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02/10/2013 – Market Update

February 10, 2013 Leave a comment Go to comments

The Water Snake Year Starts

Today is the beginning of the new lunar year. According to Chinese astrological tradition, 2013 is the year of the Water Snake which would be full of mysteries and surprises. The S&P 500 index still in a transition from the “First Floor” phase to the “Roof” phase. The “Three Peaks and a Domed House” formation suggests that the “Roof” phase could be around 1570 with a price range between 1550 and 1590. The advance of the SPX from the end of December to the present could be characterized as the third wave in the minute degree, and this third wave may reach 1550 if it keeps going up beyond 1512.


Table of Contents


The Broad Market is in a Neutral Time-Window

The LWX Indicator in Last Four Weeks (Actual)
Last 4 wks LWX 2-8-2013

The LWX Indicator in Next Four Weeks (Forecast)
Next 4 wks LWX 2-8-2013

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 4 on Friday (down from 8 the previous week) which is below the panic threshold level of 44 and indicates a bullish market. The Leading-Wave Index (LWX) has been in a short-term bearish time-window for two weeks. Based on the forecast of the LWX, the broad market should be in a short-term neutral time-window until 3/1/2013 (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:

Short-Term Cycle: downward
Date of Next Cycle Low: 3/1/2013
Broad Market Instability Index (BIX): 4, below the panic threshold (bullish)
Momentum Indicator: positive (bullish)

DWC 2-8-2013



Intermediate-Term Picture: S&P 500 Index in “Three Peaks and a Domed House” Formation

We have been tracking the current speculated “Three Peaks and a Domed House” pattern of the S&P 500 index for 15 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.

3PDH

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: In January, the SPX spent about 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 described in George Lindsay’s original model, as the general market sentiment becomes bullish. Negative divergences between market prices and technical indicators start building up.

Roof Phase: The SPX is approaching the “Roof” phase but it is not there yet. The price target for the “Roof” phase is projected at 1570 with a range between 1550 and 1590. Please be aware of that the “Roof” phase is also typically a “Bull Trap” for blind trend-followers.

This ongoing intermediate-term “Three Peaks and a Domed House” formation is supported by the standard 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.

SPX Three Peaks and a Domed House 2-8-2013



Long-Term Picture: Elliott Wave Count on S&P 500 Index

There are several ways to count Elliott Wave on the S&P 500 index. If you have seen another count somewhere else, 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.

SPX Elliott Wave 2-8-2013

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 110 points in minute wave [iii]. Wave [iii] is projected to end at 1512 (based on 0.618 extension of wave [i]), and corrective wave [iv] probably is due to come. However, if wave [iii] keeps going up beyond 1512, then wave [iii] may end at 1550 (based on 1.0 extension of wave [i]). Next, wave [iv] should be 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.

Long-Term 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 848 points since the 2009 low. Only about 252 points left in the upside, i.e., the SPX reaching 1770 from the present level of 1518, to exactly match the total-point move of the SPX in the period of 1995-2000.



Market Ratio and Competitive Strength

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. BlackBerry.

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:

Market Ratios 2-8-2013

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 Russell 2000 (small-caps) to the Russell 1000 (large caps). This week let’s have a look at the pair of the euro and the U.S. dollar.

Euro vs. U.S. Dollar: The chart below is a weekly chart for the ratio of the euro to the U.S. dollar in last seven years. The ratio has been in a symmetrical triangle pattern for six years. The central line of the triangle is at 1.7. Since last July, the euro has been outperforming the U.S. dollar. The standard monthly MACD indicates that the ratio still has room to go up before the ratio hits the upper boundary near 1.85. It means that the euro should continue outperforming the dollar in the near term.

Euro vs US Dollar 2-8-2013



Gold (Weekly) in a 18-Month Symmetrical Triangle Pattern

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

GOLD 2-8-2013 weekly



Gold (Daily) in a 4-Month Bearish Downtrend Channel

The gold index has formed a 4-month downtrend channel. Also it is forming a 2-month symmetrical triangle inside the downtrend channel. It indicates that gold currently is in sideways. We may pay attention to weakening in the strength of gold from the competitive strength between the SPX and gold updated every week in the table of the Market Ratio and Competitive Strength section above.

GOLD 2-8-2013 daily



Silver in a 4-Month Bearish Downtrend Channel

Same as gold, the silver index has formed a 4-month downtrend channel. It also is forming a 2-month symmetrical triangle.

Silver 2-8-2013



Gold/Silver Mining Stocks in a 5-Month Falling Wedge

Gold/silver mining stocks are forming a 5-month falling wedge. They should be bearish until they break out from the upper boundary of the wedge.

XAU 2-8-2012

HUI 2-8-2012



Crude Oil in 8-Month Ascending Triangle

Crude oil now is forming an 8-month ascending triangle pattern. It could be in sideways before it break out from the upper horizontal boundary.

Oil 2-8-2013



US Dollar in 4-Month Descending Triangle pattern

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. Now it is testing the upper boundary of the triangle.

USD 2-8-2013



U.S. Treasury Bond Weakening

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 135.

USB 2-8-2013



Asset Class Performance Ranking with Equity Leading

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.

Asset 2-8-2013



Sector Performance Ranking with Internet 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 5.43% above the EMA89. Outperforming sectors are Internet (9.34%), Home Construction (7.57%), and Banks (7.27%). Underperforming sectors are Precious Metals (-5.12%), Technology (1.57%), and Telecommunication (2.24%). The S&P 400 Mid-cap is outperforming and the NASDAQ 100 is underperforming.

Sector 2-8-2013



BRIC Stock Market Performance Ranking with the Chinese Market Leading

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 the Brazilian market is lagging.

BRIC 2-8-2013
  1. SeniorD
    February 11, 2013 at 11:16 am

    Great charts and as usual you commentary is inspiring!
    I think the “non-technical” reason that many charts are moving sideways, instead of upward or downward is that investors are waiting for “something” to happen which would then have a huge effect on the entire market, like an attack on Iran, or another MAJOR shift in currency devaluation by one or more of the BIGGER Countries.

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