Market Weekly Update

The bearish reversal on 6/21/2012 formed partial rises all over the major U.S. stock indices, and the broad stock market may roll into a short-term bearish time-window. Gold and silver together with the Shanghai Stock Exchange Composite Index are approaching a technical breakdown point while the 30-year U.S. treasury bond and the U.S. dollar continue their bullish trend with Fed’s extension of Operation Twist.

• Short-Term Bullish Time Window is Ending
• Partial Rising Casts a Bearish Shadow on the S&P 500 Index
• Chinese Stock Market is near its Breakdown Point
• Gold is in the “Run” Phase of a Bump-and-Run Reversal Top Pattern
• Gold is in a Descending Triangle Pattern
• Silver Price is Reaching its Breakdown Point
• Partial Rises Cast a Bearish Shadow on Gold/Silver Mining Stocks
• Crude Oil is Forming a Falling Wedge
• US Dollar is Forming a Nine-Month Bullish Uptrend Channel
• US Treasury Bond is Bullish above the Warning Line
• Asset Class Performance Ranking with U.S. Treasury Bond Leading
• Sector Performance Ranking with Telecommunication Sector Leading
• BRIC Stock Market Performance Ranking with Indian Market Leading

The broad stock market had a bearish reversal on 6/21/2012 as we expected. The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 14 (up from 11 the previous week) which is below the panic threshold level of 44, and indicates that the market is currently bullish. Based on the forecast of the Leading Wave Index (LWX), the broad stock market should roll into a short-term bearish time-window which could last about three weeks until 7/12/2012 (see the second table above). The daily chart of the Wilshire 5000 index below has the price bars color coded with the LWX indicator. The current market status is summarized as follows:

Due to the short-term bullish time-window is ending, the upside price target for the S&P 500 index should be negated. The SPX is still in a 11-week Descending Broadening Wedge formation confined by two down-slopping diverging trend lines. The main characteristics of this pattern is that price movement becomes more and more volatile with a series of up-and-down high-waves. The bearish reversal on 6/21/2012 formed a partial rising inside the broadening wedge. This partial rising is a bearish sign for the SPX and it suggests that the market may move lower to re-test the low of June.

For the last several weeks, the Shanghai Composite Index has been under my watch for forming a possible Complex Head-and-Shoulders Bottom pattern. This bottom process may need more time until the transition of China’s top political power is completed this summer. In actually, the Shanghai index is now forming a 5-month Descending Triangle pattern, and prices are quickly approaching the horizontal support line of the triangle. The descending triangle generally appears in downtrends.

If prices of the Shanghai index cannot hold at the current level of 2260 from the support of the horizontal line, a breakout to the downside of the triangle could trigger a sharp decline. According to Bulkowski’s measure rule, a downside price target could be projected by measuring the widest distance in the pattern, multiplying it by 54% price target meeting rate, and subtracting it from the breakout. Therefore, the Shanghai index could fall to 2260-(2470-2260)x54%=2146 once a downside breakout occurs. Due to the Shanghai index arriving a critical juncture, we have a “Breakdown Watch” alert for this coming week.

Both the weakening Chinese stock market and Fed’s extension of Operation Twist add pressure on gold. The gold index has been in an intermediate-term Bump-and-Run Reversal Top pattern since I identified this pattern on gold in my article “How Low Can Gold Go on a Correction?” last August. Currently the gold price is below the “Lead-in Trendline” and it is in the “Run” phase. The typical characteristics of the “Run” phase is a downhill run for price movement.

Since the middle of last month, prices of gold have tested the first target line several times. Now prices are approaching this target line again. If gold breaks through the support of this line, it may have a sharp decline to the level of 1400 at the second target line for support. To pay close attention to price development, we have a “Breakdown Watch” alert on gold for this coming week.

The gold index has formed a Descending Triangle pattern with a falling resistance line and a horizontal support line. The descending triangle generally appears in downtrends. Price movement is choppy between the two boundary lines before a breakout from the either side of the triangle. Gold tried to rebound during last several weeks but failed to reach the upper boundary of the descending triangle. Last week it formed a partial rising which is a bearish sign for an immediate downward breakout.

According to Bulkowski’s measure rule, a downside price target could be projected by measuring the widest distance in the descending triangle pattern, multiplying it by 54% price target meeting rate, and subtracting it from the breakout. So gold could fall to 1540-(1900-1540)x54%=1345 once a downside breakout occurs at 1540. To pay close attention to price development, we have a “Breakdown Watch” alert on gold for this coming week.

Since April of last year, the silver index has formed a Descending Triangle pattern with a falling resistance line and a horizontal support line. It is the same like gold, it tried to rebound during last several weeks but failed to reach the upper boundary of the descending triangle. Last week it formed a partial rising which is a bearish sign suggesting an immediate downward breakout. Now silver is reaching a critical level to test a major support at 26.80.

According to Bulkowski’s measure rule, a downside price target could be projected by measuring the widest distance in the descending triangle pattern, multiplying it by 54% price target meeting rate, and subtracting it from the breakout. Therefore, if a downside breakout occurs, silver could fall to 26.80-(49.80-26.80)x54%=14.40. To pay extreme close attention to price development, we have a “Breakdown Watch” alert on silver for this coming week.

Both XAU and HUI have been in their technical rebound since mid-May. But they failed to reach the upper boundary of the downtrend channel, and formed partial rises which are a bearish sign for the mining stocks. If prices of gold and silver have breakouts to the downside, both XAU and HUI could re-testing their previous lows.

The crude oil is forming a four-month Falling Wedge pattern. Falling wedges typically have a bullish bias, but this bullish bias can be realized only when prices break through the upper boundary of the wedge. The oil price may still fall before it has an upside breakout.

The US dollar index is forming a nine-month bullish uptrend channel. Currently it may complete its retracement and resume price movement to the upside.

As I discussed in the early of this month about “Is this a Sea-Change Signal from U.S. Treasury Bond Breakout?”, a long-term picture shows that the 30-Year US Treasury Bond has broken the warning line and has entered into the bullish bump phase of a possible “Bump-and-Run” formation. Fast rising prices on the bond could significantly influence stock, commodity, and currency markets. Fed’s extension of Operation Twist could support the current bullish trend of treasury bond prices. We will continue monitoring the bond price against the steep-upward-sloping trendline (the pike line).

The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently the U.S. Treasury Bond is outperforming. Crude oil is underperforming.

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 0.20% below the EMA89. Outperforming sectors are Telecommunication (6.45%), Biotech (4.86%), and Pharmaceuticals (3.75%). Underperforming sectors are Precious Metals (-7.29%), Energy (-6.11%), and Basic Materials (-4.88%). The NASDAQ 100 (0.30%) is outperforming the market, and the S&P 400 Mid-Cap (-2.79%) is underperforming.

The table below is the percentage change of the BRIC stock market indexes against the 89-day exponential moving average (EMA89), also in comparison to the US market. The Indian market is outperforming and all other BRIC markets are underperforming.