Market Topping

The broad stock market is topping. The S&P 500 index is in a fifth-wave extension (ending diagonal) pattern which usually appears at key market junctures. The broad stock market is projected to be in a short-term bearish time-window until 12/17/2013.

Table of Contents

• Broad Market in a Short-Term Bearish Time-Window
• Long-Term Picture of the S&P 500 Index
• Short-Term Picture of the S&P 500 Index
• Market Ratio and Competitive Strength
• Gold in 14-Month Descending Broadening Wedge
• Long-Term Picture: Silver in a 2.5-Year Falling Wedge Pattern
• Gold/Silver Stocks Forming 7-Month Horizontal Trading Range
• Crude Oil Bullish Breakout from 13-Week Downtrend Channel
• US Dollar in 5-Month Bearish Downtrend Channel
• US Treasury Bond Forming a Bump-and-Run Reversal Bottom Pattern
• Asset Class Performance Ranking with Equity Leading
• Sector Performance Ranking with Biotech Sector Leading
• BRIC Stock Market Performance Ranking with the Brazilian Market Lagging

Broad Market in a Short-Term Bearish Time-Window

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 14 on 12/6/2013 (up from 4 the previous week) which is below the panic threshold level of 42 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 12/17/2013 (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:

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], projected at 1796 by using 0.618 extension of wave [1], has been reached recently. Primary wave [3] could extend to the next price target at 2060 based on 1.0 extension of wave [1].

Short-Term Picture: S&P 500 Index in Fifth Wave Extension Pattern

As shown in the daily chart below, the S&P 500 index is forming a 5-month rising wedge pattern. This rising wedge is also characterized as an Ending Diagonal which substitutes for the fifth impulse wave and configures minor wave 5 extension pattern with five minute subwaves i, ii, iii, vi, and v confined between two converging lines. Therefore, the S&P 500 should still be in the late part of intermediate wave (3); intermediate corrective wave (4) should be next.

Although this fifth wave extension pattern could potentially reach 1890, we should keep it in mind that either a fifth wave extension or an ending diagonal implies dramatic reversal ahead. For more information about the ending diagonal, visit: “Ending Diagonal: A Pattern That Sends Shivers Down Investors’ Spines” at Elliott Wave International.

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. The ratio currently is testing the central line. Once the ratio breaks above 1.7, it would make the euro stronger than the US dollar.

The gold index is in a 14-month Descending Broadening Wedge pattern on the daily chart. Now it is also forming a 3-month falling wedge pattern inside the broadening wedge. Gold should be bearish before a breakout from 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 7-month horizontal trading range. They are still weak and are testing the lower boundary of the trading range.

Last week crude oil broke above the upper boundary of the 13-week downtrend channel. This breakout is bullish and it should suspend the short-term downtrend of crude oil.

The U.S. dollar is bearish and it is forming a 5-month downtrend channel.

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. In September prices reached the second parallel line with two times of the lead-in channel height. In September, prices crossed above the second parallel line (buy line). This crossing could be a bullish reversal sign for the treasury bond as long as it stays above the second parallel line.

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 4.33% above the EMA89. Outperforming sectors are Biotech (9.10%), Internet (6.77%), and Technology (6.00%). Underperforming sectors are Precious Metals (-10.70%), Real Estate (-2.52%), and Telecommunication (-0.17%).

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.