market Performance Ranking with Chinese Market Lagging
The table below is the percentage change of the BRIC stock market indexes against the 89-day exponential moving average (EMA89). The all BRIC markets are underperforming the US market.
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