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Midweek Market 27 Dec 2018

Dec 27th, 2018 No comments

Executive summary

US markets had a belated Xmas rally of gigantic proportions in a miracle dead cat bounce that lifted equities 5% yesterday. This was attributable to various issues including some noise emitted from the White House suggesting the US Fed Chairman will not be fired, and single day records were broken. But, the die is cast and equity wave structures continue to unfold into a bear market of equally gigantic proportions that will eventually dwarf much that has gone before.

Using the Dow Jones Industrial Average as a proxy for US equities (and indeed world equities) it can be seen that a variety of different impact factors are propelling the index to yet much lower levels. These include Elliott Wave theory, activation of a strong H&S pattern, and a strong negative divergence, all as can be seen in the charts that follow. Also, the countertrend rally in the US bond market is now probably completed with the long term bond bear market likely to resume very soon.

The US$ index has begun a multi-month decline phase since recent peaks, albeit still sluggishly, just as the similar (but in reverse) gold multi-month rally continues to gain momentum. The gold rally is gathering pace which has been energized by disproportionate increases in the silver price which has erased the long-standing non-confirmation against gold which now aligns both metals.

US$
The US$ index has begun declining after recent peaks, but is still doing so sluggishly. In moving largely sideways it is in fact even starting to construct a bear flag, as a prelude to breaking lower. The chart structure, together with corroborating data such as still extremely positive investor sentiment and bearish Cots data, indicates a multi-month dollar decline in the period ahead. The oscillators though are turning up in denial.

One of the powerful motivators for dollar weakness is the extreme investor optimism and the bearish Cots data which reflects in the continued wide dilation in the graphic (red circles). Also, finally, the dollar decline is becoming slightly more evident.

One of the powerful motivators for dollar weakness is the extreme investor optimism and the bearish Cots data which reflects in the continued wide dilation in the graphic (red circles). Also, finally, the dollar decline is becoming slightly more evident.

The 12 month daily chart illustrates the principal propellant for dollar weakness is the negative divergence between price and MACD. This is likely to drop dollar value well below 200-Dema (probably towards $93.80), despite the oscillators in denial.

The longer term 3 year weekly chart illustrates dollar value slowly beginning to roll over with the support of the oscillators turning down.

Japanese Yen
The Yen strength cycle is gaining momentum, having penetrated both the diagonal supports (red) decisively. This, by definition, is due to a weaker US$ and by implication a stronger gold price. The Yen has moved to it’s strongest in nearly 4 months, in powering through 200-Dema, and is now going to test support (red) between 108-110 Yen to the dollar.

US Treasuries
US bonds continue to collapse into a long term bear market but yields have continued to correct down in the short term counter-trend correction. In accordance with Elliott Wave, it can be seen the yield decline is now probably complete, having completed a 5 wave (i) to (v) down to 2 c (circle). This establishes 1-2 which will now propel te stronger wave 3 up as yields increase in a declining bond market.
From this point US bonds will resume their collapse into a long term bear market, and both oscillators are bottoming in support of this.

US Treasuries and Gold
The relationship between gold and the US Treasury 10 year price is reflected in the chart below with rising bias in strong gold / weak bond price, and reducing bias in weak gold / strong bond price. The chart illustrates that the relationship has bottomed (red line), as it moves up to test the H&S neckline. This reflects the stronger gold price and weaker bond price, together with both oscillators rising in support.

Gold
Gold continued to strengthen this week as the rally gains momentum. But it closed yesterday on a Doji candle which reflects indecision and could impair further gains in the ultra short term. The oscillators are overbought which indicates stalling in gold price gains, despite all the contra-indications such as weaker dollar and bullish gold Cots data.

The gold COTs data indicates the start of dilation but it is still early days and the gold price continues to rally.

The gold rally gains momentum in a breakout through the key level of $1269, having penetrated the diagonal resistance line. The oscillators are beginning to top out although momentum will probably carry the day, given all the impact factors.

South African Rand
The reducing wedge pattern has proved quite powerful with the Rand weakening to break out and then consolidate above the pattern. The struggle continues between expected dollar weakness and extending the consolidation above the reducing wedge pattern even further up. The Slow Stochastic is overbought but the MACD appears not so quite yet. Price closed at $14.55, just below the next key ZAR weakness level at $14.70.
So, whilst expected dollar weakness will lead to Rand strength, South African political and economic weakness will tend to retard any Rand strength, leaving the currency above the reducing wedge pattern.

