A Sharp Decline after Breakdown of Ending Diagonal

The S&P 500 index had a decisive downward breakout from its ending diagonal last week. It looks like the long-awaited intermediate corrective wave (4) has started. During the past several weeks, I kept subscribers alert that a corrective wave is due to come because either a fifth wave extension or an ending diagonal implies dramatic reversal ahead. The sell-off of the broad stock market in the last week triggered a surge of the Broad Market Instability Index (BIX) above the panic threshold. Based on the forecast of the Leading-Wave Index (LWX), the current short-term bearish time-window could last beyond 1/27/2014. A downside price projection suggests there is still room for further decline in the broad stock market. The January Barometer may not give us a good sign for 2014 if the major market indexes close January on a negative note. The broad market may become volatile in 2014.

Table of Contents

• Broad Market Instability Index is above the Panic Threshold
• Long-Term Picture of the S&P 500 Index
• Short-Term Picture of the S&P 500 Index
• Sector Performance Ranking with Biotech Sector Leading
• Major Global Markets Performance Ranking
• Gold in 15-Month Descending Broadening Wedge
• Long-Term Picture: Silver in 3-Year Falling Wedge Pattern
• Gold/Silver Stocks Forming 9-Month Horizontal Trading Range
• Crude Oil in 3-Month Trading Range
• US Dollar Forming 3-Month Ascending Triangle Pattern
• US Treasury Bond in 7-Month Trading Range
• Asset Class Performance Ranking with U.S. Treasury Bond Leading

Broad Market Instability Index is above the Panic Threshold

The LWX (Leading Wave Index) is Nu Yu’s proprietary leading indicator for US equity market. LWX>+1 indicates bullish (green); LWX< -1 indicates bearish (red); The LWX between +1 and -1 indicates neutral (yellow).

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, surged up and closed at 74 on 1/24/2014 (up from 21 the previous week) which is above the panic threshold level of 42 and indicates a bearish market. The reading of 74 on the BIX is the highest level since June 25, 2013. The broad market currently is in a short-term bearish time-window. Based on the forecast of the Leading-Wave Index (LWX), this short-term bearish time-window could last until 1/29/2014 (see the second table above). However, the bearish time-window may extend to 2/10/2014 if this sell-off becomes the long awaited intermediate-term correction. 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 Elliott Wave count, in a five-year time span. There are three degrees of waves: Primary, Intermediate, and Minor waves in this weekly chart. The SPX currently is in primary wave [3], intermediate wave (4), and minor wave A.

A long-term price target for primary wave [3], projected at 1796 by using 0.618 extension of wave [1], has been reached. Primary wave [3] currently is in an extension and it could extend to the next price target at 2063 based on 1.0 extension of wave [1].

Please note that primary wave [3] indicates a long-term bullish uptrend while intermediate wave (4), and minor wave A present bearish corrective waves in the intermediate-term and the short-term, respectively.

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.

During last several weeks, I was repeating to remind that intermediate corrective wave (4) is due to come because either a fifth wave extension or an ending diagonal implies dramatic reversal ahead. You should understand why I kept saying that if you read the article “Ending Diagonal: A Pattern That Sends Shivers Down Investors’ Spines” at Elliott Wave International.

Last week, the S&P 500 decisively broke down the lower boundary of the rising wedge. This bearish breakdown indicates that the ending diagonal or the fifth wave extension pattern has completed. And the long awaited intermediate corrective wave (4) should have started. In addition, the January Barometer may not give us a bright indication for 2014 if the major market indexes close January on a negative note.

According to Bulkowski’s measure rule on downward breakouts of rising wedges, a downside price target for the S&P 500 index is projected at 1740 by multiplying the height of the rising wedge by 46% price target meeting rate. However, this projection is relatively conservative. A full range decline may go down to 1640 because the correction could end in the area of the previous minor wave 4 in terms of Elliott Waves.

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 1.18% above the EMA89. Outperforming sectors are Biotech (8.11%), Internet (6.35%), and Technology (3.72%). Underperforming sectors are Telecommunication (-2.38%), Oil Equipment (-1.78%), and Energy (-1.50%).

The table below is the percentage change of major global stock market indexes against the 89-day exponential moving average (EMA89). Currently the Canadian market is leading and the Brizilian market is lagging.

The gold index is in a 15-month Descending Broadening Wedge pattern on the daily chart. Inside this broadening wedge, gold is also forming a potential “W” or double bottom between July and December. The similar pattern of a double bottom appears on the silver index and the gold/silver mining stock indexes XAU and HUI too. Currently the gold index is challenging the upper boundary of the broadening wedge. If prices break above the upper boundary of the wedge, gold could become bullish.

The silver index has formed a 3-year falling wedge pattern. Although silver will remain bearish with range-bounded swings before a breakout from the wedge, a potential “W” or double bottom pattern in developing near $19 level could set up a potential bullish reversal.

Gold/silver mining stocks are forming a 9-month horizontal trading range. Please note that a potential double bottom pattern between July and December could set up a bullish reversal.

Crude oil is forming a 3-month trading range between 92 and 100. Recently it has been in an upswing towards the upper boundary of the trading range.

The U.S. dollar is forming a 3-month ascending triangle pattern. It should be neutral before it breaks out from the triangle.

The following chart is a daily chart of the 20-year U.S. treasury bond ETF. It is forming a 7-month horizontal trading range between 101 and 108. It also forms a potential “W” or double bottom pattern. Currently it is in an upswing towards the upper boundary of the trading range.

The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently U.S. treasury bond is outperforming.