Unusual and Inconsistent Market Internals

As a new Chinese bull market woke up, the Shanghai Stock Exchange Composite Index advanced explosively and reached our second upside price target 2850. Now a new chart pattern analysis projects another upside price target at 3150 for the Shanghai index. The U.S. stock market continues positive drifting near its all time high while the Broad Market Instability Index stays above the panic threshold. Increasing numbers of new 52-week highs and lows in the New York Stock Exchange present a strong divergence and indicate inconsistency of market internals. Current unusual high readings of the High Low Logic Index flash a warning signal that it is time to be cautious about the U.S. stock market.

Table of Contents

• Broad Market Instability Index Soars above Panic Threshold Level
• Sector Performance Ranking with Semiconductors Sector Leading
• S&P 500 Index in Primary Impulse Wave 5
• 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 above 3-Year Ascending Broadening Triangle
• US Treasury Bond Bullish Breakout from 11-Month Uptrend Channel
• Gold in 5-Month Descending Broadening Wedge Pattern
• Silver in 5-Month Descending Broadening Wedge Pattern
• Gold/Silver Stocks in 3.5-Month Descending Broadening Wedge
• GDX Gold Miners ETF in 3.5-Month Descending Broadening Wedge
• Crude Oil Forming 5-Month Bump and Run Reversal Bottom
• Asset Class Performance Ranking with Equity Leading

Last week I mentioned a strong divergence of stock sectors as some sectors making 52-week highs but some sectors falling at 52-week lows. Recent readings of the High Low Logic Index support this observation. Developed by Norman Fosback, the High Low Logic Index tracks the lesser of the number of new 52-week highs or new 52-week lows with both expressed as a percentage of total issues traded. The concept behind the index is that either a large number of stocks will reach new highs or a large number will establish new lows, but normally not both at the same time. Higher readings of the index are bearish which reflects a divergence or inconsistency of market internals with many stocks reaching new highs at the same time many stocks getting new lows.

The chart below shows the High Low Logic Index computed by using NYSE data. Since the High Low Logic Index is the lesser of the two ratios, high readings are infrequent and any reading above 2.3% is considered to be unusual as an “outlier”. Since 11/28/2014, the index has crossed and stayed above the warning threshold level of 2.3%. The latest reading on last Friday was 4.43% which is a high level with only 1% chance of occasions over the last 40 years in the New York Stock Exchange. It means that the current inconsistency level of market internals is unusually high!

Historically, abnormally high readings from 52-week highs and lows at the same time was a dangerous precursor to form Hindenburg Omen which is a technical analysis pattern to portend a stock market crash.

Broad Market Instability Index Soars above Panic Threshold Level

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) is ending the short-term bullish time-window. Based on the forecast of LWX, the broad stock market will be in a toggle mode between a short-term neutral time-window and a short-term bearish time-window in the next several weeks (see the second table above). The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 99 on 12/5/2014 (up from 68 the previous week) which is above the panic threshold level of 42 and indicates a bearish 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 3.63% above the EMA89. Outperforming sectors are Semiconductor (11.89%), Biotech (10.51%), and Healthcare (8.42%). Underperforming sectors are Precious Metals (-14.81%), Oil Equipment (-13.58%), and Energy (-9.83%).

We are approaching the end of 2014. The graph below is a list of sectors by the year-to-day return. The semiconductor and biotech sectors will be winners and the precious metals sector will be a loser for 2014.

From late July to mid October, the S&P 500 index went through primary corrective wave [4] in a pattern of a Expanded Flat Correction with intermediate (A)–(B)–(C) waves. Upward wave (B) extended beyond the beginning of wave (A), and downward wave (C) extended beyond the end of wave (A). Primary corrective wave [4] ended as the expanded flat correction finished.

Now the S&P 500 index is in primary impulse wave [5] with intermediate upward wave (1). Ideally primary wave [5] contains an intermediate (1)–(2)–(3)–(4)–(5) sub-wave structure. This fifth primary wave will be the final upward leg of the entail bull market started from 2009, and this final leg can last several months which begins from mid October of this year and ends sometime in 2015.

This scenario will stand only if next downward wave (2) does not retrace all way back below 1820.

As illustrated in the chart below, currently we approach the end of intermediate wave (1) inside primary wave [5]. After intermediate wave (1) completes, we will get a projected price target for primary wave [5] based on the final height of wave (1).

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. The index maintained above the 2nd Parallel Line. The uptrend continues as long as prices stay above the Bump Trendline.

This year the Chinese stock market gradually phased out its years-long bear market after it completed a 5-year “Ending Diagonal” pattern. A new bull market just started, and the Shanghai Stock Exchange Composite Index is in primary wave [1] which is the first upward leg of a potential multi-year bull market. The chart below gives a big picture and illustrates where we are now in primary wave [1] of the Chinese stock market in terms of Elliott Waves.

Last week, the Chinese stock market had an explosive advance and the Shanghai Stock Exchange Composite Index reached our second upside price target 2850 estimated from an upward breakout of the 3-year rectangle bottom between 2000 and 2460. Now we have the third upside price target at 3150 projected by using an upward breakout of the 5-year falling wedge pattern according to Bulkowski’s measure rule.

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.

The graph below shows the performance of major international markets as the year to date. The Chinese market will be a winner and the Russian market will be a loser for 2014.

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 an 11-month bullish uptrend channel. Also it has advanced sharply along a steep trendline since mid September. Recently prices broke above the upper boundary of the channel. This bullish breakout could trigger a further advance in the treasury price if excessive speculation kicks in.

The following chart shows that the gold index formed a 5-month descending broadening wedge pattern. Prices are still confined between two divergent boundaries. This pattern is potentially a bullish reversal pattern although the trend is bearish. The bullish bias can be realized only when prices break above the upper boundary of the wedge.

The silver index has also formed a 5-month descending broadening wedge pattern. Prices are still confined between two divergent boundaries. This pattern is potentially a bullish reversal pattern although the trend is bearish. The bullish bias can be realized only when prices break above the upper boundary of the wedge.

Gold/silver mining stocks are still in a 3.5-month descending broadening wedge pattern. Prices are confined between two divergent boundaries. This pattern is potentially a bullish reversal pattern although the trend is bearish. The bullish bias can be realized only when prices break above the upper boundary of the wedge.

The GDX Market Vectors Gold Miners ETF are still in a 3.5-month descending broadening wedge pattern. Prices are confined between two divergent boundaries. This pattern is potentially a bullish reversal pattern although the trend is bearish. The bullish bias can be realized only when prices break above the upper boundary of the wedge.

Crude oil is forming a 5-month Bump and Run Reversal Bottom pattern. Since late October its decline has accelerated along the Bump Trendline, and reached a bump low with twice the lead-in height. Last week prices further declined sharply, and moved beyond three times the lead-in height. Now the third parallel line becomes an important line. It will be bearish as long as prices stay below that line. Otherwise, the third parallel line will become a buy line, according to Bulkowski on Bump-and-Run Reversal Bottoms.

The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently equity is outperforming and crude oil is underperforming.