Setting Up a Santa Claus Rally

The S&P 500 index ended its downward intermediate wave 2 as the Fed’s pledge to remain “patient” stayed in focus. The sharp rebound since last Wednesday has started the intermediate third wave and it potentially can reach to 2225 for the S&P 500 index. The Broad Market Instability index went below the panic threshold and the momentum turned to positive. The broad stock market is projected to stay in a short-term bullish time-window until 1/6/2015. This bullish time-window most likely will let the market have a Santa Claus rally within the last five days of the year and first two in January. The U.S. dollar edged up adding to multiyear highs, and it still has an upside potential. Crude oil hovers near multi-year low, and it could have a rebound soon.

Table of Contents

• Broad Market In Short-Term Bullish Time-Window
• Sector Performance Ranking with Biotech 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 4-Month Descending Broadening Wedge
• GDX Gold Miners ETF in 4-Month Descending Broadening Wedge
• Crude Oil Forming 6-Month Bump and Run Reversal Bottom
• Asset Class Performance Ranking with Treasury Leading

Broad Market in Short-Term Bullish 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 Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 9 on 12/19/2014 (down from 203 the previous week) which is below the panic threshold level of 42 and indicates a bullish market. The momentum just moved into the positive territory. Based on the forecast of LWX, the broad stock market will be in a short-term bullish time-window until 1/6/2015 (see the second table above). According to Stock Trader’s Almanac, there is a trend of Santa Claus rally nearly every year within the last five days of the year and first two in January. 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 3.13% above the EMA89. Outperforming sectors are Biotech (10.32%), Healthcare (7.22%), and Semiconductors (7.01%). Underperforming sectors are Precious Metals (-14.79%), Oil Equipment (-10.07%), and Energy (-6.34%).

We are approaching the end of 2014. The graph below is a list of sectors by the year-to-day return. The biotech and semiconductor 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]. 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.

In the intermediate level, it has completed downward wave (2) and has begun upward wave (3). Wave (3) will likely be longer in price range than wave (1). Based on 0.618 extension of wave (1), the target of (3) is projected at 2225.

In the following weekly chart, the German DAX index has been in primary impulse wave [5] since mid October. Primary wave [5] contains an intermediate (1)–(2)–(3)–(4)–(5) five-wave sequence. It has completed downward wave (2) and has begun upward wave (3).

The index also developed an 1-year broadening wedge pattern. Since wave (2) did not reach the lower boundary of the wedge, it formed a partial decline which has a bullish indication for a potential upward breakout of the wedge.

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. But last week prices broke below the Bump Trendline. This could be an early sign for a trend change, and it needs to be confirmed if prices further break below the 2nd Parallel Line.

This year the Chinese stock market has 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. Recently the Chinese stock market had an explosive advance and the Shanghai Stock Exchange Composite Index reached 3091 which is slightly below our third upside price target 3150 based on an upward breakout of the 5-year falling wedge pattern according to Bulkowski’s measure rule.

Primary wave [1] contains an intermediate (1)–(2)–(3)–(4)–(5) five-wave sequence. Now the Shanghai index is most likely ending intermediate wave (3). The next wave (4) will be a downward wave to correct wave (3).

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. 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 4-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 4-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 6-month Bump and Run Reversal Bottom pattern. Since late October its decline has accelerated along the Bump Trendline, and reached a bump low with four times the lead-in height. Now the forth parallel line becomes an important line. It will be bearish as long as prices stay below that line. Otherwise, the forth 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 U.S. treasury is outperforming and crude oil is underperforming.