Complex Correction Continues

The broad stock market is still in a complex correction with primary corrective wave 4. The S&P 500 index is in the second intermediate A-B-C corrective wave sequence of the complex correction. Due to breaching the low of the previous A-B-C flat correction by the current downward A-wave, this second A-B-C corrective sequence could be in a Zigzag-Correction formation to potentially have more dynamic moves in the downside. Last week the Broad Market Instability Index (BIX) had a panic spike up to 416 which is the highest reading over two years. This is one of five major spikes of the BIX in last three years, and each of them corresponds to a 5-10% correction on the S&P 500 index. Internationally, there is a warning sign on the German stock market. The German DAX has broken below the 9000-level neckline of a head-and-shoulders top pattern, and 8450 could be a level for support.

Table of Contents

• Broad Market Instability Index Had a Big Spike in 2 Yeas
• Sector Performance Ranking with Biotech Sector Leading
• S&P 500 Index in 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 a Pullback from Breakout
• US Treasury Bond in 9-Month Uptrend Channel
• Gold in 17-Month Descending Triangle Pattern
• Silver in 15-Month Bearish Downtrend Channel
• Gold/Silver Stocks Forming 15-Month Horizontal Trading Range
• GDX Gold Miners ETF Forming 15-Month Horizontal Trading Range
• Crude Oil in 4-Month Descending Broadening Wedge Pattern
• Asset Class Performance Ranking with the U.S. Treasury Leading

Broad Stock Market Instability Index Had a Big Spike in 2 Years

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 Leading-Wave Index (LWX) currently still in a short-term bearish time-window. Based on the forecast of LWX, the broad stock market would stay in the short-term bearish time-window until 10/16/2014 (see the second table above).

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 416 on 10/10/2014 (up from 49 the previous week) which is above the panic threshold level of 41 and indicates a bearish market. On Friday the BIX surged to 416 which is the highest reading over two years. During last three years, there are five major spikes on the BIX respectively in May 2012, November 2012, June 2013, February 2014, and current October 2014. All of them correspond to a 5-10% correction on the S&P 500 index. Please note that those spikes occurred almost near the end of each correction. So spikes of the BIX usually correspond to local lows of the broad market.

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 0.08% below the EMA89. Outperforming sectors are Biotech (1.88%), Utilities (1.19%), and Healthcare (0.71%). Underperforming sectors are Precious Metals (-13.65%), Oil Equipment (-12.69%), and Energy (-10.91%).

Since the downward breakout from the 4-month rising wedge (Ending Diagonal) in late July, the S&P 500 index has been in primary wave [4]. Now this primary wave [4] is becoming a Complex Correction to have two sets of intermediate (A)–(B)–(C) corrective wave sequences linked by wave (X).

Three weeks ago right after wave (X) flagged a warning signal as discussed in my weekly update on September 21, the S&P 500 index got into the second set of intermediate (A)–(B)–(C) corrective wave sequence. Since then, it has been in downward wave (A). Due to a Flat Correction formation in the first (A)–(B)–(C) wave sequence, the second (A)–(B)–(C) wave sequence could be in a Zigzag Correction format which is a three-wave declining pattern to potentially have more dynamic moves in the downside.

In this three-wave declining pattern, waves (A) and (C) are downward waves, and wave (B) is an upward wave between (A) and (C). Now wave (A) has extended beyond the low of the previous A-B-C corrective wave sequence, i.e. below the 1910 level. The next wave will be wave (B) for a rebound or a relief.

The German DAX index has a similar Elliott Wave structure to the S&P 500 index. But it has been much weaker than the S&P 500 index since July. Now it is in primary wave [4] and intermediate wave (C). The length of wave (C) would be same as wave (A). The corrective wave [4] of the DAX is most likely in a Zigzag Correction rather than a flat correction.

In the one-year time horizon, the DAX also formed a bearish Head-and-Shoulders pattern above a neckline at the 9000 level. Last week the DAX sharply broke below the neckline. Based on Bulkowski’s measure rule on Head-and Shoulders tops, the downside price target is projected at 8450.

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. It is bullish as long as prices keep up above the Bump Trendline. However, last week the index broke below the Bump Trendline. This is an early warning sign for topping. The next check point is at the 2nd Parallel Line to see if prices can hold above it. Otherwise, the 2nd Parallel Line will become a Sell 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 should end too.

In July, prices finally broke above the upper boundary of the falling wedge and triggered an explosive advance. This breakout is a bullish reversal signal in the long-term for the Chinese stock market, that means ending primary wave [C] and starting primary wave [1].

It also formed an 1-year horizontal trading range between 2000 and 2250. Early September prices broke above the upper horizontal resistance level of 2250 with a sharp advance. Based on that bullish breakout, the upside price target for the medium-term is projected at 2460.

The table below is the percentage change of major global stock market indexes against the 89-day exponential moving average (EMA89). Currently Chinese market is outperforming. The Russian market is underperforming.

In the following weekly chart, the U.S. dollar formed a 3-year ascending broadening triangle pattern. One week ago the dollar broke above the upper boundary of the triangle. But last week it had a sharp pullback. This pullback would put the dollar in a consolidation before returning to the breakout price.

The following chart is a daily chart of the 30-year U.S. treasury bond index. The index has formed a 9-month bullish uptrend channel. The sharp decline in September pulled the index towards the lower boundary of the channel. The lower boundary of the channel is an important line for the trend of the treasury bond. It would be bullish as long as prices stay inside the channel.

The following chart shows that the gold index formed a 17-month Descending Triangle pattern. Gold has been moving sideways over a year inside this triangle. Before a breakout from the triangle, gold is neutral in the medium-term although it is bearish in the short-term. The next breakout from the descending triangle would generate a significant move. During last 17 months, there are three times happened to test the lower horizontal boundary of the triangle around the 1200 level. This time was in this month, and prices currently bounced off the horizontal support line.

Based on Bulkowski’s measure rule on descent triangle patterns, the upside price target is estimated at 1550 with an upward breakout, and the downside price target is estimated at 1055 with a downward breakout.

After it recently had a downward breakout from a descending triangle pattern, the silver index has been forming a 15-month bearish downtrend channel. Now it just bounced off the lower boundary of the channel. It would be bearish as long as prices stay inside the channel.

Gold/silver mining stocks are forming an 15-month horizontal trading range between 80 and 107.5. Prices typically oscillate inside the range before a breakout.

The GDX Market Vectors Gold Miners ETF is forming an 9-month horizontal trading range between 20.5 and 28. Prices typically oscillate inside the range before a breakout.

Crude oil is forming a 4-month descending broadening wedge pattern. This wedge pattern is a potential bullish reversal formation. The bullish bias can be realized when prices break above the upper boundary of the wedge. Otherwise the wedge could extend to the downside.

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.