SPX, DAX and Crude Oil are Due for a Rebound

In the last four weeks, the stock market experienced a major correction and got into an oversold condition. By last Wednesday, the S&P 500 index (SPX) declined 7.40% from its all time high while the Broad Market Instability index (BIX) surged to 690 which is the highest reading over three years. In general, a major correction in midterm election years is a typical market behavior. Late last week the S&P 500 index bounced off the 1820 level which is an important support based on the low of the previous intermediate wave 4. After it declined 14.53% from its all time high, the German DAX index reached and bounced off the 8450 support level estimated for the breakdown of a head-and-shoulders top pattern. Although these key technical support levels may get retested, the broad stock market is due for a rebound, and a short-term bullish time-window is projected to open until 11/5/2014. Also crude oil is forming a Bump-and-Run Reversal Bottom pattern and is very close to a bullish breakout point on its declining bump trendline.

Table of Contents

• Broad Market Turning in a Short-Term Bullish Time-Window
• Sector Performance Ranking with Utilities 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 Still in 3-Year Ascending Broadening Triangle
• 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 Forming 4-Month Bump and Run Reversal Bottom
• Asset Class Performance Ranking with the U.S. Treasury Leading

Broad Stock Market Turning in a 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).

After about four weeks in bearish, the Leading-Wave Index (LWX) turned to bullish Friday first time. Based on the forecast of LWX, the broad stock market would be in the short-term bullish time-window until 11/5/2014 (see the second table above).

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, surged to 690 which is the highest reading in three years. But it closed much lower at 20 on 10/17/2014 (down from 416 the previous week) which is below the panic threshold level of 41 and indicates a bullish market. 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. Those spikes typically surged in the late part of each correction when pessimistic sentiments kicked in. 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 3.39% below the EMA89. Outperforming sectors are Utilities (1.39%), Biotech (0.92%), and Real Estate (0.33%). Underperforming sectors are Precious Metals (-13.22%), Oil Equipment (-11.53%), and Energy (-10.66%).

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]. So far this primary wave [4] has been in a pattern of a Complex Correction to have two sets of intermediate (A)–(B)–(C) corrective wave sequences linked by wave (X).

Four 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.

During last week, wave (A) reached near 1820 which is the level of the previous intermediate wave (4). Usually corrections end in the area of the previous wave 4. Therefore 1820 is an important support level for the current correction. 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. One week ago 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. This target was briefly reached during last week.

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. But recently the index broke below the Bump Trendline. This is an early warning sign for topping. Now it comes to another check point 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 is still in a 3-year ascending broadening triangle pattern. It is neutral before next breakout.

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. Now it is near the upper boundary of the channel, and it may bounce off the upper boundary. It would be bullish as long as prices stay above the lower boundary of 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 Bump and Run Reversal Bottom pattern. The decline accelerated along the Bump Trendline, and prices reached a bump low with twice the lead-in height. Now prices bounced off the second parallel line. If prices further broke above the bump trendline, a bullish reversal will be confirmed.

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.