The Stock Market in an Intermediate Correction

The Broad Market Instability Index (BIX) surged up to 20-month high today. The Wilshire 5000 index decisively broke through the 89-day exponential moving average (EMA89) to the downside, and had another sharp decline in 2014. TLT, the 20-year U.S. treasury bond ETF, had a bullish breakout from the neckline of its “W” or double-bottom pattern. The short-term bearish time-window for the broad stock market could extend through this week. Elliott Wave analysis suggests that the S&P 500 index still has more room to fall.

Broad Market Instability Surged up to 20-Month High

After the significant move of the market today, the “color guard” for the broad stock market has been updated as follows:

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, surged up to 344 on 2/3/2014, and this reading is the highest level since May 21, 2012. The Wilshire 5000 index broke below the 89-day exponential moving average (EMA89), and triggered an immediately sharp decline today. Based on the forecast of the Leading-Wave Index (LWX), the short-term bearish time-window for the broad market extends to 2/10/2014 (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:

Today, the S&P 500 index decisively broke below the lower boundary of the 3-month ascending broadening triangle pattern. This is the second bearish breakdown after the first bearish breakdown from the 5-month rising wedge pattern. 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. Today the S&P 500 index almost reached this target. Next we should watch for a full range decline down to 1640 because the correction could end in the area of the previous minor wave 4 in terms of Elliott Waves.

Today’s market action further confirmed that the S&P 500 is in intermediate corrective wave (4). This corrective wave 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 and wave 2 should have developed. Now it is in minute wave 3 which should be the most severe down wave.

The 20-year U.S. treasury bond ETF broke above the upper boundary of its 7-month horizontal trading range. It is also a bullish breakout from the neckline of the “W” or double bottom pattern. The “W” pattern indicates a potential significant advance for the treasury bond, targeting to 121.