Possible Consolidation for Overbought Stock Market

The broad stock market has been in a sharp rebound for over three weeks. The S&P 500 index made another new all-time high as the U.S. dollar reached a four-year high and the 30-year U.S. treasury bond extended its 10-month bullish uptrend. Elliott wave analysis suggests a pullback in the S&P 500 index ahead, with a downward wave counted as either the intermediate C wave or the intermediate second wave. The broad stock market is about to turn from bullish to neutral, and is projected to stay in a short-term neutral time-window until 11/28/2014. There is a potential bullish reversal for gold, silver, and their mining stocks as some of them hit and bounced off downside technical levels.

Table of Contents

• Broad Market to be in a Short-Term Neutral Time-Window
• Sector Performance Ranking with Biotech Sector Leading
• S&P 500 Index: Transition from the 4th to 5th Primary Wave
• 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 Bullish Breakout from 3-Year Ascending Broadening Triangle
• US Treasury Bond in 10-Month Uptrend Channel
• Gold Forming 4-Month Descending Broadening Wedge
• Silver Near Downside Price Target
• Gold/Silver Stocks Near Downside Price Target
• GDX Gold Miners ETF in Bearish 16-Month Downtrend Channel
• Crude Oil Forming 4-Month Bump and Run Reversal Bottom
• Asset Class Performance Ranking with the U.S. Dollar Leading

Broad Stock Market to be in Short-Term Neutral Time-Window

The Leading-Wave Index (LWX) 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) has been bullish since October 17. Based on the forecast of LWX, the broad stock market is about to turn into a short-term neutral time-window, and would stay in the neutral time-window until 11/28/2014 (see the second table above). The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 8 on 11/7/2014 (down from 14 the previous week) which is below the panic threshold level of 42 and indicates a bullish 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 3.37% above the EMA89. Outperforming sectors are Biotech (9.47%), Utilities (7.23%), and Healthcare (5.95%). Underperforming sectors are Precious Metals (-16.15%), Oil Equipment (-5.43%), and Energy (-3.52%).

The S&P 500 index has been in primary corrective wave [4] for 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, and closed at another new record high last Friday. Primary wave [4] should either near its end or have finished depending the following two scenarios.

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, and it is about to come. The complex correction should continue until wave (C) ends.

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 all way back below 1820.

In the following weekly chart, the German DAX index has completed primary corrective wave [4] as intermediate downward wave (C) ended. Now it is in primary impulse wave [5] with intermediate upward wave (1).

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. As it recently adjusted the slope of its Bump Trendline, the index maintained above the 2nd Parallel Line. The uptrend continues as long as prices stay above the Bump Trendline.

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 highest price in the last week reached 2454.42 very near our price target.

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

In the following weekly chart, the U.S. dollar broke above the upper boundary of the 3-year ascending broadening triangle pattern. Based on Bulkowski’s measure rule on an upward breakout of ascending broadening triangles, the upside price target is projected at 92.4.

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. 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 4-month descending broadening wedge pattern. Last week prices bounced off the lower boundary of the wedge. In this pattern, the trend is bearish but it is potentially a bullish reversal pattern.

The silver index has been below a 14-month descending triangle pattern. Based on Bulkowski’s measure rule on descent triangle patterns, the downside price target was projected at 15. The lowest price in the last week reached 15.04 which is very near our price target.

Gold/silver mining stocks have been 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 61. The lowest price in the last week reached 61.39 which is very near our price target.

The GDX Market Vectors Gold Miners ETF is forming a 16-month bearish downtrend channel. Last week prices just bounced off the lower boundary of the channel.

Crude oil is forming a 4-month Bump and Run Reversal Bottom pattern. Since October its decline has accelerated along the Bump Trendline, and reached a bump low with twice the lead-in height. Now prices bounced off the second parallel line, and are testing the bump trendline. Watch for a bullish reversal.

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. dollar is outperforming and crude oil is underperforming.