Market Likely to Face Consolidation

As the market momentum gets into negative territory, the broad market instability index starts rising. The broad stock market is likely to face consolidation. A short-term bearish time-window is expected to remain until 8/21/2013.

Table of Contents

• Broad Market Would be in Short-Term Bearish Time-Window
• Short-Term Picture of the S&P 500 Index
• Long-Term Picture of the S&P 500 Index
• Market Ratio and Competitive Strength
• Gold Forming a 3-Month Downtrend Channel
• Long-Term Picture: Silver in a 2.5-Year Falling Wedge Pattern
• Gold/Silver Stocks in 10-Month Downtrend Channel
• Crude Oil in Consolidation
• US Dollar in 5-Month Broadening Symmetrical Triangle
• US Treasury Bond Bounced Off Recent low
• Asset Class Performance Ranking with Crude Oil Leading
• Sector Performance Ranking with Biotech Sector Leading
• BRIC Stock Market Performance Ranking with the Brazilian Market Lagging

Broad Market Would be in Short-Term Bearish Time-Window

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 20 on 8/6/2013 (up from 16 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 is going to get into a short-term bearish time-window, and would be in the short-term bearish time-window until 8/21/2013 (see the second table above). The daily chart below has the Wilshire 5000 index with both the BIX and the Momentum indicators. The current market status is summarized as follows:

Short-Term Picture: S&P 500 Index Formed a 3-Month Uptrend Channel

The S&P 500 index has formed a 3-month bullish uptrend channel. Currently prices are near the upper boundary of the channel around 1700. A pullback or a downward wave towards the lower boundary of the channel is expected as the short-term bearish time-window starts.

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 minor wave 5.

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 corrective wave, i.e., intermediate wave (4), before the price target of 1770.

Intermediate wave (4) will start as soon as minor wave 5 ends.

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, and the US market vs. the world market.

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:

Each week I 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 late last year, the ratio has 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. Due to the ratio was stretched deeply away from the mean, Now it is on the way to return to the mean. This implies that the SPX/Gold ratio could reach to 2.5 from the current level of 1.3, 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. Since early this year 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 gold index is forming a 3-month bearish downtrend channel. Prices are moving downward from the upper boundary of the channel. Gold will remain bearish until prices broke above the upper boundary of the channel.

The silver index has formed a 2.5-year falling wedge pattern. Now prices are near the lower boundary of the wedge. Silver will remain bearish with range-bounded swings before a breakout from the wedge.

Gold/silver mining stocks are in a 10-month bearish downtrend channel.

After it broke above the upper boundary of the 11-month horizontal trading range, crude oil had a good advance. Now it should be in a consolidation.

The U.S. dollar formed a 5-month Broadening Symmetrical Triangle pattern. Prices should have big swings inside the triangle before next breakout from the pattern.

After it broke below the lower boundary of the 12-month downtrend channel, the 30-year U.S. treasury bond declined to near the second parallel line. Now prices have bounced off the support line. The upper resistance would be at the first parallel line.

The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently Crude Oil 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 4.70% above the EMA89. Outperforming sectors are Internet (9.30%), Biotech (8.25%), and Banks (7.41%). Underperforming sectors are Precious Metals (-13.22%), Home Construction (-10.17%), and Real Estate (-3.92%). The Russell 2000 Small-cap is outperforming and the Dow Jones Industrial 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.