“Roof” Phase is Ending

The S&P 500 index nears the end of the “Roof” phase of the intermediate-term “Three Peaks and a Domed House” pattern. Besides bearish breakdowns of gold, silver, and mining stocks, rising in the Broad Market Instability indicates that a transition from the “Roof” phase to the “Plunge” phase on the SPX is coming. The broad market should be in a short-term bearish time-window until 4/30/2013.

Table of Contents

• Broad Market Instability is Rising
• 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) Forming Bearish 20-Month Downtrend Channel
• Long-Term Picture: Silver Still Has Room to Fall
• Gold/Silver Stocks Bearish Breakdown from 6-Month Downtrend Channel
• Crude Oil Bearish Breakdown from 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 U.S. Treasury Bond Leading
• Sector Performance Ranking with Biotech Sector Leading
• BRIC Stock Market Performance Ranking with the Russian Market Lagging

Broad Market Instability is Rising

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 60 on Friday (up from 10 the previous week) which is above the panic threshold level of 44 and indicates a bearish market. Based on the forecast of Leading-Wave Index (LWX), the broad market is in a short-term bearish time-window until 4/30/2013 followed by a neutral 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 25 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 ending the “Roof” phase (“Bull Trap”). Once prices move below 1550, a transition from the “Roof” phase to “Plunge” phase will start. Currently the market is in a mixed sentiment and becomes very sensitive to any good or bad news. 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 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.

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], [v] and [a]. Minor wave 3 has been in a well-defined bullish uptrend channel for over four month.

Minor wave 3 has reached the short-term price target of 1593. Corrective wave 4 just started, and broke down the lower boundary of the four-month-long uptrend channel. A short-term price target is projected at 1460 for wave 4.

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. 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 9-month time span for the ratio of the Russell 2000 index of smaller companies divided by the Russell 1000 index of largest companies. Falling in the ratio indicates underperforming of small-cap stocks. The ratio formed an Ascending Broadening Wedge pattern in the first three months this year. This pattern is a typical topping formation. In March the ratio formed a Partial Rising pattern which the ratio could not reach the upper boundary of the wedge. This partial rising is typical bearish sign for a downside breakout from the wedge. The ratio broke to the downside from the wedge in April. The sharp decline in the ratio indicates much weakening in small-cap stocks.

The weekly chart shows that the gold index formed a 19-month Descending Triangle pattern in the intermediate term. Last week, gold finally broke down the horizontal boundary of the triangle and triggered a sharp decline. The price target of 1400 based on Bulkowski’s measure rule on descending triangles has been reached. Now gold formed a bearish 20-month downtrend channel pattern.

The following chart is a monthly chart for silver in 12 years. Last week silver broke to the downside from its 2-year Descending Triangle pattern. By using Bulkowski’s measure rule on descending triangles, the downside price target is projected at 15 for silver.

Last week gold/silver mining stocks broke to the downside from their 6-month downtrend channel. They may look for a support from the second channel line in the downside.

Crude oil broke to the downside from its 10-month ascending triangle pattern. The downside price target is projected at 78.

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 indicates 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 U.S. Treasury Bond 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 2.60% above the EMA89. Outperforming sectors are Biotech (17.38%), Pharmaceuticals (9.03%), and Healthcare (8.77%). Underperforming sectors are Precious Metals (-23.71), Materials (-3.83%), and Technology (-3.75%). 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.