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10/08/2012 – Market Update

Interesting Chart Patterns of Gold and the U.S. Dollar

Under the influence of the Fed’s QE3, changes of trends and leaderships emerge in several financial markets. We have new chart patterns observed for the S&P 500 index, gold/silver mining stocks, crude oil, and the U.S. dollar from this past week. It would be interesting to see how gold tests its major upper resistance at 1800 while the U.S. dollar tests the 78.5 support level. The Leading Wave Index waves a yellow flag for the broad stock market.

Table of Contents

Leading Wave Index Waves a Yellow Flag

The LWX Indicator in Last Four Weeks (Past)

The LWX Indicator in Next Four Weeks (Forecast)

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 7 (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 in a short-term bearish time-window until 10/9/2012. There is increasing risk with no green signs from weaker outlook of the LWX for the next four weeks (see the second table above). The market could become choppy and volatile. 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:

Short-Term Cycle: in downward phase
Next Reversal Date: 10/9/2012
Broad Market Instability Index (BIX): 7, below the panic threshold (bullish)
Momentum Indicator: positive (bullish)

The S&P 500 Index is Forming a Horizontal Channel

The S&P 500 index is forming a 4-week Trading Range between 1430 and 1470. Prices could be choppy before a breakout from the horizontal channel.

Chinese Stock Market Continues to Spiral Down

The Chinese stock market was closed last week for holidays. The Shanghai Composite Index is in a Falling Wedge formation. Prices should be in a spiral-down mode inside the falling wedge until the next breakout from the upper boundary of the wedge.

Gold is in the “Run” Phase of a Bump-and-Run Reversal Top Pattern

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. A major resistance is expected from the lead-in trendline. If the gold price can manage to move back above the Lead-in Trendline, the Run phase would end.

Gold is Forming a 12-Month Trading Range

The gold index is forming a 12-month Trading Range between 1550 and 1800. Currently prices are very near 1800 and face strong resistance from the upper horizontal line of the range. Gold could become very bullish once it breaks through the upper horizontal resistance line at 1800.

Silver is Forming a 12-Month Trading Range

The silver index is forming a 12-month Trading Range between 26.50 and 35.50 Currently prices are very close to 35.50 and face strong resistance from the upper horizontal line of the range. Silver could become very bullish once it breaks through the upper horizontal resistance line at 36.

Gold/Silver Mining Stocks are Forming 4-Month Rising Wedge

After the bullish breakout from the 6-month Descending Broadening Wedge, gold/silver mining stocks had a further powerful advance. Upside price targets have been projected at the high of the Descending Broadening Wedge, i.e., 204 for XAU and 550 for HUI. Currently gold/silver mining stocks are forming a 4-month Rising Wedge pattern. Those price targets could be near the upper boundary of the wedge.

Crude Oil is Forming a 7-Week Falling Wedge

Crude oil is forming a 7-week Falling Wedge pattern. Prices could swing between 86 and 91 inside the wedge before the next breakout from the wedge.

US Dollar is Forming a 10-Month Bearish Broadening Top

The US dollar index could not reach the price target 82 and just made a partial rise. Now it is forming a 10-month Right-Angled Ascending Broadening pattern. This pattern is typically bearish, especially with a partial rising. The 78.5 level is the horizontal support line of the broadening pattern. The dollar could become very bearish once it breaks down the 78.5 level.

U.S. Treasury Bond is in a Long-Term Bullish Uptrend

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. The data of market performance ranking in last few weeks 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. We will keep monitoring the bond price against the steep-upward-sloping trendline (the pike line).

Asset Class Performance Ranking with Gold Leading

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

Sector Performance Ranking with Biotech Sector Leading

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 4.05% above the EMA89. Outperforming sectors are Biotech (11.44%), Precious Metals (8.30%), and Banks (8.19%). Underperforming sectors are Semiconductors (-5.09%), Real Estate (0.34%), and Utilities (1.22%). All major market indices are underperforming.

BRIC Stock Market Performance Ranking with the Chinese Market Lagging

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.

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