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3/3/2012

Alert: Leading Wave Index Negative for First Time in Six Months

The Leading Wave Index (LWX) has registered its first multi-day negative readings since last August. The LWX slipped to -5.4 on 2/29/2012, -7.8 on 3/1/2012, and -8.6 on 3/2/2012, indicating weakness in the broad equity market. Also both trend and momentum indicators continue showing negative signs. The three-month rising wedge pattern suggests a 3-5% pullback, and the LWX forecasts the broad market could be in the bearish time window until the middle of March.


Table of Contents
  • Status of Key Market Parameters
  • Broad Stock Market is Forming a Rising Wedge Pattern
  • Broad Market Instability Index Starts Rising
  • Gold is Still in a the “Bump” Phase
  • Silver is Forming a Big Falling Wedge
  • US Dollar is Still in Ascending Triangle Pattern
  • 30-Year US Treasury Bond is Still in a Trading Range
  • Asset Class Performance Ranking with Crude Oil Leading
  • Sector Performance Ranking with Bank Sector Leading
  • BRIC Stock Market Performance Ranking with Russian 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 Stock Market is Forming a 3-Month Rising Wedge Pattern

The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, is forming a 3-month “Rising Wedge” pattern (see here). Although the rising wedge pattern typically has a bearish bias, it is one of the worst performing chart patterns to take a short position. Currently the Wilshire 5000 index 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, registered very negative readings this past week and closed in bearish on Friday (see the 2nd table above). It indicates that the broad market is in a bearish time window. Based on the forecast from the LWX (see the 3rd table above), the current bearish time-window could extend to the middle of March. The lower boundary of the rising wedge could get tested next week. The broad market may have a 3-5% pullback but may not breach the 89-day moving average.


Broad Market Instability Index Starts Rising

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 29 on Friday. It is the highest reading since last December. Although this reading is below the panic threshold level of 44, it has increased significantly in comparing last several weeks. The BIX is plotted in the following chart as compared with the Wilshire 5000 index.


Gold is Still in the “Bump” Phase

The gold index is still in an intermediate-term “Bump-and-Run Reversal Top” pattern and it is in the “Bump” phase. Last week it failed to retest the “Warning Line” and retreated sharply lower towards the “Lead-in Trendline”. If the broad equity market tests the lower boundary of the rising wedge, gold may have almost zero chance to escape from re-testing the “Lead-in Trendline” around 1640.


Silver is Forming a Big Falling Wedge

Since last April, the silver index has been in a “Falling Wedge” formation (see here). Although the falling wedge typically has a bullish bias, it is a very poor performer if it is counted on as a bullish pattern. Last week the up-swing was stopped at the upper boundary of the falling wedge, and prices retreated sharply inside the falling wedge.


US Dollar is Still in an Ascending Triangle

The US dollar index is forming a 15-month “Ascending Triangle” pattern (see here). The partial decline defined at 78.27 last week could be a bullish sign for the dollar to re-test the upper horizontal boundary of the ascending triangle soon.


U.S. Treasury Bond is in a Trading Range

The 30-Year US Treasury Bond index is forming a horizontal channel pattern (trading range) between the upper boundary at 146 and the lower boundary at 135. Actually the trading range has been further narrowed between 140 and 146 since last November. 140 is a middle level of the range between 135 and 146.


Asset Class Performance Ranking with Crude Oil Leading

The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently crude oil and the U.S. equity are outperforming. Food and the U.S. Dollar are underperforming.


Sector Performance Ranking with Bank 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 5.77% above the EMA89. Outperforming sectors are Banks (9.34%), Technology (9.24%), and Biotech (7.11%). Underperforming sectors are Precious Metals (-1.59%), Utilities (0.52%), and Pharmaceuticals (2.46%). The NASDAQ 100 (8.96%) is outperforming the market, and the Russell 2000 Small-Cap (3.61%) is underperforming.


BRIC Stock Market Performance Ranking with the Russian Market Leading

The table below is the percentage change of the BRIC stock market indexes against the 89-day exponential moving average (EMA89). The Russian market is leading and the Indian market is lagging.

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