Roof Phase, Bull Trap

The S&P 500 index is in the “Roof” phase of the “Three Peaks and a Domed House” pattern. The “Roof” phase is also typically a “Bull Trap”. The Leading-Wave Index forecast indicates a short-term bearish time-window until 4/5/2013.

Table of Contents

• Broad Market is Ending the 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 Reached 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 is Ending the Bullish Time-Window

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 11 on Friday (up from 5 the previous week) which is below the panic threshold level of 44 and indicates a bullish market. The Leading-Wave Index (LWX) is ending the current short-term bullish time-window. Based on the forecast of the LWX, the broad market is rolling into a short-term bearish time-window which would last until 4/5/2013 (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 20 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.

Last week the SPX reached as high as 1563 in the “Roof” phase. The doted red circle on the chart below indicates “Roof Watch” as prices are very close to the center of the gray-shadow target zone which 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 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 coming.

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.

How high can this third minor wave go? A short-term price target for minor wave 3 is projected at 1593 by using 0.618 extension of wave 1.

Currently the SPX nears the end of minute wave [v]. The end of this fifth wave should finally determine the price level of the “Roof” phase. Also it will end minor wave 3.

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 Small-Caps vs. 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 the begging of February, the ratio has turned down below the central line with a bearish partial rising pattern, and the euro has underperformed the U.S. dollar. The standard monthly MACD indicates that the momentum of the ratio is weakening. The ratio could hit the lower boundary of the triangle near 1.47. It means that the euro should continue underperforming the dollar in the near term.

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 4-week symmetrical triangle inside the wedge. A breakout from the triangle could be anytime soon. Watch out the direction of the breakout.

Same as gold, the silver index has formed a 5-month Descending Broadening Wedge. It also has a 4-week symmetrical triangle inside the wedge. A breakout from the triangle could be anytime soon. Watch out the direction of the breakout.

Gold/silver mining stocks formed a 5-month downtrend channel. It also has a 4-week symmetrical triangle inside the wedge. A breakout from the triangle could be anytime soon. Watch out the direction of the breakout.

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. It has rebounded from the lower boundary of the triangle, and has been in 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 reached our target of 83. A consolidation should be expected.

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 5.72% above the EMA89. Outperforming sectors are Biotech (10.02%), Banks (9.42%), and Financials (7.76%). Underperforming sectors are Precious Metals (-10.15%), Technology (2.24%), and Materials (3.07%). 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.