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Midweek Market 31 Jan 2019

Jan 31st, 2019 No comments

Executive summary

The counter-trend rallies in world equity markets continue for the time being, energised somewhat in the US by the dovish US Fed rate decision and commentary yesterday. Market interpretation is ‘dovish’ with, for example, a Goldman Sachs report forecasting the likelihood of a rate hike in Mar 2019 at less than 5%. This is potentially a decisive moment which could possibly be a reversal in US Fed policy from ‘tightening’ back to ‘easing’, especially if US markets continue to collapse in the coming period. It is this potential that caused the gold market to ratchet up which is dealt with in more detail later in this commentary.

The US$ index moved down decisively, and this could be the start of a more significant decline in the next period, with a similar (but in reverse) ramping up in the gold market together with the whole precious metals complex including all the ancillary elements (namely the miners). If this is in fact the end of the US Fed rate hike cycle it will provide the structural mechanism for the start of the long-awaited bull market in gold. Despite any delay in the final recognition of this structural change, the gold price is nevertheless likely to enjoy a stronger 2019 with final acceptance of the eventual bottom in the gold market before the start of the next gold bull market is actually confirmed.

Four weeks ago we looked at the arrival of the new credit crisis and how it is likely to wreak financial havoc as it bolsters the gold market, and today we look at another 10 (ten) critical impacts that are likely to drive the gold price in 2019.

US$
Analysis of the US$ will be done in reverse this week, looking first at the longer term overall picture followed by the shorter term elements.
The long term 40 year chart illustrates a clear 16 year cycle pattern during which the dollar enjoys peaks and suffers troughs. This is roughly the opposite of what happens to the gold price in dollars. Also, the sequential peaks and troughs are lower in value than the preceding peaks and troughs, and based on this it can be seen that the US$ is now in a down trend which is likely to end in 2024 at a value in the low $60s. This is also irrespective of short term gyrations in value.
A drop below roughly $88 will confirm the dollar bear market, irrespective of exactly when that occurs.

The shorter term 3 year weekly chart illustrates dollar value rolling over. The chart structure is supported by Elliott Wave analysis indicating the down phase starting at (C) with the i (circle) and ii (circle) in place, with the longer and stronger iii(circle) to follow which will drop dollar value down to a new low below C (B).
Both oscillators are dropping in support.

The 12 month chart indicates the resumption in dollar decline, propelled by the multi-month negative divergence. Both oscillators are dropping in support.

The very short term 3 month chart illustrates the strong decline down to 200-Dema after the dovish US Fed announcement yesterday. This is also likely to continue down as the extreme tensions between the US$ (higher rate) and mainly the Euro and Jap Yen (lower rates) start to unwind.
Both oscillators are dropping in support of this, together with other corroborating data such as still extremely positive investor sentiment and bearish Cots data.

Investor optimism remains strong together with negative Cots data which both indicate more dollar weakness. The continued wide dilation in the graphic (red circles) supports dollar weakness ahead.

Japanese Yen
The US$ / Jap Yen currency pair value is rolling over to Yen strength within the continued US$ bear flag and Yen bull flag. This, technically, normally precedes a drop in dollar value and an increase in the Yen. The chart structure therefore supports a yet stronger Yen, weaker dollar, and higher gold price, together with oscillator support.

US Treasuries
The benchmark US 10 year Treasury yield has changed trend from down to up, which is in line with higher yields and a continued collapse in US bond prices. From a Elliott Wave point of view, the 2C(circle)(v) yield bottom has developed a new (i)-(ii) with all options pointing to yet higher yields at (iii).

Gold
Continuing on with our series of examining what ‘other’ factors are likely to drive the gold price in 2019, today we look at 10 (ten) critical impacts, divided into 2 broad groups namely: Economic developments, and factors directly affecting gold. Once again, this is adapted mostly from original thoughts by Alasdair Macleod at GOLDMONEY.

Economic developments

1 It is late in the credit cycle with an end to the expansion phase in sight. Therefore, government deficits are going to increase, due to lower tax receipts and higher welfare commitments as economic activity contracts. This has to be financed by increased monetary inflation, which is already evident.
2 International trade has slowed sharply, as can be seen in China’s reducing demand, and the US induced tariff wars could end up having a catastrophic effect on international trade, in an already clear signal that the global economy is in trouble.
3 Contracting world economies due to increasing trade and budget deficits will need to be financed increasingly by increased savings rates, which is probably impossible, or there has to be a contraction in bank credit. This is all expected to propel world economies into a slump.
4 This will provoke central banks into yet more QE.
5 There is an increasing profound effect on central bank US$ reserves as more are turning their backs on the dollar for trade settlement, notably main economies in Asia (China, Russia, India and Iran), but elsewhere as well. Russia has already replaced all US$ reserves with gold.
Foreign selling of dollars and dollar assets (US Treasuries) will increase massively as the dollar and US securities markets begin to fall in earnest.

