Is This Intermediate Correction Bottoming Out?

Last week the Broad Market Instability Index had a major spike at 344, which is the highest since May 21, 2012. The major stock market indexes experienced volatile moves in both a big one-day drop and a big one-day rebound during the week. Our initial downside price target 1740 for the S&P 500 index has been reached. Whether the correction is bottoming out or still going down to 1640 will be discussed in this market update. The Elliott wave analysis suggests that this intermediate correction may last longer than you think. Currently we are in minor wave B which is just in the middle part of the whole A-B-C correction. The broad stock market would be in a short-term bullish time-window until 2/25/2014.

Table of Contents

• Broad Market Getting into Short-Term Bullish Time-Window
• 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 7-Month Descending Triangle Pattern
• Silver in 7-Month Descending Triangle Pattern
• Gold/Silver Stocks in 7-Month Descending Triangle Pattern
• 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 Crude Oil Leading

Broad Market Getting into Short-Term Bullish 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 32 on 2/7/2014 (down from 152 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 short-term time-window for the broad market is turning to bullish and would last until 2/25/2014 (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. 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 B.

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) presents bearish corrective wave in the intermediate-term.

For easy understanding, I made a simple daily chart below for the S&P index with tracing lines of only minor waves. The S&P 500 index had its major uptrend with powerful intermediate wave (3) from June 2012 to December 2013. This third intermediate wave is composed of a 1-2-3-4-5 wave impulse sequence in the minor wave degree. Since the beginning of this year, the S&P 500 index has turned into an intermediate correction with intermediate wave (4). For a simple correction, it would contain an A-B-C wave corrective sequence in the minor wave degree.

The Broad Market Instability Index (BIX) in the lower window of the chart below confirmed the ongoing intermediate correction with a high spike level corresponding to the prior intermediate correction of wave (2). We may see multiple or satellite spikes as the correction continues.

Our first price target 1740 has been reached with minor wave A. Strong rebounding on Thursday and Friday started minor wave B towards upside. After wave B is mature, wave C would continue the correction to make new lows below the end of wave A. A full range decline is projected down to 1640 because the correction ideally should end near the low of prior minor wave 4. This whole A-B-C correction process could last for about three months.

Given a short-term bullish time-window for the next two weeks, wave B may or may not challenge the previous high of minor wave 5. Also, the intermediate correction could become from a simple correction to a complex correction with other formations. Therefore, we need to check the market status and adapt to change with the market on a weekly basis.

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 1.33% above the EMA89. Outperforming sectors are Home Construction (10.18%), Biotech (7.97%), and Internet (7.11%). Underperforming sectors are Telecommunication (-3.74%), Energy (-1.84%), and Consumer Goods (-1.53%).

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

The gold index has formed a 7-month Descending Triangle pattern on the daily chart. Which side to breakout from the triangle could define the next move of gold. Currently the gold index is going to test the upper boundary of the triangle. Gold could become bullish if prices break above the upper boundary of the triangle.

The silver index has formed a 7-month Descending Triangle pattern on the daily chart. As two boundary lines converge, it sooner or later will have a breakout from the triangle. If it has an upward breakout from the upper boundary, silver could become bullish.

Gold/silver mining stocks are forming a 7-month descending triangle pattern like gold and silver doing. They could become bullish once an upward breakout happens. They are testing the upper boundary now.

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. Now it is going test the horizontal resistance around 100. A “W” or double-bottom pattern would be confirmed if prices break through the upper horizontal line.

The U.S. dollar is forming a 3-month ascending triangle pattern. It should be neutral before it breaks out from the triangle. As two boundary lines converge, sooner or later the dollar will have a breakout from the triangle. The breakout direction could determine the next move of the dollar.

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 crude oil is outperforming and the U.S. dollar and gold are underperforming.