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Weekend Market Analysis 11 Mar 2018

Mar 11th, 2018

Executive summary

 World equity markets all moved up this week, although technically still in a bear trend, despite the US bond market starting to decline again. The fear of a trade war seems to be moderating and the US jobs report on Friday indicated a positive spin causing the Dow to end a better week with a strong Friday. The next US FOMC meeting is on 21 Mar, with the virtual certainty of a rate hike, which is likely to ‘spook’ markets somewhat.

Markets are not moved by earnings or PE ratios, markets are moved by liquidity. And liquidity is starting to diminish as interest rates rise and US bond yields move up again, setting the stage for a long term decline in asset prices.

The US$ index moved down slightly on Friday and ended the week flat, which begs the question of whether the Dollar is likely to rally mildly or strongly, or whether the next rate hike is already priced in. Gold was assisted slightly but most views are that a continued move lower is likely until the US Fed meeting on 21 Mar. On a positive note, silver has been outperforming gold slightly during the past 5 weeks.

 

US$

The US$ index moved down slightly on Friday and ended the week flat, which begs the question of whether the Dollar is likely to rally mildly or strongly, or whether the next rate hike is already priced in. A rally is anticipated as the price moves up to close above 10-Dema, midway between support and resistance. The key level cycle top is at $90.92 and the double bottom (red) could be the propellant to breach that level and begin the climb to a mild rally target at minor resistance at $91.5 (red lines), or a strong rally target at $94 or $95. The US Fed FOMC meeting is 21 Mar 2018 and Dollar strength is more likely to peak then at about $91.5 – $92.0. The oscillators are directionless, suggesting a measure of dither in the short term.

 

 

Long term Dollar charts are not positive for future strength, and the rally from interim support towards the major resistance zone (red) may only reach $91.5 or $92.5 before withering. A stronger rally towards $95 is possible but less likely. As the range of fundamental pressures gather momentum in increased deficit spending and rising inflation, so the 2nd and 3rd stage decline targets will be reached and penetrated.  

 

 

 US Treasuries

The benchmark 10 year US Sovereign bond yield correction has ended with the yield starting to increase again to close the week at 2.90%, en route to its immediate target of 3.0% based on the depth of the H&S pattern. The US long term bond bear market is now well entrenched in the climate of rising inflation, and will increasingly devastate asset prices (most notably the US stock market).

 

 

US bond market values (as opposed to yield), as illustrated in the chart below, are once again dropping towards the neckline of the H&S pattern (and confluence of 200-Wema) after the short correction.

It may be that the correction is not quite complete yet because of mixed signals from the oscillators, but penetration of the H&S neckline and 20-Wema will be the confirmation for bond values to drop further as the bear market settles in.

 

Gold

Gold tested the previous high at $1342.90 but failed to penetrate, and is now positioned midway between the previous high and low points. Penetration of the previous low at $1303.60 could drop prices a lot further to $1280 by the time of the next FOMC meeting on 21 Mar.

Failure to break below $1303.60 will prevent this although the slow Stochastic is turning down again which suggests penetration may well occur, while the long Dragonfly candle on Friday suggests increased gold prices next week.

 

 

The 3 year weekly gold chart, with 2 consecutive weekly Doji candles, illustrates the indecision in the gold market as we approach the FOMC meeting on 21 Mar. The next move could be up or down and, with the oscillators turning down, it looks like it will be down.

Prices are likely to hold above the previous cycle lows as well as the diagonal supports (blue) until the FOMC meeting, with the potential of perhaps dropping towards $1280.

 

 

GDX US miners ETF

GDX broke above 10-Dema during the week but closed below it again, in a mode of apparent immobilisation midway between resistance and support. The challenge is to reach and penetrate the interim high at $23.18, but that seems just too far away, and any breakout is likely to be delayed until the FOMC meeting on 21 Mar.

However, the more likely scenario is that price moves lower in the next 2 weeks until the meeting, but if support is penetrated at $20.72 then it is possible to drop much further in a collapse towards $18.50.

 

The longer term GDX chart illustrates the how the miners have been range-bound for 15 months now, and any breakout must wait for the FOMC meeting. The chart indicates a potential up cycle could start next, but it is actually likely to be a downside break first.

Like silver, in many ways, GDX is somewhat coiled to respond upwards in due course. Once gold breaks out the miners will respond powerfully.

 

 

DUST US Gold Miners bear index

The inverse picture in the US Gold Miners Bear Index (Dust) indicates the exact opposite of the GDX chart, with a clear up bias and holding above 10-Dema. There is a degree of immobilisation around 10-Dema leaving the impression of price coiled and ready to jump up. If GDX drops further towards the FOMC meeting then DUST will continue to rise.

If GDX price penetrates support and collapses toward $18.50 then DUST will jump up, well beyond previous highs at $31 and $32.

 

 

Silver

Silver tested $16.95 but failed to penetrate and could now move lower to test supports. If $16.13 is penetrated then price could move much lower towards $15.50 in the next 2 weeks. Both oscillators are drifting sideways and this may provide good news in the silver price doing likewise.

On a positive note, silver has actually outperformed gold during the last 5 week period to close on Friday below a ratio of 80.

 

 

Gold : Silver Ratio

Silver has started to outperform gold over the last 5 week period to close the week below a ratio of 80. The mould is still characterised in an upward sloping reducing wedge (red) and this pattern needs to be decisively broken before the metals can start an aggressive advance.

The oscillators are also pointing in the right direction.

 

 

 General Equities

World equity markets all moved up this week, although technically still in a bear trend, despite the US bond market starting to decline again. The fear of a trade war seems to be moderating and the US jobs report on Friday indicated a positive spin causing the Dow to end a better week with a strong Friday. The next US FOMC meeting is on 21 Mar, with the virtual certainty of a rate hike, which is likely to ‘spook’ markets somewhat.

Markets are not moved by earnings or PE ratios, markets are moved by liquidity. And liquidity is starting to diminish as interest rates rise and US bond yields move up again, setting the stage for a long term decline in asset prices.

The Dow Jones has enjoyed a 6 day upward correction, and failure to penetrate the previous high will encourage the next price plunge.

 

 

 

 

 

 

 

 

 

 

 

 

 

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