Factors directly effecting Gold

6 Geopolitics – Asia, and Russia especially, have swapped US$ reserves for gold. Russia is the world’s largest energy exporter, and therefore will continue to have dollars to sell for gold. China is the world’s biggest oil importer and now pays in Yuan convertible into gold. You can add other nations to that list (eg Hungary and Poland, and many more) who are accumulating gold reserves. It is obvious what Asia thinks and they know gold is America’s weak point.
7 Gold flourishes on inflation, and US price inflation has been badly misrepresented by published CPI which has actually been averaging closer to about 8% annually since gold peaked in August 2011. Since then the purchasing power of the dollar has declined by about 43%, and inflation is forecast to accelerate into the future.
8 Monetary inflation after the 2008 global financial crisis has not been fully absorbed, and is still over $5tn above the pre-crisis long-term expansion trend. The US Fed is unable to bring it down, and is rather likely to increase these levels to save the government from having to borrow at market rates as the recession bites.
9 These are exactly the conditions faced by the German government between 1918 and 1923, although the US has a stronger tax base than Germany had at that time and therefore the rate of monetary expansion relative to the size of the economy will be less. The likely response by the Fed will be the same however: Print money to fund government deficits with the result of wealth transferred from the productive economy to be destroyed in government spending. So, the US is on the slippery slope to currency destruction and it will take much more political courage to address the inflation issue than the current political class appear to be capable of.
10 Gold is massively under-owned in the west.

Circumstances such as these will bolster gold and the whole precious metals complex during most of 2019.

Our normal gold analysis follows.

Gold
As with the US$, analysis of gold will be done in reverse this week, looking first at the longer term overall picture followed by the shorter term elements.
The 5 year chart illustrates the gold 6 month cycle lows, down to the Dec 2015 low, and up to the present moment. It can be seen that the next 6 month cycle low is due very soon, and by definition will drag the gold price down accordingly. This of course may be protracted and distorted depending on US$ behaviour.
Note also how volumes are trending down and this will have a negative effect on price.

The shorter term 3 year chart illustrates how the gold price has powered up into resistance by the weaker dollar. Although gold is likely to enjoy a strong 2019 the current rally is also likely to end somewhere in the resistance zone (blue) before correcting down. It may be that the rally does continue a while longer, but it will correct at some stage before resuming a stronger advance towards the $1400-$1450 region later in the year.
Gold has prepared a multi-year basing pattern which is likely to propel the gold price higher, but serious price advances will only occur once the US Fed has ended the rate hike cycle. This is also all linked to the declining US bond and equity markets, which will be the driver of an end to the rate hike cycle.

After 2019 gold is likely to decline to lower lows and an eventual bottom before the start of the next gold bull market.

The 12 month chart illustrates the strong gold breakout up into resistance which is propelled by the multi-month positive divergence. This positive divergence is also evident on a number of ancillary charts later in the document, which collectively supports higher gold prices despite a potential correction down.

The gold short term 3 month chart has a breakout to a new high, although ending on a threatening reversal candle. The oscillators are mixed adding to the indecision displayed by the closing candle.

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

South African Rand
The South African Rand has strengthened on the weak dollar in a breakout through 2 key strength levels, dropping down into support to close at $13.32. This is all propelled by the dovish US Fed pronouncement yesterday which will probably sustain yet lower dollar values. The process has moved the oscillators to the bottom of their ranges which presupposes the Rand will not strengthen further by much.
Fundamentally, the struggle continues between expected dollar weakness (stronger Rand) and expected South African political and economic trauma (weaker Rand), especially with elections looming and ever-present potential downgrades because of structurally weak conditions at ESKOM, et al.

HUI / Gold Ratio
The ratio has moved up strongly as US miners start outperforming gold. The next key breakout levels are near as the ratio is poised to move up further into resistance. The oscillators are rising with further increases imminent.

HUI Index
The HUI index itself has a breakout as it moves closer to resistance, propelled by multi-month positive divergence. The HUI is more positive than the HUI / Gold ratio, in a chart structure that has a positive bias, which promises better times ahead.
The oscillators are rising in support.

