Third Week in Roof Phase

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

Table of Contents

• Broad Market in a Short-Term Bearish 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 6-Month Descending Broadening Wedge
• Silver in 6-Month Descending Broadening Wedge
• Gold/Silver Stocks in 6-Month Downtrend Channel
• Crude Oil in 10-Month Ascending Triangle
• US Dollar in Consolidation
• 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 Russian Market Lagging

Broad Market in a Short-Term Bearish Time-Window

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 11 on Thursday (up from 8 the previous week) which is below the panic threshold level of 44 and indicates a bullish market. The Leading-Wave Index (LWX) is in a short-term bearish time-window. Based on the forecast of the LWX, the broad market would be in a short-term bearish time-window until 4/4/2013 (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 22 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 SPX has been the “Roof” phase for three weeks. The market is in a mixed sentiment and becomes very sensitive to any good or bad news. The “Roof” phase is typically a “Bull Trap” for blind trend-followers. One major characteristics in this phase is a negative divergence between the price and technical indicators.

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 should be in the distribution stage in which prices usually are very choppy.

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 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 minute wave [v] probably is ending.

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-cap stocks vs. large-cap stocks. This week let’s check the U.S. stock market vs. the international stock market again.

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. The ratio the U.S. stock market to the international stock market is a leading indicator for the U.S. dollar.

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 6-month Descending Broadening Wedge. It also has a 5-week ascending right triangle inside the wedge. Prices could be in sideways before a breakout from the triangle.

Same as gold, the silver index has formed a 6-month Descending Broadening Wedge. It also has a 5-week descending triangle inside the wedge. Prices could be in sideways before a breakout from the triangle.

Gold/silver mining stocks formed a 6-month downtrend channel. It also has a 5-week ascending right triangle inside the wedge. Prices could be in sideways before a breakout from the triangle.

Crude oil now is forming a 10-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 U.S. dollar has reached the price target of 83. Now it should be in a consolidation.

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 138.

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 5.29% above the EMA89. Outperforming sectors are Biotech (14.13%), Healthcare (8.00%), and Pharmaceuticals (7.00%). Underperforming sectors are Precious Metals (-7.18), Materials (0.61%), and Technology (1.34%). The S&P 400 midcap 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 Russian market is lagging.