The Broad Stock Market at a Critical Point

As the stock markets of Russia, Brazil, China, Hong Kong, Japan, and UK went under water, the Wilshire 5000 index closed January on a negative note. The January Barometer gives a cautious sign for the market in 2014. The Broad Market Instability Index (BIX) has breached the panic threshold and has surged up to 7-month high. For last 5 trading days, the Wilshire 5000 index has chopped right above the 89-day exponential moving average (EMA89). The U.S. stock market is at a critical point to test if it holds above the EMA89 or breaks it down for immediately further decline.

Table of Contents

• Broad Market Instability Index Surged up to 7-Month High
• Long-Term Picture of the S&P 500 Index
• Short-Term Picture of the S&P 500 Index
• Sector Performance Ranking with Home Construction 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 10-Month Descending Triangle
• Crude Oil in 3-Month Trading Range
• US Dollar Forming 3-Month Ascending Triangle
• US Treasury Bond in 7-Month Trading Range
• Asset Class Performance Ranking with U.S. Treasury Bond Leading

Broad Market Instability Surged up to 7-Month High

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 152 on 1/31/2014 (up from 74 the previous week) which is above the panic threshold level of 42 and indicates a bearish market. The reading of 152 on the BIX is the highest level since June 25, 2013. As the Wilshire 5000 index closed January on a negative note, the January Barometer gives a cautious sign for the market in 2014. For last 5 trading days, the Wilshire 5000 index has chopped right above the 89-day exponential moving average (EMA89). The broad market is at a critical point to test if it holds above the EMA89 or breaks it down for immediately further decline. Based on the forecast of the Leading-Wave Index (LWX), the short-term time-window for the broad market should turn from bearish to neutral next week (see the second table above). However, the bearish time-window may extend to 2/10/2014 if sell-off continues. 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, after it broke down the 5-month-long ending diagonal, the S&P 500 index is forming a 3-month ascending broadening triangle pattern. This pattern could be a precursor for a roof pattern as projected by a descending dash line on the chart. Also the horizontal support line of the triangle could serve as a neckline for a potential Head-and-Shoulders Top if another shoulder (or a partial rising) develops at the right side.

The long awaited intermediate corrective wave (4) has just started. It should contain a A-B-C structure for the minor waves. Minor wave A would have a five-wave structure with the minute waves. Minute wave 1 should have developed. Now we wait to see where minute wave 2 ends.

According to Bulkowski’s measure rule on downward breakouts of either rising wedges or ascending broadening triangles, a downside price target for the S&P 500 index is estimated around 1740. But 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 0.76% above the EMA89. Outperforming sectors are Home Construction (10.44%), Biotech (8.53%), and Internet (5.76%). Underperforming sectors are Energy (-2.70%), Consumer Goods (-2.62%), and Telecommunication (-2.14%).

A firm rebound of the U.S. treasury bond in January has been beneficial to those interest-rate-sensitive sectors such as Home Construction, Utilities, and Real Estate.

The table below is the percentage change of major global stock market indexes against the 89-day exponential moving average (EMA89). Currently the Canadian and German markets are outperforming. The US, Indian, and Australian markets are neutral. The Russian, Brizilian, Chinese, Hong Kong, Japanese, and UK markets are under water.

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. Currently the gold index retreated from the upper boundary of the broadening wedge. Gold could become bullish if prices break above the upper boundary of the wedge.

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 10-month descending triangle pattern. They are neutral before they make a breakout from the triangle.

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. It is neutral before it break out 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. Last week the dollar was sharply up and approached the upper boundary of the triangle. Watch for a bullish breakout from the upper boundary of the triangle. A bullish breakout of the triangle could make the dollar shoot up to 83.

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. The treasury bond had a firm rebound in January, and outperformed other asset classes. Currently it is testing 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 and gold is underperforming.