Gold in Check

The SPX/Gold ratio bounced off the 12-year cycle low and started to return to the mean. The recent historic decline of the Japanese yen and the years-long coupling between gold and the yen put gold at the edge of a “Golden Cliff”. The breach of the lower boundary of the 18-month symmetrical triangle holds the trigger of a downside breakout on gold. Also the U.S. dollar becomes bullish after an upside breakout from its intermediate-term descending triangle. All these factors put gold in check.

Table of Contents

• The Broad Market in a Neutral Time-Window
• Intermediate-Term Picture of the S&P500 Index
• Long-Term Picture of the S&P 500 Index
• Short-Term Picture of the S&P 500 Index
• Market Ratio and Competitive Strength
• Following Footprints of the Japanese Yen Could Lead to “Golden Cliff”
• 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 Stocks in 5-Month Falling Wadge
• Crude Oil in 8-Month Ascending Triangle
• US Dollar Bullish Breakout from 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 Chinese Market Leading

The Broad Market is in a Neutral Time-Window

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 17 on Friday (up from 4 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 three weeks. Based on the forecast of the LWX, the broad market should stay in a short-term neutral time-window until 3/15/2013 (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:

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 16 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.

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. Negative divergences between market prices and technical indicators start building up.

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.

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 had a massive washout to reset the market in early March 2009 as “ground zero” for the beginning of wave count.

There are four degrees of waves: Primary, Intermediate, Minor, and Minute waves in this weekly chart. The SPX currently is in primary wave [3], intermediate wave (3), minor wave 3, and minute wave [iii]. Superposition of the third waves in multiple degrees typically carries the best part of a bull market. A long-term price target for primary wave [3] is projected at 1770 by using 0.618 extension of wave [1].

The following 6-month daily chart of the S&P 500 index shows a detail wave structure of the current minute wave [iii] from the end of December to the present. So far wave [iii] has had sub-waves with minuette waves (i), (ii), (iii), (iv), and (v).

Minuette wave (v) is near the end. Wave [iii] will end when wave (v) ends.

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:

This year each week I am going to talk about one pair of markets in the table above. On 1/20/2013, I discussed the S&P 500 index vs. Gold and expected that the SPX could continue outperforming gold. This week let’s check the SPX vs. gold again.

S&P 500 Index vs. Gold: The chart below is a weekly chart having the ratio of the SPX to gold 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) After it reached the 12-year cycle low, the ratio has recently crossed over the EMA89 to the upside, and the slope of the EMA89 has turned positive (heading up). This could be a major trend change of the SPX/Gold ratio. Also the ratio was stretched deeply away from the mean. Now it started to return to the mean. This implies that the SPX/Gold ratio could reach to 2.5 from the current level of 0.94, i.e., the SPX would become more expensive in terms of gold in the near future.

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. It looks very similar to what happened in 1995 that the SPX started to become significantly outperforming gold.

In my Weekly Update of 2/3/2013, I mentioned the coupling of gold and the Japanese yen. Gold has coupled with the Japanese yen very well for last several years. The recent sharp decline of the Japanese yen may raise a question: will gold follow the yen to decline or will it decouple from the yen?

The daily chart below shows gold (yellow) and the Japanese yen (red) in last 7 years. Both of them had similar trends for years. Just recently, gold tried to hold its steps after the yen’s historic decline. A big divergence between gold and yen has been formed. If gold is unable to decouple from the yen, it could follow the footprints of the yen and would head to a historic “Golden Cliff” anytime soon.

The weekly chart shows that the gold index has formed a 18-month Symmetrical Triangle pattern in the intermediate-term. Prices have been in sideways and have wound around 1700. Last Friday, the lower boundary of the triangle was breached. If prices go below 1625, further decline could be triggered. An initial price target could be 1421 based on Bulkowski’s measure rule of the symmetrical triangle.

The gold index has formed a 4-month downtrend channel. Also it is forming a 2-month symmetrical triangle inside the downtrend channel. Last week prices broke down the symmetrical triangle, and dropped sharply towards the lower boundary of the downtrend channel. Gold is bearish as long as it is in this downtrend channel.

Same as gold, the silver index has formed a 4-month downtrend channel. It also is forming a 2-month symmetrical triangle. Last week prices broke down the symmetrical triangle, and dropped sharply towards the lower boundary of the downtrend channel. Silver is bearish as long as it is in this downtrend channel.

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.

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.

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. Last week it broke out to the upside of the triangle. The first price target is projected at 81.25, and the second target at 83.

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 136.

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 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 5.01% above the EMA89. Outperforming sectors are Home Construction (9.36%), Internet (9.31%), and Banks (7.36%). Underperforming sectors are Precious Metals (-8.71%), Telecommunication (0.44%), and Technology (0.94%). 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 Chinese market is leading, and the Brazilian market is lagging.