GDX US miners ETF
The GDX chart is similar to the HUI Index chart except it is more positive in a strong breakout propelled by the multi-month positive divergence. The oscillators are mixed though with the Slow Stochastic turning at the top of its range.

DUST US Gold Miners Bear Index
The Dust chart has similar commentary, except in the opposite direction being a US miners bear index. There is a breakout as the index powers down through support levels with a correction likely soon.
The Slow Stochastic is turning up at the bottom of its range in support of a correction.

Silver
The silver 5 year weekly chart illustrates the overall long term picture of a multi-year base at about $14 with a solid mid-range resistance zone between $16.00 and $17.50, which the silver price is nudging from the bottom. Together with penetration of the diagonal resistance it would appear that a break through 200-Wema will provide a major multi-year breakout opportunity at a price above $17.00.

The shorter term 12 month silver chart illustrates a breakout as the multi-month positive divergence kicks in. Momentum plus additional energy in the oscillators indicates some further price increase possible before a correction sets in, soon.

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 continuing.

Gold : Silver Ratio
Silver is beginning to outperform gold as a down-sloping trendline develops together with a H&S pattern which would complete and activate at a ratio of about 81. The ratio closed at 82.60 with both oscillators relatively positive.

General Equities
The Dow Jones countertrend rally of 5 weeks gained some added energy from the dovish US Fed pronouncement yesterday, and in accordance with Elliott Wave analysis the wave ii(circle) has therefore still not completed. A completed wave ii(circle) leads to the longer and stronger wave iii(circle) which is a more powerful wave 3 of 3 which will propel strong meaningful surges to the downside in the Dow, taking price well below Dec 2018 lows.

A large bear flag is evident in the Dow 12 months chart and once this activates it will propel the Dow down by the height of the flag. This in turn will activate the trigger point level of 22638 at the Jan 2019 low, which in turn will be assisted by the added weight of the major negative divergence which is still active. The next decline wave will take prices below the Dec 2018 lows.

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Midweek Market 24 Jan 2019

Jan 24th, 2019 No comments

Executive summary

The counter-trend rally in world equity markets has lost momentum and is in its final stages, still led by the US and Canada, and bond markets have resumed their decline with yields starting to tick up. Both equity and bond markets are likely to soon move in the same direction, and both are likely to see strong declines through 2019, in line with rising interest rates and the variety of different factors negatively impacting the world financial and monetary system.

The US$ index is in a multi-month decline phase, just as the similar (but in reverse) gold multi-month rally continues to gain momentum. Both the dollar and gold have been correcting during this past week but are expected to resume their primary paths soon. In accordance with Elliott Wave there are elements in the dollar wave structure that indicate the dollar rally is not quite complete, and therefore neither is the gold correction. The 2 week correction has seen silver correct more than gold and consequently has begun underperforming gold with negative impacts on the whole complex, principally on miners. This will persist until the corrections are all complete and the rallies resume their natural path.

Structurally, the gold market is not likely to begin its long-awaited bull market until the US Fed ends the rate hike cycle, but nevertheless it has prepared a multi-year basing pattern which is likely to propel the gold price higher in the meantime. This is all linked to the declining US bond and equity markets, which will be the driver of an end to the rate hike cycle. Until final recognition of that the gold price is likely to enjoy a stronger 2019 with a decline phase after that to an eventual bottom and the beginning of the next gold bull market.

US$
The US$ index is turning down, after correcting, in a multi-month decline phase. In accordance with Elliott Wave theory the rally can be interpreted as a 5 wave advance in which case the rally is not complete (illustrated on the chart as i – v). Therefore it may be that the decline is further delayed, but penetration through the low point would nullify this. The oscillators appear to be turning down which supports continued dollar decline, as does other corroborating data such as still extremely positive investor sentiment and bearish Cots data.

Investor optimism remains strong together with negative Cots data which both indicate more dollar weakness. The continued wide dilation in the graphic (red circles) supports dollar weakness ahead.

The 12 month chart indicates the dollar turning down at resistance and together with the negative divergence between price and MACD suggests a probable continuation of the stair step decline soon. The Slow Stochastic is nearing the top of its range and is beginning to turn down.

The longer term 3 year weekly chart illustrates dollar value rolling over and this is supported by Elliott Wave annotation indicating a chart structure suggests more bearishness ahead with completion of (A)(B)(C) and a new i – ii (circle), both indicating further declines.

