Wave Extension

The strong bull market of stocks blew off the “Ceiling” and pushed the “Roof” higher. The S&P 500 index is forming a special extension-wave formation. The short-term neutral time-window turned bullish, and it should stay bullish until 5/8/2013 followed by a bearish period.

Table of Contents

• Short-Term Time-Window Turned to Bullish from Neutral
• 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 Below 6-Month Downtrend Channel
• Crude Oil Bearish Forming 10-Month Trading Range
• US Dollar in 7-Month Broadening Ascending Triangle
• US Treasury Bond Formed 12-Month Symmetrical Triangle
• Asset Class Performance Ranking with Equity Leading
• Sector Performance Ranking with Biotech Sector Leading
• BRIC Stock Market Performance Ranking with the Brazilian Market Lagging

Short-Term Time-Window Turned to Bullish from Neutral

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 7 on Monday (down from 12 the previous week) which is below the panic threshold level of 44 and indicates a bullish market. The short-term time-window turned to bullish from neutral last week. Based on the forecast of the Leading-Wave Index (LWX), the broad market is in a short-term bullish time-window until 5/8/2013 followed by a bearish period (see the tables 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 27 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 (“Bull Trap”). The price-range between 1550 and 1590 for the “Roof” phase was based on the estimation of minor wave 3 from 0.618 extension of minor wave 1, i.e., (1470-1270)x0.618+1470=1593. This projection could have under-estimated the current market. Now the SPX crossed the expected target and pushed the “Roof” higher. Lindsay’s original model does not quantitatively address how high the “Roof” should be. Other techniques may be used to help price-target projection. Please check Elliott Wave section about “Wave Extension”.

Before the “Plunge” phase, there are still two steps: 1) completion of the “Roof” phase, and 2) a phase transition from “Roof” to “Plunge”. Without moving below 1550, a transition from the “Roof” phase to “Plunge” phase would not happen for the SPX. Therefore, no any price target is projected for the “Plunge” phase. This view is applied to German DAX and London FTSE 100 too. Please keep in mind that the pattern we are tracking can be derailed or fade out from the model at any stages in its course, that is more like tracking a hurricane.

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 three degrees of waves: Primary, Intermediate, and Minor waves in this weekly chart. It shows that the SPX currently is in primary wave [3], intermediate wave (3), and the beginning of minor wave 3. Superposition of the third waves in multiple degrees typically carries a strong 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 minor wave 3 has been in a well-defined bullish uptrend channel for over five months. Inside wave 3, it should have finished sub-waves of minute waves [i], [ii], [iii], [iv], and wave [v].

Now what is going on after wave [v]? Originally I thought they are minute waves [a] and [b]. But they are not. This strong bull market has made wave 3 to actually have a special extended wave formation: a possible structure with nine waves rather than five waves. It means that wave 3 may have waves [vi], [vii], [viii] and [ix] after wave [v]. Currently it should be in wave [vii].

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 Greek Market vs. Chinese Market again.

Greek Market vs. Chinese Market: The chart below is a daily chart in one-year time span for the ratio of the Athens Composite Index of Greece divided by the Shanghai Composite Index of China. Rising in the ratio indicates outperforming of the Greek market and underperforming of the Chinese market. After a sharp rising last year, the ratio formed a horizontal trading range.

Since April, the ratio has had a sharp advance again. Now it has a bullish breakout from the upper boundary of the horizontal channel. This bullish breakout could start another up-leg, that suggests either the Greek market would advance sharply or the Chinese market would fall hardly.

The weekly chart shows that the gold index has formed a 20-month Downtrend Channel after it recently broke down from the 19-month Descending Triangle and reached the downside price target of 1400. It should be no surprise to see continuing price rebound from the lower boundary of the channel. But gold is under a long-term bearish shadow.

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

Gold/silver mining stocks have recently broken 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 is forming a 10-month horizontal trading range between 86 and 98. No price target is projected at this time.

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. Please note that it just formed a 2-month “flag” formation inside the big triangle.

The 30-year U.S. treasury daily chart has formed a 12-month Symmetrical Triangle pattern. It could be in sideways before a breakout from the triangle.

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 4.04% above the EMA89. Outperforming sectors are Biotech (14.58%), Home Construction (9.67%), and Consumer Services (7.35%). Underperforming sectors are Precious Metals (-15.42), Basic Materials (1.68%), and Pharmaceuticals (3.59%). The NASDAQ 100 is outperforming and the Dow Jones Industrial Average 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.