HUI / Gold Ratio
The ratio continues to gain momentum despite breakbacks, which means that US miners are moving up slightly faster than the gold price. The next key breakout level at 0.1291 is very close and both oscillators have turned up in support.

HUI Index
The HUI index itself is far more positive than the HUI / Gold ratio, with the miners not having to compete against the gold price. The positive bias has the next key breakout levels close at hand, and the oscillators are turning up in support.

GDX US miners ETF
The GDX chart is similar to the HUI Index chart except it is even more positive. It seems as if the US miners may well catapult up if these patterns persist.

DUST US Gold Miners Bear Index
The Dust chart has similar commentary, except in the opposite direction being a US miners bear index. The downside bias in the chart is gaining momentum despite the breakbacks, having penetrated the diagonal support (red). The oscillators are bottoming and therefore further increase in the chart is possible.

Silver
Silver has a breakout both through the key level of $14.95 and the diagonal resistance line. Silver has erased the long-standing non-confirmation against gold which now aligns both metals, in a very positive move for the whole precious metals complex. The breakout line at $14.95 has developed into a powerful resistance line, comprising many breakout attempts, and it has now been penetrated decisively and will act as a propellant. The next key breakout levels are close at hand on either side of the resistance zone at $15.25 and $15.71. The oscillators are overbought however and may act as a retardant.

The silver COTs data remains very positive although the convergence pattern is beginning to dilate slightly. Because it is still early days the silver rally is nevertheless gaining momentum.

Gold : Silver Ratio
Silver is in the early stages of beginning to outperform gold, which is positive for the whole precious metals complex, and this is reflected in the chart with a breakout through the rising wedge pattern. The oscillators are turning down in support, and the potential top is increasingly looking like an actual top.

General Equities
The Elliott Wave analysis of the Dow short term chart illustrates the potential for further declines. The ‘dead cat bounce’ in the Dow yesterday could be the rise to 4 to be followed by the decline to 5, to complete the 5 wave down to (3). Or, that wave 3 is still in progress which will generate a much lower (3).

The corrective ABC up will only engage once these declines are complete.

The Dow 12 months chart illustrates the major negative divergence between price and MACD which is the main driver in propelling the Dow down strongly. The partial recovery yesterday is a ‘dead cat bounce’ as part of the overall decline process.

The large H&S pattern developed over the last 9 months has been activated, and this is likely to propel the Dow down by 3000 points, being the height of the head. This will drop the Dow down through the next big region of support around the region of 22000 to the next region below that around 21000. This will test 200-Wema (green).

Categories: Currency, Equity, Gold Tags:

Midweek Market 20 Dec 2018

Dec 20th, 2018 No comments

Executive summary

The US Federal Reserve pronounced yesterday in a more hawkish mode than the markets anticipated, and the rate was hiked with two more indicated for 2019. This activated further declines in US equities as the bear market continued to unfold more aggressively. The approach to the Fed announcement attracted higher levels of hopeful anticipated dovish expectation which finally turned to despair.

Wave structures in the key US equity indices now indicate strong potential for further sharp declines down to new lows as sequential support levels are tested lower down. Using the Dow Jones Industrial Average as a proxy for US equities it can be seen that a variety of different impact factors are propelling the index in the short term to much lower levels. These include Elliott Wave theory, activation of a strong H&S pattern, and a strong negative divergence.

The US$ index has begun a multi-month decline phase since recent peaks, just as the similar (but in reverse) gold multi-month rally continues to gain momentum. This is discussed in more detail at the start of the Gold section. As with equities, gold and all it’s associated elements and charts have been propelled up strongly in anticipation of a more dovish US Fed pronouncement and consequently reacted negatively to the actual more hawkish announcement.

Two weeks ago we looked at the start of the next gold bull market, and today we look at other factors that are likely to drive the gold price in 2019: All at the start of the Gold section.

 

US$

The US$ index has begun declining after recent peaks, and has confirmed a top with consecutive closes below 10-Dema. The chart structure, together with corroborating data such as extreme positive investor sentiment and bearish Cots data, indicates a multi-month dollar decline in the period ahead. The oscillators are declining in support of this, although shadows on the last 2 candles suggest some upward movement is still possible first.

 

 

 

One of the powerful motivators for dollar weakness is the extreme investor optimism and the bearish Cots data which reflects in the continued wide dilation in the graphic (red circles). Despite this, a solid decline phase has yet to start.