Japanese Yen
The Yen is correcting up and the dollar down as the currency pair continue creating a US$ bear flag and Yen bull flag. Technically this would normally precede a drop in dollar value and an increase in the Yen. The chart structure therefore supports a yet stronger Yen, weaker dollar, and higher gold price.

US Treasuries
The benchmark US 10 year Treasury yield has changed trend from down to up, which is in line with higher yields and a continued collapse in US bond prices. From a Elliott Wave point of view, the 2C(circle)(v) yield bottom has developed a new (i)-(ii) with all options pointing to yet higher yields at (iii).

Gold
Gold is completing a price correction during the dollar correction before resuming its multi-month rally. The oscillators are dropping which supports further declines to come before the advance resumes.

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

The 12 month chart illustrates the decisive bullish Gold Cross plus the positive divergence between price and MACD which indicates higher gold prices to come. This positive divergence is also evident on a number of ancillary charts later in the document, which collectively supports higher gold prices despite the lower prices at present.

The longer term weekly 3 year chart illustrates the destination region of the gold multi-month rally being the resistance zone roughly between $1300 and $1370. Gold is likely to enjoy a stronger 2019 with the price once again advancing higher towards the $1400-$1450 region.
Structurally, the gold market is not likely to begin its long-awaited bull market until the US Fed ends the rate hike cycle, but nevertheless it has prepared a multi-year basing pattern which is likely to propel the gold price higher in the meantime. This is all linked to the declining US bond and equity markets, which will be the driver of an end to the rate hike cycle.

After 2019 gold is likely to decline to lower lows and an eventual bottom before the start of the next gold bull market.

South African Rand
The South African Rand has weakened slightly from overbought levels but is likely to start strengthening again once the dollar starts to weaken. But the oscillators are turning up in support of a weaker Rand.
Fundamentally, the struggle continues between expected dollar weakness (stronger Rand) and expected South African political and economic trauma (weaker Rand), especially with elections looming and ever-present potential downgrades because of structurally weak conditions at ESKOM, et al.
Key strength and weakness levels remain at $13.53 and $14.70 respectively.

HUI / Gold Ratio
The ratio has moved sideways with a slightly weaker bias during this period of correction in the dollar and gold. The oscillators are mixed and the period of ‘limbo’ might continue for a short while.

HUI Index
The HUI index itself, although negative, is more positive than the HUI / Gold ratio, as it bounces off support: There is a breakout and break-back through the key level of 150.90. The chart has a positive bias, and of note is the positive divergence between price and MACD (as on the gold chart). This promises better times ahead.
Although the oscillators are mixed the Slow Stochastic has bottomed in support of a potential price increase.

GDX US miners ETF
The GDX chart is similar to the HUI Index chart except it is slightly more positive; also bouncing off support, and also with positive divergence. There is also a breakout and break-back through the key level of 20.46.

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 maintained although with a turn-up in the tail during the corrections, and this has stalled at resistance.
The Slow Stochastic is topping out indicating a potential reversal.

Silver
The Silver correction has been more severe than gold and silver’s underperformance has deepened. But silver also has positive divergence between price and MACD which indicates higher prices to come. The oscillators are dropping but the Slow Stochastic has bottomed and appears to be turning.

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 continuing.

Gold : Silver Ratio
Silver’s underperforms of gold has deepened during this time of metal corrections, and the ratio has increased to close at 83.49. Although the oscillators are mixed the Slow Stochastic has reached the top of its range and appears to be turning down.

General Equities
The Elliott Wave analysis of the Dow short term chart illustrates the potential for further declines. The counter-trend rally is losing momentum and the Dow should decline in the days and weeks ahead, once wave ii (circle) is complete. Wave ii leads to the longer and stronger wave iii which will take the Dow down well below Dec 2018 lows.

This is a wave 3 of 3 which will be even more powerful, and when activated will propel strong meaningful surges to the downside.

A large bear flag is evident in the Dow 12 months chart and once this activates it will propel the Dow down by the height of the flag. This in turn will activate the trigger point level of 22638 at the Jan 2019 low, which in turn will be assisted by the added weight of the major negative divergence which is still active. The next decline wave will take prices below the Dec 2018 lows.

The earlier H&S pattern has been nullified with the extent of the counter-trend rally rising above the neckline. Also, the emotional wheel has not quite begun to turn yet and there is still no fear in the market. The mindset of ‘holding on’ and ‘buying the dips’ still applies.

