07/01/2012 – Market Update
Continuous positive reading from the Leading Wave Index (LWX) shows surprising strength of the broad stock market. Crude oil has a bullish breakout from its four-month falling wedge. However, chart patterns suggest a choppy market ahead.
- Short-Term Bullish Time Window still Opens
- The 500 Index could Become Very Choppy
- Chinese Stock Market is Still in a Primary Downtrend
- Gold is in the “Run” Phase of a Bump-and-Run Reversal Top Pattern
- Gold is in a Descending Triangle Pattern
- Silver Price is Still at Risk to the Downside
- Gold/Silver Mining Stocks could Become Very Volatile
- Crude Oil has a Bullish Breakout from Falling Wedge
- US Dollar Consolidates with a Symmetrical Triangle Pattern
- 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 Leading Wave Index (LWX) showed surprising strength last week and kept the short-term bullish time-window open. The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 10 (down from 14 the previous week) which is below the panic threshold level of 45, and indicates that the market is currently bullish. Based on the forecast of the Leading Wave Index (LWX), the broad stock market should be neutral until 7/12/2012 (see the second table above). The market could become very choppy in next several weeks. 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:
Inside the 12-week Descending Broadening Wedge formation, the S&P 500 index is forming a 6-week Rising Wedge pattern. Price movement could be choppy between two boundary lines of the rising wedge before a breakout from the wedge. The upper boundary of the broadening wedge still is a resistance. So the price of the SPX could be choppy between 1335 and 1375.
The Shanghai Composite Index was unable to hold above the horizontal support line of the 5-month Descending Triangle pattern, and it broke to the downside of the triangle. 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.
Considering the Bullish Engulfing candlestick appeared on the Shanghai index last Friday, prices may re-test the horizontal line of the triangle. But this bullish engulfing candlestick may act as a temporary reversal because the primary trend is downward. Then the downside price target is still in effect as long as prices stay below the horizontal line of the descending triangle.
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. Last week gold tested the first target line but closed above the line. We still keep the down price target 1400 at the second target line in case gold breaks through the support of the first target line.
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 that formed a partial rising as a bearish sign for a 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.
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, that resulted in a partial rising as a bearish sign for a 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. Therefore, if it breaks through 26.80, silver could fall to 26.80-(49.80-26.80)x54%=14.40.
Both XAU and HUI are forming 5-month Descending Broadening Wedge patterns inside their downtrend channels. Price movement of mining stocks could become very volatile inside their broadening wedges.
As I discussed last week, the crude oil formed 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. Last Friday the oil price had a powerful bullish breakout to the upside of the falling wedge. The upside price target is projected around 89 in order to form the upper boundary of a potential downtrend channel.
The US dollar index is forming a 4-week Symmetrical Triangle pattern inside its intermediate-term uptrend channel. This could be a consolidation process before a breakout from the symmetrical triangle.
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 1.60% above the EMA89. Outperforming sectors are Telecommunication (7.19%), Biotech (5.67%), and Pharmaceuticals (5.54%). Underperforming sectors are Precious Metals (-5.45%), Basic Materials (-1.86%), and Semiconductors (-1.79%). The Russell 2000 Small-Cap (2.18%) is outperforming the market, and the S&P 400 Mid-Cap (0.22%) 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.