 

 

 

The 12 month daily chart illustrates the prominent negative divergence between price and MACD which is another powerful indicator of the start of a multi-month decline phase. The earlier indecision, apparent in the Slow Stochastic, has triggered into decline by penetrating the black diagonal support line. The drop in dollar value could eventually well penetrate well below 200-Dema (probably towards $93.80).

 

 

 

The 3 year weekly chart illustrates the start of declining through the diagonal support from the cluster of indecision below resistance. Both oscillators are topping out in support of this.

 

 

 

Japanese Yen

The Yen has started a new strength cycle in penetrating the diagonal supports (red). This, by definition, is a weaker US$ and by implication strengthening for gold. The Yen has moved to it’s strongest in 2 months and which mirrors the multi-month gold rally. The Yen could well strengthen to 200-Dema and beyond, probably toward 111 to the dollar, and the oscillators are declining in support of this.

 

 

 

US Treasuries

US bonds continue to collapse into a long term bear market but yields have continued to correct down in the short term counter-trend correction. In accordance with Elliott Wave, it can be seen the yield decline is moving down to (v) to simultaneously complete an abc in establishing the 1-2. Yield will be turning up into wave 3 once 2 (v) is confirmed, which is very close. From this point US bonds will resume their collapse into a long term bear market. Both the oscillators are bottoming in support of this.

 

 

 

Gold

Continuing on from our series of 2 weeks ago, we examine what other factors are likely to drive the gold price in 2019? These slightly longer term thoughts are adapted mostly from original thoughts by Alasdair Macloed at GOLDMONEY.

Macro-trends affecting Gold

Some additional basic elements include:

  • Developments affecting the US$;
  • Continued evolving geopolitics;
  • Economic outlook;
  • Relationship between gold and fiat money and resulting inflation;
  • Supply and demand for gold;
  • Activities in the ‘paper gold’ market;

 

All in all, 2019 will probably be good for gold.

 

Developments affecting the US$

Gold has had to contend with a strong dollar for much of 2018, driven by the US Fed interest rate hike cycle. Although the rate hike cycle may be ending soon it has enjoyed the imbalance of no rate hikes in Japan and the EU, accentuating US$ strength. Banks and hedge funds have profited massively from this, but the position is now starting to reverse in what is likely to unwind towards a weaker dollar and higher gold price.

 

Geopolitics

The transfer of gold from West to East continues with significant increases in Russia, India, and China (plus some others). Russia has virtually replaced it’s US$ foreign reserves with gold, and is in a position to do away with the dollar entirely for its energy export payments, or even to link the rouble to gold. China, as the world’s biggest oil importer, has launched it’s oil contract denominated in yuan exchangeable into gold. This is in the early stages of threatening Petro-dollar hegemony and will eventually enable avoidance of receiving dollars entirely. It has also now led to the creation of a number of new Asian gold exchanges and associated substantial gold storage vaults.

This is a direct challenge to the dollar as a reserve currency, and likely to be attractive to oil suppliers, such as Iran, seeking to circumvent use of the dollar and accumulate gold instead.

Wars in the Middle East and Ukraine are now matched by developing trade tariff wars as Donald Trump, true to his election campaign promises to make America great again, is using tariffs in directing policy towards bankrupting China which is seen (correctly) as the greatest economic threat to America. The objective is to impede China’s technological development as it creates a sophisticated economy with a technological capability that is arguably overtaking that of the US. This became visible with the detention of the Huawei CFO, escalating the already deteriorating relations between America and China. Huawei is the world’s leading developer of 5G mobile technology, which will make internet broadband redundant and will become widely available from next year. This has the potential to escalate the tariff war.

China will target financial weapons of her own at the US, including massive holdings of US treasuries which could be sold with equally massive consequences for the US and specifically the dollar. Also, her use of physical gold to insulate China from the fall-out of a collapsing dollar, to protect the yuan as well as limiting the rise of Chinese interest rates.

 

Economic outlook

The trade tariff war today is a re-run of 1929. Then, as now, America ‘ruled the world’ and decided on trade tariffs after the Smoot-Hawley Tariff Act was passed by Congress. The New York Stock Exchange crashed and introduced ‘The Great Depression’ to the world. The likely consequences for today are obvious, in collapsing the financial markets, the banking system, and probably the international monetary system as well, given that we have had 90 years of gross central bank mismanagement since then.

