Home > News > 04/14/2013 – Market Update

04/14/2013 – Market Update

“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

The LWX Indicator in Last Four Weeks (Actual)
Last 4 wks LWX 4-12-2013

The LWX Indicator in Next Four Weeks (Forecast)
Next 4 wks LWX 4-12-2013

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:

Short-Term Cycle: upward
Date of Next Cycle High: 4/23/2013
Broad Market Instability Index (BIX): 10, below the panic threshold (bullish)
Momentum Indicator: negative (bearish)

DWC 4-12-2013



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.

3PDH

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.

SPX Three Peaks and a Domed House 4-12-2013



Long-Term Picture: Elliott Wave Count on S&P 500 Index

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.

SPX Elliott Wave 1-2-3 (Weekly) 4-12-2013



Short-Term Picture: Elliott Wave Count on S&P 500 Index

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.

SPX Elliott Wave (Daily) 4-12-2013



Market Ratio and Competitive Strength

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:

Market Ratios 4-12-2013

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.

SPX-GOLD 4-12-2013



Gold Following Footprints of the Japanese Yen into “Golden Cliff”

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”.

GOLD vs Yen 4-12-2013



Gold (Weekly) Bearish Breakdown from 19-Month Descending Triangle

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.

GOLD 4-12-2013 weekly



Gold (Daily) Bearish Breakdown from 6-Month Descending Broadening Wedge

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.

GOLD 4-12-2013 daily



Silver Bearish Breakdown from 5-Month Falling Wedge

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.

Silver 4-12-2013



Gold/Silver Mining Stocks in 6-Month Downtrend Channel

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

XAU 4-12-2013

HUI 4-12-2013



Crude Oil in 10-Month Ascending Triangle

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

Oil 4-12-2013



US Dollar in a 7-Month Broadening Ascending 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.

USD 4-12-2013



U.S. Treasury Returned into a 3-Year Uptrend Channel

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.

USB 4-12-2013



Asset Class Performance Ranking with Equity Leading

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.

Asset 4-12-2013



Sector Performance Ranking with Biotech Sector Leading

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.

Sector 4-12-2013



BRIC Stock Market Performance Ranking with the Russian Market is Lagging

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.

BRIC 4-12-2013
  1. SeniorD
    April 19, 2013 at 12:15 pm

    Dr. Nu Yu
    Please consider posting your interpretation of the chart for Silver but use the 15 year historic data instead of the one posted above or whatever you feel is more accurate, the large wedge which is created seems to “Point” to the low 20’s or very close to Silvers current price of 23 which may in fact become a major turning point, as we await yet more Central Bank news…

    • April 19, 2013 at 12:54 pm

      SeniorD,

      I will post a longer term chart for silver this weekend. Thank you for your suggestion.

      Nu Yu

  2. Roger
    April 19, 2013 at 12:19 am

    Dr Nu Yu,

    Do you think Gold was in the three peaks and now is approaching the basement bear trap?

    Would you suggest a strong rally in Gold in May while stocks go the opposite direction?

    It looks to me now after the gold crash that this pattern may play out..

    • April 19, 2013 at 7:57 am

      Roger,

      I have not observed any qualified signs for developing a “three peaks and a domed house” pattern on gold. But on a 3-year weekly chart it may look like “A Domed House and Three Peaks” pattern, that is horizontally inverted from the original version. That means a domed house first with three peaks after. It looks like gold developed a domed house in 2011. Now it could be approaching the basement as you suggested. The next would be a bounce to form three-peaks. Then gold may have a significant downtrend after the 3 peaks to end “A Domed House and Three Peaks”.

      The Japanese yen should give a clue for the direction of gold.

      Nu Yu

      • Roger
        April 19, 2013 at 10:18 am

        Thank you.. will watch the xjy.

  3. April 15, 2013 at 10:51 am

    The very next day, 4/15/13 both Gold and Silver have fallen below your posted downside price targets!

    Now the question becomes where is their next turning point projected to be?

    I’d like to add that many online sellers have not lowered their prices for either Gold or Silver which I find telling, like maybe they know something we do not!

    I’m waiting to read the words PM REVERSE THEIR PLUNGE…

    • April 16, 2013 at 12:57 am

      SeniorD,

      The price target of 1400 for gold was estimated from 54% meeting price target based on the height of the 19-month Descending Triangle pattern. The full size price target from the pattern should be 1250 for gold.

      The price target of 24 for silver was estimated from 30% meeting price target based on the height of the 5-month Falling Wedge pattern. The full size price target from the pattern should be 18 for silver.

      The next turning point is projected on 4/30/2013.

      Nu Yu

      • April 19, 2013 at 11:53 am

        Thank You for your replay!

        I believe that these charts are just displaying what the Central Banks are doing to the World’s economy (we are seeing them display what the result of changing the “rules” during a game are upon the game)! Because we have just seen major “corrections” by the Central Banks, what the charts are showing is far from what they might have projected if we were not having these dramatic events occur.

        For this reason, would you consider that unless one refers to similar periods in history where the Central Banks did the same thing, the charts while interesting don’t reflect our current reality! For all those that using charting to decipher the Market, it is as if they are trying to decode a long message while the code they are using is changed during the process… The end message, even though it is decoded properly, is garbled.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s