Tricky Fifth Wave

The broad stock market may have started the fifth wave in the minute degree. The impulse fifth wave is tricky because it could turn to an advance either far extended or truncated against the third wave. The quality of this fifth wave should finally define the price level of the “Roof” phase for the SPX. The Leading-Wave Index suggests a short-term bullish time-window until 3/21/2013.

Table of Contents

• The Broad Market Nears the End of Bearish 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
• Gold (Weekly) in a 18-Month Descending Triangle Pattern
• Gold (Daily) in a 4-Month Descending Broadening Wedge
• Silver in a 4-Month Descending Broadening Wedge
• Gold/Silver Stocks in 5-Month Downtrend Channel
• 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 Biotech Sector Leading
• BRIC Stock Market Performance Ranking with the Brazilian Market Lagging

The Broad Market Nears the End of Bearish Time-Window

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 36 on Friday (up from 23 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 5 weeks. Based on the forecast of the LWX, the broad market should gradually enter and stay in a short-term bullish time-window until 3/21/2013 (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 18 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 phase transition from the “First Floor” to the “Roof” usually has two segment up-moves with wave 21 and wave 23 described in George Lindsay’s original model. The SPX may have finished wave 21 but may not have reached wave 23 yet. The price target for the “Roof” phase is projected at 1570 with a range between 1550 and 1590. The actual price level of the “Roof” phase should be finally determined by the fifth wave in the minute degree in terms of Elliott Waves. 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 also can be checked with the standard weekly MACD Histogram indicator mathematically mapped on the following SPX daily chart, marked with each stage of the market cycle. The current market probably is ending the mark-up stage as the MACD inflects. But it may or may not have entered the distribution stage because there is still a possibility of turning up again in the MACD.

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 [v]. 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 minute wave [iii] from the end of December to February. Wave [iii] had sub-waves with minuette waves (i), (ii), (iii), (iv), and (v).

Late February minute Wave [iv] developed. Now the SPX should be in minute wave [v], an impulse wave. Please note that the fifth wave is tricky. It could become extended far beyond Wave [iii]. Or it could become truncated at the price level of Wave [iii]. The quality of this fifth wave should finally define the price level of the “Roof” phase.

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 will talk about one pair of markets in the table above. Last week, I discussed gasoline vs. crude oil. This week let’s check the U.S. market vs. the international market.

U.S. Stock Market vs. International Stock Market: The chart below is a daily chart in six-month time span for the ratio of the Wilshire 5000 Index to the Dow Jones World Stock Index. The previous downtrend of the ratio ended in late December. An uptrend channel has been developed since then. It indicates that the U.S. stock market has been outperformed the international stock market so far this year. The U.S. market outperforming typically corresponds to strengthening in the U.S. dollar. I regard the ratio the U.S. stock market to the international stock market as a leading indicator for the U.S. dollar.

The weekly chart shows that the gold index has formed a 18-month Descending Triangle pattern in the intermediate-term. Prices are testing the lower boundary of the triangle. Defending the price level of 1575 is important for gold to prevent a free fall.

The gold index has formed a 4-month Descending Broadening Wedge. Prices may re-test the lower boundary to find a support.

Same as gold, the silver index has formed a 4-month Descending Broadening Wedge. Prices may re-test the lower boundary to find a support.

Gold/silver mining stocks formed a 5-month downtrend channel. It is a very bearish pattern for the price in a downtrend.

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.

After a bullish breakout from the 4-month Descending Triangle pattern, the US dollar has strengthened, and the first price target of 81.25 has been reached. The next price target is projected 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 137.

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 3.97% above the EMA89. Outperforming sectors are Biotech (8.65%), Internet (6.84%), and Consumer Goods (5.06%). Underperforming sectors are Precious Metals (-13.56%), Materials (-0.55%), and Technology (-0.18%). 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 Brazilian market is lagging.