There are other core reasons for market weakness as well. Global economies are at the end of a strong expansionary phase and are at the start of contraction with astronomic debt levels and long term rising interest rates. This toxic cocktail will evolve into the mother of all financial market crises, and it has already started.

 

Relationship between gold and fiat money and resulting inflation

Central bank gold reserves of 33,757 tonnes are worth $1.357 trillion at current prices, according to the World Gold Council. Global fiat money is estimated to total about $90 trillion, which suggests there is 66 times as much in global money as there is gold to back it, roughly. In turn, this suggests a gold price of $80 000.00 based on equitable currency convertibility. This relationship continues to widen as the global monetary base continues to increase.

During the great depression, dollar prices of raw materials and commodities declined heavily, bankrupting everyone involved world-wide. Thus the purchasing power of the dollar increased, because it acted as a gold substitute. But now, there is no convertibility between the dollar and gold at all, so the effect of a global economic depression is bound to see the gulf between the dollar and gold widen, as central banks expand the quantity of money in an attempt to fight recession and keep their governments solvent.

Gold is already close to all-time lows, relative to the quantity of fiat money.

 

Supply and demand for gold

Demand for physical gold consistently exceeds mine supply. Central banks plus Chinese and Indian private sector demand account for 3,344 tonnes annually, which is the same as global mine supply. Net demand from the rest of the world is supplied from existing above-ground bullion, with the most identifiable swing-factor being ETF demand.

ETF demand acts typically as a contrary indicator of future price trends which fits in with market theory. Investor psychology has it that investors are at best trend-chasers, investing most heavily at market tops and liquidating positions at price lows. And right now the gold price is low with ETF outflows peaking.

 

Paper markets for gold

The technical position in the paper markets looks favourable, with close to record levels of bearishness, and an established pattern of Gold bottoms at the end of the year with rallies to follow.

Note the blue arrows on the 5 year gold chart below.

 

 

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Our normal gold analysis follows.

Gold continued to edge up this week in a multi-month rally with the start of dollar weakness into a similar multi-month decline. The gold rally continues to gain momentum although there was some over-reaction in leading up to the US Fed rate hike and gold has declined slightly which is not evident in the chart (because of timing). The oscillators are rising in accord with this momentum.

 

 

 

The gold COTs data indicates the beginning of a slight dilation of the convergence, and correctly the gold rally continues unabated.

 

 

 

The gold rally momentum is maintained despite the US Fed rate hike, and the 12 month chart illustrates the next key breakout level at $1269.

 

 

 

South African Rand

The ZAR weakened to breakout from the reducing wedge and consolidate into a cluster just below resistance. This is now between the key weakness and strength levels evident on the chart. Expected dollar weakness will lead to Rand strength, although South African political and economic weakness will tend to retard any Rand strength, leaving the currency above the reducing wedge pattern.

 

 

 

HUI / Gold Ratio

The ratio continued to gain momentum into the US Fed rate hike, with the market anticipating a more dovish Fed. Reality set in after the Fed announcement and the breakout turned into a strong breakback, with the next key breakout level remaining at 0.1291. Both oscillators have turned down and more ratio weakness is possible.

 

 

 

GDX US miners ETF

The GDX chart is similar to the HUI/Gold ratio with similar commentary, except it appears to be slightly more positive. GDX also continued to gain disproportionate momentum into the US Fed rate hike, with the market anticipating a more dovish Fed. In fact the key breakout level of 20.55 was penetrated. Reality set in after the Fed announcement and the breakout turned into a strong breakback, with the next key breakout level now much higher at 21.50. Both oscillators have turned down and more weakness is possible.

 

 

 

DUST US Gold Miners Bear Index

The Dust chart has similar commentary, except in the opposite direction being a US miners bear index. The downside bias in the chart has been somewhat adjusted by the US rate hike, but overall remains positive. The oscillators are bottoming and therefore further increase in the chart is possible.

 

 

 

Silver

Silver continued to edge up this week and is likely to soon start outperforming gold. However, like gold, there was some over-reaction in leading up to the US Fed rate hike and silver has declined slightly which is not evident in the chart (because of timing). It continues to form a quadruple top at the key level of $14.95, closing at $14.82. Silver has a strong consolidation base below this level which will act as a powerful propellant as and when breakout occurs. The oscillators are rising in accord with this momentum.

 

 

 

The silver COTs data remains very positive with a continued bullish convergence pattern indicating silver strength and likely gain in rally momentum.

