A Potential “W” Bottom Pattern for Bond, Gold, and Oil

It seems that a “W” or double bottom pattern is emerging in several beaten-down sectors such as the US treasury bond, gold, silver, mining stock indexes, and crude oil. This potential base formation may set up a short-term or even intermediate-term technical rebound for those sectors. Meanwhile, the broad stock market is choppy near its all time high, and it should be in a short-term bearish time-window until 1/27/2014.

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
• 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 2-Month Trading Range
• US Dollar Bullish Forming 2.5-Month Ascending Triangle Pattern
• US Treasury Bond in 7-Month Trading Range
• Asset Class Performance Ranking with Equity Leading

Broad Market Getting in a Short-Term Bearish Time-Window

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, closed at 21 on 1/17/2014 (up from 14 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 1/27/2014 (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 Elliott Wave count, in a five-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. 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].

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 the 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.

Intermediate corrective wave (4) should be due to come. The January Barometer soon will tell us more.

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 4.09% above the EMA89. Outperforming sectors are Biotech (10.06%), Internet (8.54%), and Healthcare (6.78%). Underperforming sectors are Telecommunication (-1.01%), Utilities (0.51%), and Real Estate (0.55%).

The table below is the percentage change of major global stock market indexes against the 89-day exponential moving average (EMA89). Currently the German market is leading and the Chinese 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 likely double bottom appears on the silver index and the gold/silver mining stock indexes XAU and HUI too. 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 2-month trading range between 92 and 100. Last week it bounced off the lower boundary of the trading range. Crude oil should be in an upswing towards the upper boundary of the trading range.

The U.S. dollar is forming a 2.5-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 likely “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 equity is outperforming, and oil is underperforming.