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05/07/2013 – Market Update

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

The LWX Indicator in Last Four Weeks (Actual)
Last 4 wks LWX 5-6-2013

The LWX Indicator in Next Four Weeks (Forecast)
Next 4 wks LWX 5-6-2013

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:

Short-Term Cycle: upward
Date of Next Cycle High: 5/8/2013
Broad Market Instability Index (BIX): 7, below the panic threshold (bullish)
Momentum Indicator: positive (bullish)

DWC 5-6-2013

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 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.

SPX Three Peaks and a Domed House 5-6-2013

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 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.

SPX Elliott Wave (Weekly) 5-6-2013

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

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].

SPX Elliott Wave (Daily) 5-6-2013

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 5-6-2013

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.

Greece-vs-China 5-6-2013

Gold (Weekly) Forming Bearish 20-Month Downtrend Channel

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.

GOLD 5-6-2013 weekly

Long-Term Picture: Silver Still Has Room to Fall

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.

Silver 5-6-2013 monthly

Gold/Silver Mining Stocks Bearish Below 6-Month Downtrend Channel

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.

XAU 5-6-2013

HUI 5-6-2013

Crude Oil Forming 10-Month Trading Range

Crude oil is forming a 10-month horizontal trading range between 86 and 98. No price target is projected at this time.

Oil 5-6-2013

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

USD 5-6-2013

US Treasury Bond Formed 12-Month Symmetrical 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.

USB 5-6-2013

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 5-6-2013

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 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.

Sector 5-6-2013

BRIC Stock Market Performance Ranking with the Brazilian Market 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 Brazilian market is lagging.

BRIC 5-6-2013
  1. May 13, 2013 at 12:24 pm

    I believe that the Central Banks (along with their Partners) are adding to their own PM holdings and they will continue to do so since they will be able to best take advantage of any reductions in the perceived value of PM’s LIKE THE LAST PLUNGE, which they help create by allowing naked shorting by their Partners who are allowed to use their paper currency as collateral for the naked shorting that is caused the big drop in the value of PM’s that scared many owners of PM’s into selling!

    I believe that the Financial FIX is in, the Central Banks are now using this and other techniques for their own benefit and not the public’s (because ordinary investors are not allowed to do naked short trades) who have no control over those that control their money supply or its value.

    Now despite the gaming of the PM markets, i.e. selling naked shorts which only the Ultra Wealthy leadership partners can do, most small investors still believe that in the long run, PM’s offer a level of confidence that paper money can never hope provide!

    We are seeing a continued attack on PM prices but I predict that PM prices will not “plunge” from their current value, since those holding actual PM’s will not fall for the same trick by the Central Bankers and their Partners (of selling paper backed naked shorts) twice.

    I believe that in the very near future, “Coin of the Realm” will no longer be considered paper money, especially since everyone knows that money does not grow on trees yet the very paper it is printed on is made from trees!

    For me THE KEY INDICATOR is the backlog in actually taking possession of PM’s once they are paid for, the longer delay and the less any “paper” drop in the price of PM’s matters!

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