 

 

 

We look again at the interesting US Silver Miners vs Dow ratio.  This illustrates the balance between silver miners and general equities and indicates a strong move up off the bottom. IE Silver miners up and/or Dow down.

The oscillators are bullish in support.

 

 

 

Gold : Silver Ratio

Silver is in the early stages of beginning to outperform gold, which is positive for the whole precious metals complex. The ratio is dithering somewhat but maintains the powerful top formation which promises a breakout through the bottom of the rising wedge formation.

 

 

 

General Equities

The Dow Jones wave structure now indicates strongly the potential for further sharp declines soon. The Elliott Wave patterns illustrate completion of the (1)-(2), ABC correction, and 1-2, all leading to the powerful wave 3  down. The decline from 2 is part of an impulse 5 wave structure that will continue down to new lows with the longer and stronger wave 3 in progress.

 

 

The Dow 12 months chart illustrates the major negative divergence between price and MACD which is the main driver in propelling the Dow down strongly. The key breakdown level in the region of 24 400 has been penetrated decisively, as have all the low points created during 2018.

 

 

 

The large H&S pattern developed over the last 9 months has been activated, and this is likely to propel the Dow down by 3000 points, being the height of the head. This will drop the Dow down through the next big region of support around the region of 22000 to the next region below that around 21000. This will test 200-Wema (green).

 

 

 

VIX (Volatility Index)

A fascinating aspect of this particular market decline is that virtually nobody is concerned and virtually everybody believes this is all part of a continuing bull market. Volatility is moving up but seemingly in an orderly fashion. There is now a cluster developing at a higher level, as the bear market begins to bite, but at the same time there appears to be still no panic or raw fear. The market is virtually unaware of the impending collapse ahead.

 

 

 

 

 

 

 

Categories: Currency, Equity, Gold Tags:

Midweek Market 13 Dec 2018

Dec 13th, 2018 No comments

Executive summary

Using the Dow Jones Industrial Average as a proxy for US equities which are in the early stages of a new bear market, the wave structure now indicates strongly that the potential for further sharp declines is likely soon. Also, that these declines should continue down to new lows below those achieved earlier this month. The Dow has constructed numerous 5 wave advances, inter-mingled with a completed ABC correction leading to a new 5 wave impulse decline with the longer and stronger wave 3 about to engage.

The US$ index peaked in Nov at $97.693 and has created a triple top at that level. Corroborating data, such as extreme positive investor sentiment and bearish Cots data, indicates a multi-month period of dollar decline in the period ahead. This is now likely to commence, just as the similar (but in reverse) gold multi-month rally has already commenced during the period of dollar strength leading up it’s peak and triple top. This delayed start to the dollar decline should energise and catapult gold up somewhat as it develops. Much should evolve out of the US Fed Dec rate hike next week, together with associated commentary and interpretation.

 

US$

The US$ index peaked in Nov 2018 at $97.693 and created a triple top at that level over a 4 week period. The dollar still has to confirm a top technically, by closing below 10-Dema consecutively, and therefore there is no likelihood of declining until that happens. But, corroborating data, such as extreme positive investor sentiment and bearish Cots data, indicates a multi-month dollar decline in the period ahead. The oscillators are mixed and somewhat directionless which appears to agree with a period of dollar indecision.

 

 

 

One of the powerful motivators for dollar weakness is the extreme investor optimism and the bearish Cots data which reflects in the continued wide dilation in the graphic (red circles). This is a powerful motivation for a drop in dollar value, which has still to happen.

 

 

 

The 12 month daily chart illustrates the prominent negative divergence between price and MACD which is another powerful indicator of the start of a multi-month decline phase. Indecision is also apparent in the dithering Slow Stochastic as well as the need to still close below the black diagonal support. The drop in dollar value could eventually well penetrate well below 200-Dema (probably towards $93.80).

 

 

 

The 3 year weekly chart illustrates the peak cluster of indecision just below the resistance zone. Once the diagonal support is penetrated dollar value could well drop below 50-Wema towards the bottom of the support zone. Both oscillators are topping out in support of this.

 

 

 

US Treasuries

US bonds continue to collapse into a long term bear market but yields have continued to correct down in the short term counter-trend. Yield on the benchmark US 10 year treasury (1 year daily chart) blipped up slightly to close at 2.91%, very close to the diagonal supports (red) and below 200-Dema. Both the oscillators are bottoming in support of higher yields in line with the main trend.

