Time to be Cautious on the Market

The broad stock market has had a throwback to the previous high with Wave B, and it approaches another key market juncture. In the short-term, bulls have limited time to push the market higher as the short-term bullish time-window nears its end by the projected date of 2/25/2014. In this week’s report, two interesting international market charts have been added, one for the German DAX Index and another for the Shanghai Composite Index, to expand our coverage to major global markets. A chart of the DBA Agriculture ETF is also included to track a potential major breakout.

Table of Contents

• Broad Market in Short-Term Bullish Time-Window
• Sector Performance Ranking with Biotech Sector Leading
• Long-Term Picture of the S&P 500 Index
• Short-Term Picture of the S&P 500 Index
• German DAX Index: Elliott
• Shanghai Composite Index: Long-Term Picture
• Major Global Markets Performance Ranking
• US Dollar Bearish Downward Breakout from 3-Month Ascending Triangle
• US Treasury Bond in 7-Month Trading Range
• Gold Bullish Breakout from 7-Month Descending Triangle
• Silver Bullish Breakout from 7-Month Descending Triangle
• Gold/Silver Stocks Bullish Breakout from 7-Month Descending Triangle
• GDX Gold Miners ETF Bullish Breakout from 10-Month Falling Wedge
• Crude Oil Forming 4-Month Ascending Broadening Triangle
• DBA Agriculture ETF Nears a Major Bullish Breakout
• Asset Class Performance Ranking with Agriculture Leading

Broad Market in 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 3 on 2/21/2014 (down from 5 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 stock market is in a short-term bullish time-window 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 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 3.27% above the EMA89. Outperforming sectors are Biotech (12.57%), Internet (9.23%), and Home Construction (9.16%). Underperforming sectors are Telecommunication (-1.32%), Consumer Goods (0.39%), and Energy (1.02%).

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 an intermediate-term correction.

As shown in a daily chart below, the S&P 500 index had its major uptrend with powerful intermediate wave (3) composed of a 1-2-3-4-5 sub-wave impulse sequence from June 2012 to December 2013. 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.

This whole A-B-C correction process will possibly last about three months, i.e., wave A down in January, wave B up in February, and wave C down again in March. As it is near the previous high of minor wave 5, now wave B is close to late part of its move. In the short-term, bulls have limited time to push further because the short-term bullish time-window has two days left by 2/25/2014 as projected.

Once wave B is mature, wave C will 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.

The German DAX index recently outperforms the U.S. market, and it has a similar Elliott Wave structure to the S&P 500 index. The DAX is currently in primary wave [3], intermediate wave (4), and minor wave B. Once wave B is mature, wave C will continue the correction to the downside near 9000 which is close to the lower boundary of the intermediate uptrend channel.

The following weekly chart of the Shanghai Stock Exchange Composite Index shows a 5-year falling wedge pattern. After a long time sliding, it is close to a point to challenge the upper boundary of the falling wedge. Falling wedges typically build up a bullish bias as it is mature. This bullish bias can be realized only when prices break through the upper boundary of the wedge to the upside. Watch for the Shanghai Composite Index tests 2200 near the upper boundary of the wedge.

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

The U.S. dollar broke below the lower boundary of a 3-month ascending triangle pattern. This downward breakout made the dollar bearish. A downside price target is projected at 79.20. However, the dollar may throwback to re-test the lower boundary of the ascending 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. Recently it have been moved around the upper boundary of the trading range to test the horizontal resistance. It may test the resistance again soon.

The gold index has broken above the upper boundary of the 7-month Descending Triangle pattern recently. This breakout made gold bullish with an upside price target projected at 1420. A pullback could happen after 2/25/2014 when the short-term bullish time-window ends.

Similar to gold, the silver index recently has had a powerful bullish breakout from the 7-month Descending Triangle pattern. An upside price target is projected at 24.50. A pullback may happen after 2/25/2014 when the short-term bullish time-window ends.

Gold/silver mining stocks had a bullish breakout forming a 7-month descending triangle pattern like gold and silver did recently. Now they become bullish with an upside price target at 114 for the XAU.

The GDX Market Vectors Gold Miners ETF had a powerful upward breakout from its 10-month falling wedge pattern. The bullish breakout of the falling wedge sets a $29 price target for GDX. However, a pullback could happen after 2/25/2014 when the short-term bullish time-window ends.

Crude oil had a bullish breakout from its 4-month trading range last week, and a “W” or double-bottom pattern is confirmed. Now it is forming another 4-month ascending broadening triangle pattern. It may pullback from the upper boundary of the triangle. The horizontal level of 100 becomes a support.

The following chart shows that the PowerShares DBA Agriculture ETF has formed a 3-year falling wedge pattern. Last week, it had a sharp advance towards the upper boundary of the wedge. Now it is testing the upper boundary. A further advance could be explosive once it breaks above the upper boundary.

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