Market Weekly Update

Although prices are choppy, the US treasury bonds, US dollar, and US stock market all show bullish uptrends. The Chinese stock market hit a 3-year low and is still at risk of further breakdown.

• Choppy Market in a Flipping Mode
• The 500 Index is Forming a 9-Week Uptrend Channel
• Chinese Stock Market Hits 3-Year Low
• 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 Reached Their Short-Term Price Target
• Crude Oil is Forming a 4-Week Uptrend Channel
• 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 broad stock market has been choppy for several weeks. The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 32 (up from 25 the previous week) which is below the panic threshold level of 45, and indicates that the market is currently bullish. However, the BIX was temporarily above the panic threshold last week, and the BIX readings of recent several days are very close to the panic threshold 45. Based on the forecast of the Leading Wave Index (LWX), the broad stock market should be still choppy in the next couple of weeks. The market flipped upward on 7/24/2012, and would flip downward again on 8/1/2012. 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:

The last Market Update indicated that both possibilities for an upside and a downside breakout exist. Actually both breakouts happened last week. First the S&P 500 index broke through the lower boundary of the 8-week rising wedge to the downside, and reshaped the rising wedge into a 9-week uptrend channel. Then the price flipped upward and broke through the upper boundary of the 15-week broadening wedge. As I mentioned last week, 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. Now prices are above the broadening wedge, and are in a 9-week uptrend channel.

As the Chinese stock market keeps sliding lower and hits 3-year low, the Shanghai Composite Index formed a 9-month Descending Triangle pattern. Descending triangles generally appear in downtrends. Now the Shanghai index is testing the horizontal support line of the triangle. If prices can not hold above 2130, the Chinese stock market could have a further 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 2130-(2536-2130)x54%=1910, that is almost another 10% decline measured from the current level of 2130.

Emerging economies face capital outflows. Also there are similarities between China today and Southeast Asia fifteen years ago. The BRIC markets have performed poorly for recent months. The Chinese market is ranked as the worst one in performance among the BRIC markets this past week.

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. Both target prices, 142 for XAU and 386 for HUI, were reached last week.

Last week crude oil prices broke down the 3-week rising wedge, and reshaped the wedge to a 4-week uptrend channel.

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).

Watch for signs from a scheduled meeting of FOMC this coming week.

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 2.57% above the EMA89. Outperforming sectors are Biotech (11.09%), Telecommunication (8.35%), and Pharmaceuticals (6.54%). Underperforming sectors are Precious Metals (-6.58%), Basic Materials (-1.96%), and Semiconductors (-1.08%). The S&P 500 (3.06%) is outperforming the market, and the S&P 400 Mid-cap (1.05%) 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.