 

 

 

US Yield Curve

The US Treasury yield curve continues to trend lower toward zero and beyond, indicating US reccession at some stage during 2019. It closed at 1.05 yesterday with the last lap to zero, when it is said to ‘invert’, lying dead ahead. The last inversion occurred in 2006 – 2007 just before the Global Financial Crisis.

 

 

 

Gold

The gold multi-month rally continued to edge up this week despite a continued strong US$ index, which continues to delay in the start of it’s expected multi-month decline. As the gold rally gains momentum it has now achieved 4 consecutive closes above 200-Dema, and in so doing has increased the depth of it’s support base by closing above the previous high during Oct. The oscillators are rising in accord with this momentum.

 

 

 

The gold COTs data indicates the beginning of a slight dilation of the convergence, and correctly the gold rally continues unabated.

 

 

The gold rally gains momentum and the 12 month chart illustrates the breakout through the key level of $1246, with the next key breakout level now at $1269. Penetration of 200-Dema was last achieved during Jun 2017.

 

 

 

South African Rand

The ZAR weakened to breakout from the reducing wedge only to strengthen back into the pattern, leaving the key strength and weakness levels at $13.53 and $14.60 respectively. Although expected dollar weakness will lead to Rand strength, South African political and economic weakness will tend to retard any Rand strength, and the reducing wedge pattern may yet be penetrated through the top diagonal again (ZAR weakness).

 

 

 

HUI / Gold Ratio

The ratio continues to gain momentum and has a breakout through the key level at 0.1245, leaving the next key breakout level very near at 0.1291. Both oscillators are rising in support.

 

 

 

GDX US miners ETF

The GDX chart is similar to the HUI/Gold ratio with similar commentary, except it appears to be slightly more positive. GDX continues to gain momentum and has a breakout through the lower key level at 19.95, and very nearly through the higher one at 20.55 as well.

 

 

 

The longer term weekly 3 year chart illustrates the gaining momentum off the support diagonal (red) towards the earlier range-bound region, which is now quite close. Both oscillators are rising in support.

 

 

DUST US Gold Miners Bear Index

The Dust chart is even more positive with similar commentary, except in the opposite direction being a US miners bear index. The downside bias is accelerating with both key breakout levels penetrated to a new low. The oscillators are mixed with the Slow Stochastic turning up and the MACD dropping.

 

 

 

Silver

Silver improved markedly again this week gaining momentum to form a near quadruple top at the key breakout level at $14.95, closing at $14.85.  Silver has a strong consolidation base below this level which will act as a powerful propellant as and when breakout occurs. Both oscillators are rising in support.

 

 

 

The silver COTs data remains very positive with a continued bullish convergence pattern indicating silver strength and likely gain in rally momentum.

 

 

 

Gold : Silver Ratio

Silver is in the early stages of beginning to outperform gold, which is positive for the whole precious metals complex. The ratio improved again this week to close at 84.17 and the potential top is beginning to look like an actual top. Also, the close is a micrometer over the bottom parameter of the rising wedge pattern and is beginning to look like the start of a breakout. Both oscillators are dropping in support of this.

 

 

General Equities

The Dow Jones wave structure now indicates strongly that the potential for further sharp declines is likely soon. Also, that these declines should continue down to new lows below those achieved earlier this month. The Dow has constructed numerous 5 wave advances, inter-mingled with a completed ABC correction leading to a new 5 wave impulse decline with the longer and stronger wave 3 about to engage.

 

 

 

The Dow 12 months chart illustrates the major negative divergence between price and MACD which is the main driver to eventually propel the Dow down strongly. The key breakdown level is in the region of 24 400 which is the tipping point for much lower prices.

 

 

 

The first waves down in a new bear market are underway, and as this develops it will activate a developing H&S pattern which will propel the index down another 3000 points, being the height of the head projected down below the neckline. This will easily penetrate the support base and drop the index down towards 200-Wema.

 

 

 

Categories: Currency, Equity, Gold Tags:

Midweek Market 6 Dec 2018

Dec 6th, 2018 No comments

Executive summary

US equities are in the early stages of a new bear market after peaking in early Oct 2018 and which enjoys numerous counter rallies from comments made by the likes of Jerome Powell or Donald Trump designed to keep equities lofted. But, socio-economics are in a down cycle and the interest rate cycle has turned up which are the bedrock foundations of powerful forces that dictate the fortunes of capital markets which are in a serious downturn for the foreseeable future. This is also in accord with the US bond market which started to turn down as early as mid-2016 into a long term bond bear market.

