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10/26/2014 – Market Update

October 26, 2014 Leave a comment Go to comments

A Bullish Tone in Stocks

The stock market had a big rebound and set a bullish tone as U.S. general election day approaches. Biotech, Healthcare, and Home Construction sectors led the rally. The Broad Market Instability index (BIX) has returned into a low volatility territory. The correction may near the end when the primary corrective fourth wave of the S&P 500 index reaches its late part. The broad stock market is projected to stay in a short-term bullish time-window until 11/4/2014 which is coincident with the U.S. general election day. In the German DAX index, the one-year head-and-shoulders top pattern has completed and it could become a precursor of a potential “Three Peaks and a Domed House” pattern. Crude oil is in a Bump-and-Run Reversal Bottom pattern and is due for a rebound.


Table of Contents


Broad Stock Market 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).

The LWX Indicator in Last Four Weeks (Actual)
Last 4 wks LWX 10-24-2014

The LWX Indicator in Next Four Weeks (Forecast)
Next 4 wks LWX 10-24-2014

The Leading-Wave Index (LWX) has been bullish since October 17. Based on the forecast of LWX, the broad stock market would be in the short-term bullish time-window until 11/4/2014 (see the second table above) which is coincident with the U.S. general election day. The stock market seems bullish in the five days before and three days after the election day.

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 8 on 10/24/2014 (down from 20 the previous week) which is below the panic threshold level of 41 and indicates a bullish market. During the last three years, there are five major spikes on the BIX respectively in May 2012, November 2012, June 2013, February 2014, and October 2014. All of them correspond to a 5-10% correction on the S&P 500 index. Spikes of the BIX typically surged in the late part of each correction when pessimistic sentiments kicked in. As a contrarian indicator, they usually correspond to local lows of the broad market.

BIX 10-24-2014

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:

Short-Term Cycle: upward
Date of Next Cycle High: 11/04/2014
Broad Market Instability Index (BIX): 8, below the panic threshold (bullish)
Momentum Indicator: positive (bullish)

W5000 10-24-2014


Sector Performance Ranking with Biotech Sector Leading

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 0.57% above the EMA89. Outperforming sectors are Biotech (10.72%), Healthcare (4.94%), and Home Construction (4.81%). Underperforming sectors are Precious Metals (-12.55%), Oil Equipment (-7.27%), and Energy (-6.72%).

Sector 10-24-2014



S&P 500 Index Nears the End of Primary Corrective Wave 4

The S&P 500 index has been in primary corrective wave [4] for almost three months since the downward breakout from the 4-month rising wedge (Ending Diagonal) in late July. After it reached near 1820 which is the level of the previous intermediate wave (4), the S&P 500 index had a big rebound. Now we have a question: does this correction with primary wave [4] end or have more to go? To answer this question, there are two scenarios as follows.

Scenario 1 – Complex Correction

Primary wave [4] has a pattern of a Complex Correction combining two sets of intermediate (A)(B)(C) corrective wave sequences linked by wave (X). Now the S&P 500 index is in upward wave (B) of the second set of intermediate (A)-(B)-(C) waves. There is still downward wave (C) ahead. The complex correction should continue until wave (C) ends.

SPX Elliott Wave 10-24-2014 Scenario 1

 

Scenario 2 – Expanded Flat Correction

Primary wave [4] has a pattern of a Expanded Flat Correction with a single set of intermediate (A)(B)(C) corrective waves. Upward wave (B) went up beyond the beginning of wave (A), and downward wave (C) finished beyond the end of wave (A). This expanded flat correction should have finished as primary corrective wave [4] ended. Now primary impulse wave [5] should have started with intermediate upward wave (1). This scenario can stand only if next downward wave (2) does not retrace below 1820.

SPX Elliott Wave 10-24-2014 Scenario 2



German DAX Index: Elliott Wave

In the following weekly chart, the German DAX index is completing primary corrective wave [4] as intermediate downward wave (C) ends. Its next move should be primary impulse wave [5] with intermediate upward wave (1).

The Head-and-Shoulders pattern we tracked for weeks has finished. Now this pattern could become a precursor of a potential “Three Peaks and a Domed House” pattern. Right now it just had a separating decline after the three peaks.

DAX 10-24-2014 (Weekly)



India Bombay Stock Exchange Index in Bump Phase

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.

BSE 10-24-2014 (Weekly)



Shanghai Composite Index: Long-Term Picture

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.

SSEC 10-24-2014 (Weekly)



Major Global Market Performance Ranking

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

Global Markets 10-24-2014



US Dollar Still in 3-Year Ascending Broadening Triangle

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.

USD 10-24-2014 (Weekly)



US Treasury Bond in 10-Month Bullish Uptrend Channel

The following chart is a daily chart of the 30-year U.S. treasury bond index. The index has formed a 10-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.

USB 10-24-2014



Gold in 17-Month Descending Triangle Pattern

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 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.

GOLD 10-24-2014



Silver in 15-Month Bearish Downtrend Channel

The silver index is forming a 15-month bearish downtrend channel. Recently it bounced off the lower boundary of the channel. It would be bearish as long as prices stay inside the channel.

Silver 10-24-2014



Gold/Silver Mining Stocks Bearish Breakout from 16-month Descending Triangle

Gold/silver mining stocks broke below the horizontal boundary of a 16-month descending triangle pattern. Based on Bulkowski’s measure rule for descending triangle breakout, the downside target is projected at 65.

XAU 10-24-2014



GDX Gold Miners ETF Forming 16-Month Descending Triangle Pattern

The GDX Market Vectors Gold Miners ETF is forming a 16-month descending triangle pattern. Now is is testing the horizontal boundary of the triangle. If prices break below the horizontal support, the downside price target would be 14.8.

GDX 10-24-2014



Crude Oil Forming 4-Month Bump and Run Reversal Bottom

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.

Oil 10-24-2014



Asset Class Performance Ranking with the U.S. Treasury Bond Leading

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.

Asset 10-24-2014
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