12/29/2012 – Market Update
Stocks of the BRIC emerging markets continue outperforming the U.S. stock market. Especially the recent powerful rebound of the Chinese stock market could potentially trigger a bullish reversal of gold and silver any time soon. The U.S. stock market is currently compressed by the political standoff over the so-called fiscal cliff, and its price movement is divergent from both the world stock market and the bullish sign of the Leading-Wave index.
- Bullish Divergence Between Market Price and Leading-Wave Index
- The S&P 500 Index is Still Under the “First Floor” Phase
- Chinese Stock Market Bullish Breakout from a 4-Month Descending Broadening Triangle
- 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 Crude Oil Leading
- Sector Performance Ranking with Banks Sector Leading
- BRIC Stock Market Performance Ranking with the Chinese Market Leading
Readings of the Leading-Wave Index (LWX) were still bullish while the broad market declined last week. The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 4 on Friday (down from 10 the previous week) which is below the panic threshold level of 44 and indicates a bullish market. Based on the forecast of the LWX, the broad market may extend the short-term neutral time-window to 1/9/2013 (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.
Progress of the speculated “Three Peaks and a Domed House” pattern on the S&P 500 index is as follows:
Three Peaks phase: From mid-September to mid-October, the SPX formed three peaks in a trading range between 1430 and 1460 while the broad market was in the distribution process of the market cycle.
Separating Decline: From late October to mid-November, the SPX declined declined about 110 points from 1460 to 1350 while the broad market was in the markdown process of the market cycle.
Basement phase: Around mid-November the SPX was in the “Basement” phase that is typically a “bear trap” with all bearish views from both headline news and majority of popular technical indicators.
Swift Advance: From mid-November to mid-December, the SPX sharply advanced about 100 points from 1350 to 1450 while the broad market was in the accumulation process of the market cycle.
First Floor phase: In the third week of December, the SPX just very briefly entered the territory of the “First Floor” phase projected between 1440 and 1460, and retreated after. Therefore, the “First Floor” phase has not been formed. The “First Floor” phase is still projected in a range between 1440 to 1460. In general, both the “Basement” phase and the “First Floor” phase are in the accumulation process of the market cycle when general market sentiment is still bearish.
The recent impressive rebound of the Chinese stock market significantly changed the chart pattern to a 4-month Descending Broadening Triangle. Prices have broken through the horizontal resistance of 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 crude oil is outperforming. Gold 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 0.26% below the EMA89. Outperforming sectors are Banks (4.59%), Home Construction (3.68%), and Internet (2.58%). Underperforming sectors are Precious Metals (-6.86%), Technology (-3.16%), and Utilities (-2.80%). 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 Chinese market is leading, and all BRIC markets are outperforming the US market.
