Near the End of Wave Extension

The S&P 500 index could be in the last impulse wave in the extension of minor wave 3. We continue monitoring the “Bump and Run Reversal Top” for the S&P 500 index and the “Bump and Run Reversal Bottom” for gold/silver mining stocks. The broad stock market should be in a short-term neutral time-window until 6/17/2013.

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 Forming a 8-Week Horizontal Trading Range
• Long-Term Picture: Silver Still Has Room to Fall
• Gold/Silver Stocks in “Bump and Run Reversal Bottom” Pattern
• Crude Oil Bearish Forming 11-Month Trading Range
• US Dollar Forming 3-Month Ascending Broadening Triangle
• US Treasury Bond Formed 12-Month Bearish Downtrend Channel
• Asset Class Performance Ranking with Equity Leading
• Sector Performance Ranking with Bank Sector Leading
• BRIC Stock Market Performance Ranking with the Brazilian 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 16 on Friday (down from 23 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 6/17/2013 (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 Top” Pattern

The S&P 500 index is in a possible 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.

From mid-November to mid-April, the SPX was in a uptrend channel for about 5 months. This uptrend channel serves as a “Lead-in” phase in which prices move in an orderly manner and the range of waves defines the lead-in height. In late April, the SPX started to advance into the “Bump” phase with fast rising prices following a sharp bump trendline having an angle large than 45 degrees.

Although prices typically could reach a bump high with at least twice the lead-in height, the price target projected at the 2nd Parallel Line is negated once prices cross below the Bump Trendline (green line). Last week the SPX bounced off the lead-in trendline. We will see if prices are able to cross back above the first parallel line to form another bump.

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 six months. Inside wave 3, it should have finished sub-waves of minute waves [i], [ii], [iii], [iv], [v], [vi], [vii] and [viii].

This strong bull market has made minor 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 [ix] which could be the last impulse wave of the extension.

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 U.S. stock market vs. the international stock market again.

U.S. Stock Market vs. International Stock Market: The chart below is a daily chart in seven-month time span for the ratio of the Wilshire 5000 Index to the Dow Jones World Stock Index. The previous downtrend of the ratio ended in late December. The ratio has been in an advance since then. It indicates that the U.S. stock market has been outperformed the international stock market so far this year. Last week the ratio broke above the upper boundary of the 5-month uptrend channel. This could be a setup for a “Bump and Run Reversal Top”, and now it should be in the “Bump” phase.

The daily chart shows that the gold index is forming a 8-week horizontal trading range between 1340 and 1480. Prices should be in sideways before a breakout from the trading range.

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 are in a possible “Bump and Run Reversal Bottom” pattern, i.e., the exact opposite of the SPX’s “Bump and Run Reversal Top” 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. In last two months, prices fell into the “Bump” phase with fast declining prices following a sharp downtrend-line slope with an angle large than 45 degrees.

Although prices typically could reach a bump low with at least twice the lead-in height, the price target projected at the 2nd Parallel Line is negated once prices cross above the Bump Trendline (red line). Testing the lead-in trendline should be expected. If prices break above the lead-in trend line, the bullish “Run (up)” phase could start.

Crude oil is forming an 11-month horizontal trading range between 86 and 98. Prices should be in sideways before a breakout from the trading range.

The U.S. dollar is forming a 3-month Ascending Broadening Triangle pattern. Now it is testing the horizontal boundary of the triangle. This is a bearish pattern.

The 30-year U.S. treasury daily chart has formed a 12-month bearish downtrend channel. Now it is near the lower boundary of the channel, and prices could rebound.

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 4.13% above the EMA89. Outperforming sectors are Banks (8.33%), Biotech (6.71%), and Semiconductors (6.16%). Underperforming sectors are Precious Metals (-11.22), Real Estate (-2.60%), and Home Construction (-1.65%). The Russell 2000 Small-cap is outperforming and the S&P 400 Mid-cap 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.