Market Weekly Update

With relative bullish strengths of the US treasury bonds, US dollar, and US stock market, the broad markets are choppy and are waiting for the next breakout. The Chinese stock market, gold, and silver are all in similar descending triangle patterns and wait for the next breakout, as well.

• Choppy Market with Every 5-Day Flipping
• The 500 Index is in a Choppy Mode with a Rising Wedge Pattern
• Chinese Stock Market is 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 Stayed below Short-Term Symmetrical Triangle Pattern
• Crude Oil is Forming a 3-Week Rising Wedge
• US Dollar is Forming a 2-Month Uptrend Channel with a Shallow Slope
• US Treasury Bond is in a Long-Term Bullish Uptrend
• Asset Class Performance Ranking with U.S. Treasury Bond Leading
• Sector Performance Ranking with Biotech Sector Leading
• BRIC Stock Market Performance Ranking with All BRIC Markets Underferforming

The Leading Wave Index (LWX) was still positive and the short-term bullish time-window stayed open. The broad stock market has been choppy for several weeks. It flips almost every 5 trading days. The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 25 (up from 10 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 and very choppy in the next couple of 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 15-week Descending Broadening Wedge formation, the S&P 500 index is forming an 8-week Rising Wedge pattern. Price movement has been choppy between two converging boundaries of the rising wedge; the market has flipped almost every 5 trading days. However, the last up-swing did not reach the upper boundary of the rising wedge and formed a Partial Rise inside, that is a bearish sign for an immediate downward breakout from the lower boundary of the rising wedge.

Meanwhile, the SPX is also testing the upper boundary of the 15-week Descending Broadening Wedge confined by two gray dotted lines on the following chart. If prices decisively break above the upper boundary of the broadening wedge, the broad market could become very bullish and the SPX could advance to the level of the previous high at 1420.

Based on above analyses of both the 8-week rising wedge and the 15-week broadening wedge patterns, the possibilities for an upside or a downside breakout exist. Watch out for the breakout direction.

The Shanghai Composite Index has stayed below the horizontal line of the 5-month Descending Triangle pattern. The downside price target of 2146 was reached last week. Now the Chinese stock market is forming a larger scale, 9-month Descending Triangle pattern. Prices should bounce inside the triangle before the next breakout.

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. If the gold price breaks through the support of the first target line, the down price target is projected to 1420 at the second 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 and formed several partial rises 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 have been in a 10-month Downtrend Channel and a 5-month Descending Broadening Wedge. Also they broke to the downside of a 5-week short-term Symmetrical Triangle pattern. According to Bulkowski’s measure rule, the downside price targets are projected at 142 for XAU and 386 for HUI.

The post-breakout of a four-month Falling Wedge pattern pushed the crude oil price higher and formed a 3-week Rising Wedge pattern. Watch out for the breakout direction from the rising wedge.

The US dollar index is forming a 2-month uptrend channel with a shallow slope. This pattern is still considered as a consolidation after the shape advance of May. Prices could be choppy inside this channel before the next breakout.

As I discussed on 6/4/2012 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 had a bullish breakout from the warning line and entered into the bump phase of a possible “Bump-and-Run” formation. In the bump phase, sharp price movement could drive prices reach a bump height with at least twice the height of the lead-in uptrend channel. That means the 30-year U.S. treasury bond could reach to 172 in next several months.

Fed’s extension of Operation Twist should support the current bullish trend of treasury bonds. Fast rising prices on bonds could significantly influence stock, commodity, and currency markets. Also stocks in the utilities and real estate sectors should benefit most. 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 1.11% above the EMA89. Outperforming sectors are Biotech (6.36%), Pharmaceuticals (5.42%), and Telecommunication (5.07%). Underperforming sectors are Precious Metals (-9.20%), Semiconductors (-4.93%), and Basic Materials (-1.98%). The S&P 500 (1.42%) is outperforming the market, and the S&P 400 Mid-cap (-0.10%) 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. Currently all BIRC markets are underperforming the US market.