Stretching for a Bump

The S&P 500 index broke above its 6-month uptrend channel. Instead of the “Three Peaks and a Domed House” formation, a new pattern is emerging and it could ultimately become a “Bump and Run Reversal Top” for the SPX. Also a “Bump and Run Reversal Bottom” pattern is possibly in forming for gold/silver mining stocks. The broad stock market is projected to be in a short-term neutral time-window until 5/31/2013.

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 (Weekly) Broke Below 20-Month Downtrend Channel
• Long-Term Picture: Silver Still Has Room to Fall
• Gold/Silver Stocks in Bump Phase
• Crude Oil Bearish Forming 10-Month Trading Range
• US Dollar Bullish Breakout from 2-Month Trading Range
• 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 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 12 on Friday (up from 6 the previous week) which is below the panic threshold level of 43 and indicates a bullish market. Based on the forecast of the Leading-Wave Index (LWX), the broad market should be in a short-term neutral time-window until 5/31/2013 (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 May Form a “Bump and Run Reversal” Pattern

Last week the S&P 500 index broke above the upper boundary of the 6-month uptrend channel. Based on this bullish breakout, the “Roof” phase of the intermediate-term “Three Peaks and a Domed House” pattern is stretched to the upside far from the original model. This “stretching” could generate a big error in projecting the “Plunge” phase. Therefore, tracking this “Three Peaks and a Domed House” pattern is suspended.

Meanwhile, I begin coverage on the S&P 500 index in emerging to an intermediate-term “Bump and Run Reversal Top” pattern. A Bump-and-Run pattern typically occurs when excessive speculation drives prices up steeply. According to Thomas Bulkowski, this pattern consists of three major phases: 1) Lead-in phase, 2) Bump phase, and 3) Run phase.

Since mid-November, the SPX has been in an uptrend channel for almost 6 months. This uptrend channel serves as a “Lead-in” phase in which prices move in an orderly manner and the range of price waves defines the lead-in height.

Last week, the SPX broke above the upper boundary, or the 1st Parallel Line, of the “Lead-in” phase, and started the “Bump” phase. In the “Bump” phase, typically excessive speculation kicks in and fast rising prices following a sharp trend line slope with an angle large than 45 degrees until prices reach a bump high with at least twice the lead-in height. The next price target in the upside should be at the 2nd Parallel Line. The development of the “Bump” phase is monitored by the Bump Trendline (green line).

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], [v] and [vi].

This strong bull market has made wave 3 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 the SPX vs. Gold.

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 1.23, 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.

The weekly chart shows that the gold index formed a 20-month Downtrend Channel after it reached the downside price target of 1400. Gold is under a long-term bearish shadow. As Japanese yen falls to a 4-1/2 year Low, gold was not able to hold the 1400 level, and it broke to the downside. The next price target is projected at 1250.

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 may be forming a “Bump and Run Reversal Bottom” pattern, i.e., the exact opposite of the SPX’s “Bump and Run Reversal Bottom” pattern discussed above. The 6-month downtrend channel serves as a “Lead-in” phase in which prices move in an orderly manner and the range of price waves defines the lead-in height.

Now prices are below the 1st Parallel Line in the “Bump” phase. In the “Bump” phase, typically excessive speculation kicks in and fast declining prices following a sharp downtrend-line slope with an angle large than 45 degrees until prices reach a bump low with at least twice the lead-in height. The next price target in the downside should be at the 2nd Parallel Line. The development of the “Bump” phase is monitored by the Bump Trendline (red line).

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

Last week the U.S. dollar broke above the upper resistance line of the 2-month horizontal Trading Range. Now it is in another sharp advance towards a projected price target at 86.

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 7.48% above the EMA89. Outperforming sectors are Biotech (14.86%), Home Construction (11.05%), and Semiconductors (8.27%). Underperforming sectors are Precious Metals (-18.67), Basic Materials (4.25%), and Utilities (4.29%). The S&P 400 Mid-cap 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 Russian market is lagging.