09/16/2012 – Market Update
Newly announced Fed’s QE3 plan is making changes in trends and leaderships of several financial markets. Sell-offs in the U.S. treasury bonds and the U.S. dollar drive commodities and overseas stock markets more favorable. The data of market performance ranking this last week show that the U.S. treasury bonds, U.S. dollar, and U.S. stock market all became lagging and started to lose their leading positions which they have maintained nearly a year since Fed’s Operation Twist was launched last September. The next reversal date for the broad market is projected on 9/21/2012.
- The Broad Market Remains Bullish
- The 500 Index Bullish Breakout from 15-Week Rising Wedge
- Chinese Stock Market Bullish Breakout from 5-Month Falling Wedge
- Gold is in the “Run” Phase of a Bump-and-Run Reversal Top Pattern
- Gold Bullish Breakout from 12-Month Descending Triangle
- Silver Bullish Breakout from 12-Month Descending Triangle
- Gold/Silver Mining Stocks Bullish Breakout from 10-Month Downtrend Channel
- Crude Oil is Forming a 11-Week Rising Wedge
- US Dollar Broke Down the 12-Month Rising Wedge
- US Treasury Bond is in a Long-Term Bullish Uptrend
- Asset Class Performance Ranking with Gold Leading
- Sector Performance Ranking with Precious Metals Sector Leading
- BRIC Stock Market Performance Ranking with the Chinese Market Lagging
Fed’s QE3 plan boosted the broad market to the new 52-week high last week. The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 3 (same from 6 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 is in a short-term bullish time-window until 9/21/2012 (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:
The S&P 500 index broke to the upside of the 15-week Rising Wedge pattern last week. This breakout may adjust the slope of the upper boundary of the wedge steeper, that could transform the rising wedge into a bullish uptrend channel.
After a couple of months struggle at a multi-year lows, the Shanghai Composite Index finally broke to the upside of the 5-month Falling Wedge pattern last Friday. This is a bullish sign for the Chinese market, and an upside price target could be projected at 2250 to form a potential downtrend channel.
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. If the gold price can manage to move back above the Lead-in Trendline (resistance line), the Run phase could end.
The gold index has broken to the upside from the 12-month Descending Triangle pattern. This is an intermediate-term bullish sign for gold, and an upside price target could be projected at the previous high around 1900. There is still a possibility that prices could pull back for a certain mount of retracement before marching higher.
Silver has broken to the upside from the 12-month Descending Triangle pattern. This is an intermediate-term bullish sign for silver, and an upside price target could be projected at the previous high near 50. There is still a possibility that prices could pull back for a certain mount of retracement before marching higher.
After the bullish breakout from both the 6-month Descending Broadening Wedge and the 10-month Downtrend Channel, gold/silver mining stocks had a further powerful advance. Upside price targets could be projected at the high of the Descending Broadening Wedge, i.e., 204 for XAU and 550 for HUI.
Crude oil is forming a 11-week rising wedge. It should stay bullish to make higher highs along the rising wedge but prices could become choppy inside the wedge before prices break out from either boundary. This pattern itself does not give us a breakout direction at this moment.
The US dollar index has broken down from the 12-month Rising Wedge pattern. Typically downward breakouts of rising wedges perform poorly if short positions are taken. A downside price target for the dollar now is re-projected around 79 to form a uptrend channel.
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 bullish trend of treasury bonds.
However, the continuation of this sharp bullish trend would be in question with newly announced Fed’s QE3 plan. A violent selloff in treasury bonds last week actually sent yields higher, also mortgage interest rates all jumped higher than the previous week, regardless of Fed’s attempt for the QE3. We will keep 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 gold, the U.S. stock market and crude oil are outperforming. the U.S. treasury bond and U.S. dollar are 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 6.31% above the EMA89. Outperforming sectors are Precious Metals (14.37%), Banks (11.69%), and Energy (8.94%). Underperforming sectors are Semiconductors (-0.69%), Utilities (-0.34%), and Consumer Goods (2.98%). The Russell Small-Cap (7.74%) is outperforming the market, and the Dow Jones Industrial Average (4.78%) 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 the Chinese market is lagging.
