Market Weekly Update

The S&P 500 index is still forming a “Three Peaks and a Domed House” pattern, and now is above the “First Floor”. The broad stock market continues drifting up, and international markets continue outperforming the U.S. market, with a short-term neutral time-window until 2/7/2013. The market ratio and competitive strength show a warning sign for a potential long-term trend of gold underperforming.

• Leading-Wave Index Continues Its Bullish Readings
• The S&P 500 Index above the “First Floor” Phase
• Market Ratio and Competitive Strength
• Gold (Weekly) in a 18-Month Symmetrical Triangle Pattern
• Gold (Daily) in a 4-Month Downtrend Channel
• Silver in a 4-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 Weakening
• Asset Class Performance Ranking with Oil Leading
• Sector Performance Ranking with Home Construction Sector Leading
• BRIC Stock Market Performance Ranking with the Chinese Market Leading

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 4 on Friday (same from 4 the previous week) which is below the panic threshold level of 44 and indicates a very bullish market. Since 11/19/2012, the Leading-Wave Index (LWX) has been steadily bullish for nine weeks. Based on the forecast of the LWX, the broad market should be in a short-term neutral time-window until 2/7/2013 (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:

We have been tracking the current speculated “Three Peaks and a Domed House” pattern of the S&P 500 index for 12 weeks since my Weekly Update on 10/31/2012. The “Three Peaks and a Domed House” pattern is a complex chart formation, and it presents higher difficulties or challenges for a single technical indicator or system to handle the market throughout the entire pattern. It enhances risks and opportunities for both the bulls and bears.

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 progressional development of the current speculated “Three Peaks and a Domed House” pattern 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 stage of the market cycle. That was the earliest warning sign for a beginning of “Three Peaks and a Domed House” formation.

Separating Decline: From late October to mid-November, the SPX declined about 110 points from 1460 to 1350. Typically, this decline is a phase transition from the “Three Peaks” phase to the “Basement” phase, and corresponds to the mark-down stage of the market cycle. It usually moves much faster than general technical indicators can respond.

Basement phase: Around mid-November the SPX hit 4-month low near 1350 which was in the “Basement” phase. This phase is typically a “bear trap” near the bottom of a down cycle with a bearish market sentiment combining all bearish views from both headline news and popular technical indicators. The accumulation stage of the market cycle usually starts from here and it progresses stealthily.

Swift Advance: From mid-November to early January, the SPX sharply advanced about 110 points from 1350 to 1460. This advance is typically a phase transition from the “Basement” phase to the “First Floor” phase while the broad market continues the accumulation stage although the general sentiment is skeptical, or even still bearish.

First Floor phase: The SPX has spent three weeks in the “First Floor” phase between 1450 and 1470. This phase is typically a consolidation in price movement. The accumulation stage of the market cycle usually ends in this phase with a change of the general market sentiment from bearish to neutral.

Continuation Advance: Last week the SPX started moving out of the “First Floor” phase for a potential continuation advance which should be a phase transition from the “First Floor” phase to the “Roof” phase. The market cycle now is in the mark-up stage. The price target for the “Roof” phase is projected at 1570 to challenge the 2007 all time high.

The current speculated “Three Peaks and a Domed House” pattern is also supported by the typical weekly MACD Histogram indicator mathematically mapped on the following SPX daily chart, marked with each stage of the market cycle.

The market ratio is very helpful to compare strengths between two markets. The following table tracks weekly performances for several pairs of markets, i.e., the euro vs. the US dollar, the Greek market vs. the Chinese market, the long-term rate vs. the short-term rate, the S&P 500 index vs. gold, small caps vs. large caps, the US market vs. the world market, and Apple vs. Research In Motion.

For each pair of markets listed in the table, the market ratio is calculated by dividing one market by another. Then the competitive strength is further evaluated from a percentage change of the ratio against its 89-day exponential moving average. The results divide the current markets into two groups: outperforming markets and underperforming markets.

This year each week I am going to talk about one pair of markets in the table above. Last week I discussed the market ratio of the Greek stock market to the Chinese stock market. This week I focus on the pair of the S&P 500 index and gold.

S&P 500 Index vs. Gold: The chart below is a weekly chart of the SPX to gold ratio from 1980 to the present. Two technical indicators, the 89-week exponential moving average (EMA89) and the 89-week Williams %R, are used to gauge the trend of the competitive strength between the SPX and gold.

1) Since 2000, the SPX to gold ratio has been in a downtrend, in other words, the SPX has underperformed gold over a decade. This downtrend could continue if the ratio stays below the EMA89. But, recently there is a warning sign showed up for a potential trend change of the ratio. The ratio has crossed over the EMA89 to the upside, and the slope of the EMA89 has turned positive (heading up). The SPX has become outperforming gold.

2) In the Williams %R window, gold outperforms if the %R indicator moves down into the lower yellow band, or the SPX outperforms if the %R indicator moves up into the upper blue band. Recently the %R indicator has stepped into the upper blue band for SPX-outperforming. If the indicator stays in the upper blue band, the SPX could continue outperforming gold like most of the times before 2000.

The weekly chart shows that the gold index has formed a 18-month Symmetrical Triangle pattern in an intermediate-term. Prices have been winding around 1700. Gold could continue the sideways near this level before it breaks out from the triangle.

The gold index has formed a 4-month downtrend channel. Prices have recently tested the lower boundary of the channel twice. An upswing towards the upper boundary of the channel should be expected.

Same as gold, the silver index has formed a 4-month downtrend channel. Prices have recently tested the lower boundary of the channel twice. An upswing towards the upper boundary of the channel should be expected.

Gold/silver mining stocks are testing 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. Now it is testing the upper boundary of the triangle.

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

Considering the current deflationary environment indicated by the inflation rate below 3%, bonds have an inverse relationship with stocks. Strengthening in stocks means weakening in bonds. The 30-year U.S. treasury bond has recently broken a 2-year rising wedge pattern to the downside. A price target could be projected at 134.

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, and the U.S. treasury bond 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 4.73% above the EMA89. Outperforming sectors are Home Construction (12.46%), Internet (7.02%), and Banks (6.85%). Underperforming sectors are Precious Metals (-5.02%), Telecommunication (-1.40%), and Technology (0.47%). The Russell 2000 small-cap 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.