Market Weekly Update

After two months steadily in bullish, the Leading-Wave index raised a red flag as an early warning sign of possible market topping in the short-term, with a bearish time-window until 2/7/2013. We could see negative divergences building up between market prices and technical indicators, while the market may keep drifting higher with a bifurcation behavior in buying winners and selling losers. Elliott Wave analysis suggests the broad market, in the intermediate-term, could move up beyond the 2007 high.

• Leading-Wave Index Raised a Red Flag
• The S&P 500 Index above the “First Floor” Phase
• Elliott Wave Count on the S&P 500 Index
• 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
• 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 Equity Leading
• Sector Performance Ranking with Home Construction Sector Leading
• BRIC Stock Market Performance Ranking with the Russian Market Leading

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 14 on Friday (up from 4 the previous week) which is below the panic threshold level of 44 and indicates a bullish market. However, the BIX just started rising, and it could be an early warning sign of possible market topping. Also on Friday the Leading-Wave Index (LWX) raised a red flag with its first negative reading after two months. Based on the forecast of the LWX, the broad market should be in a short-term bearish 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 13 weeks since my Weekly Update of 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: Currently the SPX is drifting up for a continuation advance above the “First Floor” phase. This advance is a phase transition from the “First Floor” to the “Roof”, and it usually has two segment up-moves with wave 21 and wave 23 as described in George Lindsay’s original model. Now the market could be very close to point 21. The price target for the “Roof” phase is projected at 1570 to challenge the 2007 all time high.

This ongoing “Three Peaks and a Domed House” formation 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 currently is in the mark-up stage with rising MACD above the zero line.

There are several ways to count Elliott Wave on the S&P 500 index. If you have seen another count somewhere, please just treat my count as a second opinion. The following chart is a weekly chart of the S&P 500 index, with my Elliott Wave count, in a four-year time span. The stock market crash of 2008 resets the market in early March 2009 as “ground zero” for the beginning of wave count.

Primary Wave: From the 2009 low, the primary wave of the SPX carried impulsive wave [1] up to a high in May of 2011, and corrective wave [2] down in August of 2011. Since then, the SPX has been in impulsive primary wave [3].

Intermediate Wave: Inside the current primary wave [3], the intermediate wave started from August low in 2011, with wave (1) up to April high in 2012 and wave (2) down to June low in 2012. Then the SPX has been in intermediate wave (3).

Minor Wave: Inside the current intermediate wave (3), the minor wave started from June low in 2011, with wave 1 up to last September high and wave 2 down to last November low. Then, the SPX has been in minor wave 3.

Minute Wave: Inside the current minor wave 3, the minute wave started from last November low near 1350, with wave [i] up to 1448 in mid-December, and wave [ii] down to 1400 in the end of December. So far the SPX has been up about 100 points in minute wave [iii]. And corrective wave [iv] probably is going to come soon. Wave [iv] could be in sideways because wave [ii] in December was relatively sharp.

It is very significant for a potential strong bull market in superposition of the third waves in multiple wave degrees at the same time.

Target Projection: This wave count suggests that the SPX may have strong potential to move much higher beyond its 2007 high, in the current presidential cycle. By using the height of primary wave [1] described above, the price target for primary wave [3] is estimated as:

(1350-670)x0.618 + 1350 = 1770.

The magnitude from the 2009 low to this price target, could be comparable to the total 1100-point advance of the SPX in the big bull market between 1995 and 2000. Actually, the SPX has been already up about 830 points since the 2009 low. Only about 270 point left in the upside, i.e., the SPX reaching 1770 from the present level of 1500, to exactly match the total-point move of the SPX in the period of 1995-2000.

The market ratio is very helpful to compare strengths between two markets. The table below 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 markets into two groups: outperforming markets and underperforming markets, for this week as follows:

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 SPX to gold. This week I focus on the pair of Apple and Research In Motion.

Apple vs. Research In Motion: The chart below is a daily chart in one-year time span for AAPL (red), RIMM (blue) and their ratio (yellow). Contrary to popular expectations, AAPL and RIMM moved dramatically in opposite directions against each other. The ratio of AAPL to RIMM has been continuously below the 89-day exponential moving average (EMA89) together with the EMA89 trending down since last October, which indicates weakening in AAPL and strengthening in RIMM. As the broad stock market hits multi-year high, AAPL has a 37% decline and RIMM has a 169% advance in the same period from last September to the present. Earning growth and revenue growth must be the most important factors behind the price moves. As long as the market ratio of them keeps trending down and below its EMA89, the current situation of AAPL and RIMM could continue. We track their competitive strength every week in the table above.

The weekly chart shows that the gold index has formed a 18-month Symmetrical Triangle pattern in an intermediate-term. Prices have wound 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 tried to move up towards the upper boundary of the channel but failed. You may pay attention to the competitive strength between the SPX and gold updated every week in the table of the Market Ratio and Competitive Strength section above.

Same as gold, the silver index has formed a 4-month downtrend channel. Prices tried to move up towards the upper boundary of the channel but failed with a bearish partial rising.

Crude oil has formed a 7-month Symmetrical Triangle pattern. It is still 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 equity 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 5.62% above the EMA89. Outperforming sectors are Home Construction (15.56%), Internet (12.32%), and Banks (7.75%). Underperforming sectors are Precious Metals (-7.46%), Telecommunication (-3.43%), and Technology (0%). The S&P 400 Mid-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 Russian market is leading, and the Brazilian market is lagging.