The US$ index peaked in Nov and is in the early stage of a multi-month decline, in line with US Fed comments indicating an end to the rate hike cycle soon, which is adding impetus to a gold multi-month rally. The dollar enjoys extreme bullish investor sentiment plus bearish Cots data while gold suffers extreme bearish investor sentiment plus bullish Cots data, which all adds powerful credence to the next dollar cycle being weak and the next gold cycle being strong.

The next gold bull market will be stratospheric because of the potential collapse in the capital markets and eventually the international monetary system itself. It is close and getting closer. Consequently, the narrative below under the heading of Gold describes in some detail some of the underlying impact factors that will finally launch the next gold bull market.

 

US$

The US$ index is in the early stage of a multi-month decline, after it’s recent 5 wave advance to peaks in Nov and the start of the down trend after that. But it still needs to confirm a top with consecutive closes below 10-Dema and it also closed on a Dragonfly Doji candle yesterday which indicates indecision. The oscillators are also mixed with some more short term indigestion likely before declining further.

 

 

 

One of the powerful motivators for dollar weakness is the extreme investor optimism and the bearish Cots data which reflects in the continued wide dilation in the graphic. This is a powerful motivation for a drop in dollar value.

 

 

 

The 12 month daily chart illustrates the prominent negative divergence between price and MACD which is another powerful indicator of the start of a multi-month decline phase. Indecision is also apparent in the dithering Slow Stochastic as well as the need to still close below the black diagonal support. The drop in dollar value could eventually well penetrate well below 200-Dema (probably towards $93.80).

 

 

 

The 3 year weekly chart illustrates the peak cluster of indecision just below the resistance zone. Once the diagonal support is penetrated dollar value could well drop below 50-Wema towards the bottom of the support zone.

 

 

 

Japanese Yen

The Yen has started a new strength cycle which by definition is weakening for the US$ and by implication strengthening for gold. It spiked through both 10- and 50-Dema to the diagonal support line (red) which it now needs to penetrate. The Yen could well strengthen to 200-Dema and beyond, probably toward 111 to the dollar. The oscillators are set to drop in support of this.

 

 

 

US Treasuries

US bonds continue to collapse into a long term bear market but yields have continued to correct down in the short term. Yield on the benchmark US 10 year treasury (1 year daily chart) closed down at 2.91%, very close to the diagonal support (red) and even penetrating 200-Dema. Bothe oscillators look set to bottom in support of higher yields off the diagonal support line.

 

 

 

US Yield Curve

The US Treasury yield curve continues to trend lower toward zero and beyond, indicating US reccession at some stage during 2019. It closed at 1.04 yesterday with the last lap to zero, when it is said to ‘invert’, lying dead ahead. The last inversion occurred in 2006 – 2007 just before the Global Financial Crisis.

 

 

 

Gold

The next gold bull market will be stratospheric because of the potential collapse in the capital markets and eventually the international monetary system itself. It is close and getting closer, but when will it finally begin?

There are numerous improving market and economic developments which are positive for Gold which is positioned ever more so to start the next gold bull market. But the ignition triggers are not quite ready yet, which means the bullish launch platform still needs further development although completion is getting close. Gold price behaviour is dependent on many things, and history shows that some of them, like those below, actually need to breakout before the next gold bull market can start:

  • US Federal Reserve policy shifts;
  • Shape of the US yield curve;
  • Outperformance against general equities;
  • Outperformance against foreign currencies, given that gold is mainly quoted in US$;

 

US Federal Reserve policy shifts

The unfolding bear market in equities (and the already 2½ year bear market in US bonds) had the US Fed indicate last week that the rate hike cycle may end soon, with the market now expecting no more than another 2 rate hikes. This is good news for gold which thrives in a rate cutting environment, which by definition has not started yet. It will of course accelerate as the equity market collapse gains momentum.

 

Shape of the US Yield curve

The yield curve reflects the state of the US economy including the stock market and the health of it’s companies, and therefore leads US Fed policy. The stronger the economy the tighter Fed policy will be, and vice versa. As the yield curve flattens and reaches zero, it is said to ‘invert’, as the US economy moves into recession or worse. This is where it is headed at the moment which predicts weak equities and by definition gold outperformance of equities. It is not a reflector of gold performance per se, as at gold peaks in 1980 it was flat and in 2011 it was very steep.

