08/03/2014 – Market Update
The Broad Stock Market in a Correction
The S&P 500 index and the German DAX sharply broke down their multi-month Ending Diagonals early than expected, and started a correction with the intermediate A-wave which is the first downward leg of the primary corrective fourth wave. The Broad Market Instability index surged above the panic threshold level. At the opposite side, the Shanghai composite index may come to the end of its years-long bear market after a recent bullish explosive breakout from a 5-year Ending Diagonal. The broad stock market is projected to be in a short-term bearish time-window until 8/13/2014.
Table of Contents
- Broad Market in a Short-Term Bearish Time-Window
- Sector Performance Ranking with Semiconductors Sector Leading
- S&P 500 Index is Getting into Primary Corrective Wave 4
- German DAX Index: Elliott Wave
- India Bombay Stock Exchange Index in Bump Phase
- Shanghai Composite Index: Long-Term Picture
- Major Global Markets Performance Ranking
- US Dollar in 9-Month Trading Range
- US Treasury Bond Forming 7-Month Uptrend Channel
- Gold Forming 7-Month Symmetrical Triangle Pattern
- Silver Stays above 3-Year Falling Wedge
- Gold/Silver Stocks Forming 7-Month Ascending Triangle Pattern
- GDX Gold Miners ETF Forming 7-Month Ascending Triangle Pattern
- Crude Oil in 2-Month Falling Wedge Pattern
- Asset Class Performance Ranking with the U.S. Treasury Bond Leading
Broad Stock Market 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 market sentiment had a significant change right after last Tuesday’s announcement of the U.S. and European economic sanctions imposed on Russia. The Russian stock market was falling, but it also dragged the European and U.S. stock markets down sharply on the uncertainty if the sanctions will have any negative-feedback impacts to Europe and the U.S. The bullish week we expected actually dramatically changed to a bearish week. The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, jumped up sharply and closed at 145 on 8/1/2014 (up from 22 the previous week) which is above the panic threshold level of 41 and indicates a bearish market. Based on the forecast of the Leading-Wave Index (LWX), the broad stock market would stay in a short-term bearish time-window until 8/13/2014 (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 0.28% below the EMA89. Outperforming sectors are Semiconductors (4.65%), Biotech (4.20%), and Precious Metals (3.10%). Underperforming sectors are Home Construction (-7.98%), Industrials (-2.62%), and Banks (-1.91%).
The S&P 500 index has been in a rising wedge for near four months. This rising wedge is also characterized as Ending Diagonal because it happens with intermediate wave (5). The intermediate fifth wave is the final leg of primary wave [3], and the ending diagonal typically implies a dramatic bearish reversal ahead.
The sharp decline last week made minor wave 5 end early, and the decisive downward breakout from the ending diagonal also terminated intermediate wave (5) and primary wave [3]. The termination of the waves negates our upside price target of 2060 estimated for intermediate wave (5) and 2063 for primary wave [3].
Now the S&P 500 index is in a correction with intermediate wave (A) and primary wave [4]. Primary wave [4] is typically a major corrective (but not crash) wave, and it is expected to be formed by an intermediate (A)–(B)–(C) corrective wave structure, and current intermediate wave (A) is just the first downward leg of primary corrective wave [4]. The downside price target for primary wave [4] is projected at 1820. Another possibility is that the correction could run with extended time until the U.S. congressional elections this year.
You can find a “road map” to show you where those waves are with the current market from the following three charts: 1) 1-year S&P 500 index daily chart for the intermediate-term, 2) 5-year S&P 500 index weekly chart for the long-term, and 3) ideal Elliott Wave structure with both primary- and intermediate-waves.
The German DAX index has had a very high correlation with the S&P 500 index for last 20 years. Currently it has a similar Elliott Wave structure to the S&P 500 index. Last week it broke below the lower boundary of the rising wedge (Ending Diagonal). Now it is in primary wave [4], intermediate wave (A). From our “Major Global Markets Performance Ranking” section, you can find that the Germany stock market last week is ranked as a worst performer just next to the Russian stock market.
In the weekly chart of the India Bombay Stock Exchange 30 Sensex index, there is a possible development of a Bump and Run Reversal Top pattern. According to Thomas Bulkowski, the Bump-and-Run Reversal Top pattern consists of three main phases:
1) A lead-in phase in which a lead-in trend line connecting the lows has a slope angle of about 30 degrees. Prices move in an orderly manner and the range of price oscillation defines the lead-in height between the lead-in trend line and the first parallel line.
2) A bump phase where, after prices cross above the first parallel line, excessive speculation kicks in and the bump phase starts with fast rising prices following a sharp trend line slope with 45 degrees or more until prices reach a bump height with at least twice the lead-in height. Once the second parallel line gets crossed over, it serves as a sell line.
3) A run phase in which prices break support from the lead-in trend line in a downhill run.
Since March of this year, the Bombay index has been in the Bump phase with a sharp trendline as excessive speculation drives prices up steeply. Recently it has fought with the second parallel line. It is bullish as long as prices keep up above the second parallel line.
After crashed from its all time high in 2007, the Shanghai Stock Exchange Composite Index has been in a long time sliding through a primary corrective [A]-[B]-[C] wave structure for years. Its primary wave [C] is in a formation of a 5-year falling wedge which is also characterized as a “Ending Diagonal”. Once this ending diagonal ends, the bear market with primary corrective [A]-[B]-[C] waves could end too.
Just one week ago, prices finally broke above the upper boundary of the falling wedge. This breakout is a long-term bullish reversal signal for the Chinese stock market, and triggered an explosive advance. The upside price target for the medium-term is projected at 2400.
The table below is the percentage change of major global stock market indexes against the 89-day exponential moving average (EMA89). Currently Hong Kong market is outperforming. The Russian market is underperforming.
The U.S. dollar has formed a 9-month trading range between 79.2 and 81.4. It is neutral before a breakout from the trading range. Now it is testing the upper boundary of the trading range.
The following chart is a daily chart of the 30-year U.S. treasury bond index. The index is forming a 7-month bullish uptrend channel.
The gold index is forming a 7-month symmetrical triangle pattern. It is neutral before a breakout from the triangle. Also recently a 4-week falling wedge is formed inside the triangle. If the index has a upward breakout from the falling wedge, it is most likely that prices may further break through the upper boundary of the symmetrical triangle to the upside. We maintain our upside price target 1400 for the medium-term.
The silver index recently had a bullish breakout from its 3-year falling wedge pattern. The initial upside price target for the medium-term is projected at 24.
Gold/silver mining stocks are forming a 7-month ascending triangle pattern. Once prices break above the upper horizontal boundary, the upside price target could be projected at 125.
The GDX Market Vectors Gold Miners ETF is also forming a 7-month ascending triangle pattern. Once prices break above the upper horizontal boundary, the upside price target could be projected at 33.5.
Crude oil is forming a 2-month falling wedge pattern. It is neutral before a breakout from the wedge.
The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently the U.S. treasury bond is outperforming and crude oil is underperforming.
