Market Weekly Update

The broad market is testing whether it has reached the “First Floor” phase of the speculated “Three Peaks and a Domed House” pattern. A consolidation is expected in the “First Floor” phase. Any significant directional movement could be washed out this week by the expectations of both the “Santa Claus Rally” and the “Fiscal Cliff”. The Leading-Wave Index shows no support to the current general bearish market sentiment. The BRIC emerging markets continue outperforming the U.S. market.

• No Support for Bearish Sentiment from the Leading-Wave Index in Both Real Readings and Forecast
• The S&P 500 Index is Testing the “First Floor” Phase
• Chinese Stock Market in a 4-Month Descending Broadening Triangle Pattern
• Gold is in the “Run” Phase of a Bump-and-Run Reversal Top Pattern
• Gold in a 3-Month Downtrend Channel
• Silver in a 3-Month Downtrend Channel
• Gold/Silver Mining Stocks Still in a 6-Month Uptrend Channel
• Crude Oil in a 7-Month Symmetrical Triangle
• US Dollar in a 4-Month Descending Triangle
• US Treasury Bond is in a Long-Term Bullish Uptrend
• Asset Class Performance Ranking with Equity Leading
• Sector Performance Ranking with Banks Sector Leading
• BRIC Stock Market Performance Ranking with the Brazilian Market Leading

The broad market has been stronger than expected based on readings vs. forecast of the Leading-Wave Index (LWX) since 12/6/2012. Although the LWX forecast expected a neutral time-window starting 12/6/2012, the real readings were all green in bullish, even including last Friday when the market had a “mini-crash”. The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 10 on Friday (up from 3 the previous week) which is below the panic threshold level of 44 and indicates a bullish market. Based on the forecast of the Leading Wave Index (LWX), the broad market should be still in a short-term neutral time-window until 12/31/2012 (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 formed a three-peak pattern inside the trading range from September to October. It could be the beginning of a “Three Peaks and a Domed House” formation. In speaking of “the Three Peaks and a Domed House” pattern, my version modified from George Lindsay’s basic model uses a macro or “phase-counting” approach which is different from Lindsay’s original micro approach (which uses “wave-counting” from 1 to 28) in that it divides the “Three Peaks and the Domed House” pattern into five major phases as follows: 1) Three Peaks, 2) Basement, 3) First Floor, 4) Roof, and 5) Plunge.

The downwave of the S&P 500 index between 10/18/2012 and 11/15/2012 was a “Separating Decline” for a transition from the “Three Peaks” phase to the “Basement” phase. Typically the Basement phase is known as “the bear trap” with an integration of all bearish views from both headline news and majority of popular technical indicators. After the “Basement” phase gets well established, it starts to build up a “Domed House”. A swift advance should be seen as a front wall of the “First Floor” phase. The swift advance on the SPX launched in mid-November is projected to reach the level of 1460 to re-test previous high. In general, both the “Basement” phase and the “First Floor” phase are in an accumulation process of the market cycle when general market sentiment is still bearish.

Last week the SPX briefly entered the territory of the projected “First Floor” phase above 1440, and retreated after. Now the question is whether it is defining the “First Floor” phase with a lower price level below the projected level of 1460. We will see how the market develops this week. The “First Floor” phase is typically a consolidation or sideways period. Especially any significant directional movement could be washed out this week by the expectations of both the “Santa Claus Rally” and the “Fiscal Cliff”. It looks like the fight between bulls and bears could be heavy around the key level of 1430.

The recent impressive rebound of the Chinese stock market significantly changed the chart pattern to a 4-month Descending Broadening Triangle. If prices break through the horizontal resistance at 2150, the upside price target could be projected at 2270. However, Descending Broadening Triangle patterns generally are not reliable chart patterns which have a high failure rate with very often partial rising after a 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?” in August of 2011. Currently the gold price is below the “Lead-in Trendline” and it is in the “Run” phase. It is a bearish sign for gold with a breakdown from the support of the first target line at 1700. The next support could be at 1550 near the 2nd target line.

The gold index broke the lower boundary of the 6-month uptrend channel last week, and a 3-month downtrend channel was formed. Prices may bounce off the lower boundary of the channel from here.

The silver index broke the lower boundary of the 6-month uptrend channel last week, and a 3-month downtrend channel was formed. Prices may bounce off the lower boundary of the channel from here.

Gold/silver mining stocks moved down to test the lower boundary of the 6-month uptrend channel. Prices may bounce off the lower boundary of the channel from here.

Crude oil has formed a 7-month Symmetrical Triangle pattern. Currently prices move in a converging range bounded between 86 and 94.

The US dollar index may form a 4-month Descending Triangle pattern. The direction of a breakout from this triangle could be important to the next move of the dollar.

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. 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 equity is outperforming. Gold and Crude oil 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 1.77% above the EMA89. Outperforming sectors are Banks (6.56%), Home Construction (6.50%), and Internet (5.19%). Underperforming sectors are Precious Metals (-7.98%), Telecommunication (-1.17%), and Technology (-1.14%). The S&P 400 Midcap is outperforming and the NASDAQ 100 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 Brazilian market is leading.