Reaches “Roof”

The S&P 500 index has reached the “Roof” phase of the “Three Peaks and a Domed House” pattern, but has not completed point 23 yet. Elliott wave analysis has a short-term price target of 1593 for the third minor wave. The Leading-Wave Index indicates a short-term bullish time-window until 3/19/2013.

Table of Contents

• Broad Market in Bullish Time-Window
• Intermediate-Term Picture of the S&P 500 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 19-Month Descending Triangle Pattern
• Gold (Daily) in 5-Month Descending Broadening Wedge
• Silver in 5-Month Descending Broadening Wedge
• Gold/Silver Stocks in 5-Month Downtrend Channel
• Crude Oil in 9-Month Ascending Triangle
• US Dollar Nears 83 Price Target
• 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

Broad Market in Bullish Time-Window

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 5 on Friday (down from 36 the previous week) which is below the panic threshold level of 44 and indicates a bullish market. The Leading-Wave Index (LWX) has entered a short-term bullish time-window. Based on the forecast of the LWX, the broad market should be in this short-term bullish time-window until 3/19/2013 (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 19 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. Now the SPX is in wave 23 but may have not reached point 23 yet. The price target for the “Roof” phase is projected at 1570 with a range between 1550 and 1590. This target zone is marked by a gray-shadow circle on the following chart.

Last Friday the SPX closed above 1550 and it just entered the “Roof” zone. The doted red circle on the chart indicates “Roof Watch” as prices approach the gray-shadow target zone. 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 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 in a process of ending the mark-up stage. The distribution stage is next.

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 and 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.

How high can this third primary wave go? 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 minor wave 3, from mid-November to the present, with sub-waves of minute waves [i], [ii], [iii], [iv], and [v]. Minor wave 3 has been in a well-defined bullish uptrend channel for almost four month.

Now the SPX is in minute wave [v], an impulse wave. Please note that the fifth wave is tricky. It could become extended far beyond Wave [iii]. The end of this fifth wave should finally determine the price level of the “Roof” phase.

How high can this third minor wave go? Minor wave 3 will end as minute wave [v] ends. A short-term price target for minor wave 3 is projected at 1593 by using 0.618 extension of wave 1.

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 U.S. Stock Market vs. International Stock Market. This week let’s check small-cap stocks vs. large-cap stocks again.

Small-Caps vs. Large-Caps: The chart below is a daily chart in seven-month time span for the ratio of the Russell 2000 index of smaller companies divided by the Russell 1000 index of largest companies. Rising in the ratio indicates outperforming of small-cap stocks. Last nine weeks the ratio formed an Ascending Broadening Wedge pattern. This pattern is a typical topping formation.

The weekly chart shows that the gold index has formed a 19-month Descending Triangle pattern in the intermediate-term. Prices are testing the lower boundary of the triangle. Defending the price level of 1575 is critical for gold to prevent a free fall.

The gold index has formed a 5-month Descending Broadening Wedge. It also has a 7-week downtrend channel inside the wedge. Prices could break to the upside from the 7-week downtrend channel, towards the upper boundary of the wedge.

Same as gold, the silver index has formed a 5-month Descending Broadening Wedge. It also has a 7-week downtrend channel inside the wedge. Prices could break to the upside from the 7-week downtrend channel, towards the upper boundary of the wedge.

Gold/silver mining stocks formed a 5-month downtrend channel. It also has a 7-week downtrend channel inside. Prices could break to the upside from the 7-week downtrend channel, towards the upper boundary of the large channel.

Crude oil now is forming a 9-month ascending triangle pattern. It could be in sideways before it break out from the upper horizontal boundary. Last week it rebounded from the lower boundary of the triangle. It may start an up-wave towards the horizontal boundary.

After a bullish breakout from the 4-month Descending Triangle pattern, the US dollar has strengthened. Last week prices briefly reached 82.94 that was very close to our target of 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 5.79% above the EMA89. Outperforming sectors are Biotech (10.54%), Internet (8.59%), and Banks (8.42%). Underperforming sectors are Precious Metals (-11.67%), Technology (1.90%), and Materials (2.58%). 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.