Heading to Volatile October

As influenced by U.S. federal budget debate, the broad market could become volatile. A potential “Expanded Flat Elliott Wave” pattern suggests that the current corrective wave could send the S&P 500 index more substantially below August low. The broad stock market should be in the short-term bearish time-window until 10/11/2013.

Table of Contents

• Broad Market is Weakening
• 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 12-Month Descending Broadening Wedge
• Long-Term Picture: Silver in a 2.5-Year Falling Wedge Pattern
• Gold/Silver Stocks Forming 6-Month Inverted Roof Pattern
• Crude Oil Bearish Breakdown from 3-Week Symmetrical Triangle
• US Dollar Bearish Breakdown from 2-Month Trading Range
• US Treasury Bond Forming a Bump-and-Run Reversal Bottom Pattern
• Asset Class Performance Ranking with Equity Leading
• Sector Performance Ranking with Internet Sector Leading
• BRIC Stock Market Performance Ranking with the Russian Market Leading

Broad Market is Weakening

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 9 on 9/27/2013 (up from 5 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 bearish time-window until 10/11/2013 (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 Forming a 5-Month Rising Wedge Pattern

The S&P 500 index is forming a 5-month rising wedge pattern. If it breaks below the lower boundary of the wedge, a downside price target could be projected at 1620.

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 (4), and minor wave C.

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.

Since early August, the S&P 500 index has been in a correction with intermediate wave (4) which should consist of short-term minor waves A-B-C. As shown in the second chart below, wave B has terminated above the starting level of wave A. This move could be a setup for a Expanded Flat Elliott Wave pattern, and it suggests that current wave C could go more substantially below the ending level of wave A. In other words, the current downwave could send the SPX more substantially below August low. 1620 is just a conservative downside target.

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 have a look at the euro vs. the U.S. dollar.

Euro vs. U.S. Dollar: The chart below is a weekly chart for the ratio of the euro to the U.S. dollar in last seven years. The ratio has been in a symmetrical triangle pattern for six years. The central line of the triangle is at 1.7. Currently the ratio swings up towards 1.70 to make the euro stronger than the US dollar.

The gold index is forming an 12-month Descending Broadening Wedge pattern on the daily chart. Late August price touched the upper boundary of the wedge and began falling again. Gold should be neutral before it breaks above the upper boundary of the wedge.

The silver index has formed a 2.5-year falling wedge pattern. Silver will remain bearish with range-bounded swings before a breakout from the wedge.

Gold/silver mining stocks are forming a 6-month Inverted Roof (or Complex Head-and-Shoulders Bottom) pattern. They could become bullish once prices break above the horizontal resistance line of the inverted roof.

Crude oil has broken below the lower boundary of the 3-week symmetrical triangle pattern. Based on this bearish breakdown, a downside price target is projected at 101.

Last week the U.S. dollar has broken below the lower boundary of the 2-month horizontal trading range. Based on this bearish breakdown, a downside price target is projected at 79.25.

The 30-year U.S. treasury bond is forming a Bump-and-Run Reversal Bottom Pattern. It has been in the bearish bump phase since June. Last month prices reached the second parallel line with two times of the lead-in channel height. Last week prices sharply crossed above the second parallel line (buy line) after Fed’s announcement. This crossing could be a bullish reversal sign for the treasury bond.

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 2.82% above the EMA89. Outperforming sectors are Internet (9.85%), Biotech (8.37%), and Industrials (4.49%). Underperforming sectors are Precious Metals (-4.69%), Telecommunication (-2.25%), and Home Construction (-1.94%).

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 leading.