“Golden Cliff”

As the S&P 500 index challenged all time high in the “Roof” phase, the SPX/Gold ratio returned above 1. Gold failed in defending the key price level of 1575, and entered a long-term bear market. The sharp decline of the Japanese yen and the years-long coupling between gold and the yen are dragging gold into a “Golden Cliff”.

Table of Contents

• Broad Market in a Short-Term Neutral 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 Following Footprints of the Japanese Yen into “Golden Cliff”
• Gold (Weekly) Bearish Breakdown from 19-Month Descending Triangle Pattern
• Gold (Daily) Bearish Breakdown from 6-Month Descending Broadening Wedge
• Silver Bearish Breakdown from 5-Month Falling Wedge
• Gold/Silver Stocks in 6-Month Downtrend Channel
• Crude Oil in 10-Month Ascending Triangle
• US Dollar in 7-Month Broadening Ascending Triangle
• US Treasury Bond Returned into 3-Year Uptrend Channel
• 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 Neutral Time-Window

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 10 on Friday (down from 87 the previous week) which is below the panic threshold level of 44 and indicates a bullish market. Based on the forecast of Leading-Wave Index (LWX), the broad market would be in a short-term neutral time-window until 4/23/2013 followed by a bearish period (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 24 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 is still in the “Roof” phase within our target price range between 1550 and 1590. 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. Before the “Plunge” phase, there are still two steps: 1) completion of the “Roof” phase, and 2) a phase transition from “Roof” to “Plunge”.

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 is 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.

A long-term price target for primary wave [3] is projected at 1770 by using 0.618 extension of wave [1]. However, there would be a couple of corrective waves, i.e., minor wave 4 and intermediate wave (4), before the price target of 1770.

As I discussed last week, there are two scenarios of wave counts on the SPX, with tow different perspectives. Both of them suggest that at this point the current market possibly faces a correction, just a matter of how deep. I would still focus on the “bullish” scenario talked above, and will update another “bearish” scenario from time to time.

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 over four month.

A short-term price target for minor wave 3 is projected at 1593 by using 0.618 extension of wave 1. This target has been almost reached.

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. On 2/17/2013, I discussed the SPX vs. gold. This week let’s check them 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 1.07, 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 2/17/2013, I mentioned that recent sharp 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 daily chart below shows gold (yellow) and the Japanese yen (red) in last 7 years. Both of them had similar trends for years. After the yen fell this year, a big gap between gold and yen formed. Gold is following the footprints of the yen and is falling into a historic “Golden Cliff”.

The weekly chart shows that the gold index formed a 19-month Descending Triangle pattern in the intermediate term. I have mentioned for several weeks that defending the price level of 1575 is critical for gold to prevent a free fall. Last week, gold finally broke down the horizontal boundary of the triangle and triggered a sharp decline. By using Bulkowski’s measure rule on descending triangles, the downside price target should be projected at 1400 for gold.

The gold index has formed a 6-month Descending Broadening Wedge. It also has a 6-week trading range inside the wedge. Last week prices broke out to the downside from the trading range, and further broke through the lower boundary of the descending broadening wedge. By using Bulkowski’s measure rule on descending broadening wedges, the downside price target should be projected at 1392 for gold.

The silver index showed more weakness than gold. It formed a 5-month Falling Wedge. Last week prices broke out to the downside from the lower boundary of the wedge. By using Bulkowski’s measure rule on falling wedges, the downside price target should be projected at 24 for silver.

Gold/silver mining stocks are in a 6-month downtrend channel, very bearish.

Crude oil has been in a 10-month ascending triangle pattern. It could be in sideways before it break out from the triangle.

The U.S. dollar is forming a 7-month Broadening Ascending Triangle pattern. Although this pattern has a bearish bias, but it has poor performance of direction suggestion. The U.S. dollar should continue its consolidation.

The 30-year U.S. treasury returned to a 3-year uptrend channel after it rebounded in March, and regained strength. Considering the current deflationary environment indicated by the inflation rate below 3%, bonds have an inverse relationship with stocks. Strengthening in bonds means weakening in stocks.

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 Wilshire 5000 index, as an average or a benchmark of the total market, is 5.21% above the EMA89. Outperforming sectors are Biotech (17.90%), Healthcare (9.96%), and Pharmaceuticals (9.00%). Underperforming sectors are Precious Metals (-16.77), Materials (-1.16%), and Technology (0.39%). The DJ Industrial Average 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.