 

 

Outperformance against General Equities

$Gold needs to breakout against long term US equities and, in this example against the 400 day moving average in the gold / NYSE index, it is preparing to do so.

 

 

It has actually already achieved a breakout against the world equities (excluding US) index and the Emerging markets index, in penetrating the long term 400 day moving average.

 

 

 

So, the US stock market is key as it will dictate US Fed policy. That could be taken off the table as the US market collapses into the current bear market, which will push the US Fed into an earlier rate cutting cycle. Or, even earlier still as the market begins to discount the start of a rate cutting cycle.

Observe the Dow and the potential to now push down through the 400 day MA with very little support in the next 5000 points decline.

 

 

 

Outperformance against Foreign Currencies

It also needs to breakout against foreign currencies, given that gold is usually quoted in US$. In this case it is contesting a confluence of resistance at the 200 and 400 day MAs before it can break free to test the overhead diagonal resistance trendline.

 

 

 

So, gold is preparing for the start of the next bull market which is closing in fast. But some have it that gold is currently enjoying only a corrective wave up to be followed first by another serious decline toward the 1000 to 900 region, before the start of the bull market. Maybe, or maybe not!!! Watch this space.

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Our normal gold analysis follows.

The gold multi-month rally received a mini-boost this week and spiked up into the resistance zone. Extreme investor pessimism and positive Cots data remains and this will generate further energy and momentum gains, especially as the dollar weakens. The oscillators are rising in accord with this.

 

 

 

The gold COTs data continues to indicate the bullish convergence which will support higher gold prices and, by definition, also a weaker dollar.

 

 

 

The 12 month chart illustrates the breakout through the diagonal resistance line. It closed at $1241.10 as it gets ever nearer to the key breakout level at $1246.

 

 

 

South African Rand

The US$ / ZAR currency has formed a reducing wedge pattern with price closing on 2 consecutive Engulfing candles (black) which technically indicates a breakout up (US$ strength / Rand weakness). Conversely, expected dollar weakness will lead to Rand strength first, although South African political and economic weakness will tend to retard any Rand strength. Key levels are now: ZAR strength $13.53, and ZAR weakness $14.60. The oscillators are turning up in support of Rand weakness.

 

 

 

HUI / Gold Ratio

The ratio has maintained a positive bias with 2 consecutive closes above 10-Dema. The lower of the 2 key breakout levels at 0.1245 beckons next with the ratio closing at 0.1204 with both oscillators beginning to turn up in support.

 

 

 

GDX US miners ETF

The GDX chart is similar to the HUI/Gold ratio with similar commentary, except it appears to be slightly more positive. The lower of the 2 key breakout levels at 19.95 beckons next (very close) with the ETF closing at 19.60 and both oscillators rising in support.

 

 

 

DUST US Gold Miners Bear Index

The Dust chart is equally similar with similar commentary, except in the opposite direction being a US miners bear index. The downside bias is accelerating and closed at 30.60 which is very close to the higher of the key breakout levels at 29.50. Both oscillators are supportive and turning down.

 

 

 

Silver

Silver improved markedly this week and has a breakout through both diagonal resistance (blue line) and the lower of the 2 key breakout levels at $14.53. The higher and much stronger key breakout level at $14.95 now beckons and both oscillators are rising in support.

 

 

 

The silver COTs data remains very positive with a continued bullish convergence pattern indicating silver strength and likely gain in rally momentum.

 

 

 

Gold : Silver Ratio

Silver is now in the early stages of beginning to outperform gold, which is positive for the whole precious metals complex. The ratio improved to 84.77 and a potential top is forming with the potential likely hood of a breakout through the bottom of the rising wedge pattern. Both oscillators are dropping in support of this.

 

 

General Equities

The Dow Jones dropped 750 points yesterday with more to come in the final approach run to the key breakdown level of 24 400. The oscillators are turning down in support of this.

 

 

 

The Dow 12 months chart illustrates the major negative divergence between price and MACD which is the main driver to eventually propel the Dow down strongly.

The key breakdown level is at 24 400 which is the tipping point for much lower prices, and the oscillators are turning down in support of this.

 

 

 

The first waves down in a new bear market are underway, and as this develops it will activate a developing H&S pattern which will propel the index down another 3000 points, being the height of the head projected down below the neckline. This will easily penetrate the support base (solid red) and drop the index down towards 200-Wema.

 

 

 

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