2/20/2012

Market Weekly Update by Nu Yu — Tue, 21 Feb 2012 01:05:48 +0000

The Broad Market is Overdue for a Pullback

The broad equity market continues moving on an upward incline with low volatility. The eleven-week short-term rising wedge pattern suggests a 3-5% pullback towards the middle of March. Both my trend and momentum indicators continue showing negative signs.

Table of Contents

Status of Key Market Parameters
Broad Stock Market is Forming a Rising Wedge Pattern
Broad Market Instability Index is below the Panic Threshold
Gold is Still in a the “Bump” Phase
Silver is Forming a Big Falling Wedge
US Dollar is Still in Ascending Triangle Pattern
30-Year US Treasury Bond is Still in a Trading Range
Asset Class Performance Ranking with U.S. Equity Leading
Sector Performance Ranking with Banks Sector Leading
BRIC Stock Market Performance Ranking with Brazilian Market Leading

Current Status of the LWX (Leading Wave Index)

The LWX Indicator in Last Four Weeks (Past)

The LWX Indicator in Next Four Weeks (Forecast)

Broad Stock Market is Forming an 11-Week Rising Wedge Pattern

The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, is forming an 11-week “Rising Wedge” pattern (see here). Although the rising wedge pattern typically has a bearish bias, it is one of the worst performing chart patterns to take a short position. Currently the Wilshire 5000 index is above the 89-day moving average and it is in the choppy zone of the rising wedge with negative readings of both the trend and momentum. The Leading Wave Index (LWX) indicator, color coded in the price bars of the following daily chart of the Wilshire 5000 index, closed in bullish on Friday. Based on the forecast from the LWX (see the 3rd table above), the broad market would be in a bearish time-window until the middle of March. The broad market may have a 3-5% pullback but may not breach the 89-day moving average.

Broad Market Instability Index is below the Panic Threshold

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 3 on Friday. This reading is below the panic threshold level of 46, and it indicates that the current market is bullish. The BIX is plotted in the following chart as compared with the Wilshire 5000 index.

Gold is Still in the “Bump” Phase

The gold index is still in an intermediate-term “Bump-and-Run Reversal Top” pattern and it is in a the “Bump” phase. Lower highs in the “Bump” phase indicate that the Lead-in Trend line should be re-tested.

Silver is Forming a Big Falling Wedge

Since last April, the silver index has been in a “Falling Wedge” formation (see here). Although the falling wedge typically has a bullish bias, it is a very poor performer if it is counted on as a bullish pattern. We will see if the current swing can reach the upper boundary of the falling wedge. If price rounds over before coming close to the upper trendline, it would be a partial rise that is usually a bearish sign for the price with a high probability to re-test the lower trendline.

US Dollar is Still in an Ascending Triangle

The US dollar index is forming a 14-month “Ascending Triangle” pattern (see here).

U.S. Treasury Bond is in a Trading Range

The 30-Year US Treasury Bond index is forming a horizontal channel pattern (trading range) between the upper boundary at 146 and the lower boundary at 135.

Asset Class Performance Ranking with U.S. equity 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. equity and crude oil are outperforming. Food and the U.S. Treasury Bond are underperforming.

Sector Performance Ranking with Banks Sector Leading

The following table is the percentage change of sectors and major market indexes against the 89-day exponential moving average (EMA89). The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total market, is 6.94% above the EMA89. Outperforming sectors are Banks (10.04%), Technology (9.57%), and Semiconductors (8.98%). Underperforming sectors are Precious Metals (-1.62%), Utilities (1.07%), and Telecommunication (2.73%). The NASDAQ 100 (8.50%) is outperforming the market, and the Dow Jones Industrial Average (5.41%) is underperforming.

BRIC Stock Market Performance Ranking with the Brazilian Market Leading

The table below is the percentage change of the BRIC stock market indexes against the 89-day exponential moving average (EMA89). The Brazilian market is leading and the Chinese market is lagging.