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Midweek Market 17 Jan 2019

Jan 17th, 2019 No comments

Executive summary

World markets are in a counter-trend rally which, using the Dow Jones Industrial Average as a proxy for equities generally, is now exhibiting muted tendencies compatible with loss of upside momentum. They remain poised in the early stages of a secular bear market which is soon to start more meaningful surges to the downside, as equities begin to assume the more correct behaviour of the US bond market which has been declining since mid-2016 in sympathy with the variety of different factors negatively impacting the world financial and monetary system.

The US bond market has now changed trend, ending a 2 month long counter-trend rally, with yields beginning to increase once again as US bonds resume their long term collapse. This will now begin to impact the rest of the world, principally the other remaining nations in the G7, as the interest rate differentials cannot continue to diverge.

The US$ index has begun accelerating down into a multi-month decline phase, just as the similar (but in reverse) gold multi-month rally continues to gain momentum. Both the dollar and gold have been correcting during this past week but are expected to resume their primary paths soon. The correction has seen silver correct more than gold and consequently has begun underperforming gold, which is expected to reverse as the rallies resume their natural path.

US$
The US$ index correction is evident in the chart. The oscillators are rising which might support a short delay before the main trend down resumes. The chart structure, together with corroborating data such as still extremely positive investor sentiment and bearish Cots data, indicates a continued multi-month dollar decline in the period ahead.

Investor optimism remains strong together with negative Cots data which both indicate more dollar weakness. The continued wide dilation in the graphic (red circles) supports dollar weakness ahead.

The negative divergence between price and MACD illustrated in the 12 month chart is one of the primary drivers of dollar weakness. The correction up has the dollar rally stopping at the start of the resistance zone (blue), and the stair step nature of the dollar decline now anticipates the next drop down towards the support zone (red).

The longer term 3 year weekly chart illustrates dollar value rolling over into decline towards support starting at $94.50, with the oscillators declining in support. The chart structure suggests more bearishness ahead.

Japanese Yen
The Yen corrected this week in line with the dollar rally. It has created a bull flag which suggests further declines down into the support zone as the dollar continues to weaken. The chart structure supports yet stronger Yen, weaker dollar, and higher gold price.

US Treasuries
The benchmark US 10 year Treasury yield has changed trend from down to up, which is in line with higher yields and a continued collapse in US bond prices. From a Elliott Wave point of view, (i) will decline to (ii), through abc (black circle), and thereafter increase to the longer and stronger (iii) as yield increases gather momentum.

The longer term weekly 5 year chart illustrates the end of the US bond bull market (blue arrow) and the start of the US bond bear market (red arrow), with the turning point at the yield bottom (1.3%) in Jul 2016.
It also illustrates the multi head and shoulders penetrations (small black circles) which are all likely to propel yields up by the depth of each head. The short term projection for the US 10 year yield is therefore in the region of 5%, as the bear market gains traction.

Gold
The Gold multi-month rally continues to gain momentum as price consolidates during the dollar correction. During the dollar rally the gold price actually only moved sideways, and not down, which illustrates inherent strength in gold. The bullish Gold Cross is also now decisive, which portends higher prices to come. The oscillators are also reasonable supportive in a sideways drifting mode.

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

The 12 month chart illustrates the recent resistance penetrations as well as the decisive bullish Gold Cross. But of note is the positive divergence between price and MACD which indicates higher gold prices to come. This positive divergence is also evident on a number of ancillary charts later in the document, which collectively supports higher gold prices.

South African Rand
The South African Rand has penetrated the diagonal support line as well as a breakout through the first key strength level at $13.84. But, it is now reaching overbought levels, judging by the oscillators.
The struggle continues between expected dollar weakness (stronger Rand) and expected South African political and economic trauma (weaker Rand), especially with elections looming and ever-present potential downgrades because of structurally weak conditions at ESKOM, et al.
Key strength and weakness levels remain at $13.53 and $14.70 respectively.

HUI / Gold Ratio
The ratio declines as US miners underperform gold during this time of corrections. The fact that miners are not out-pacing gold is negative for the whole complex, and the oscillators are dropping fast.

HUI Index
The HUI index itself, although negative, is more positive than the HUI / Gold ratio, as it bounces off support. There is a more positive bias to the chart, and of note is the positive divergence between price and MACD (as on the gold chart). This promises better times ahead.

GDX US miners ETF
The GDX chart is similar to the HUI Index chart except it is even more positive; also bouncing off support, and also with positive divergence.

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 maintained although with a turn-up in the tail during the corrections.

Silver
Silver begins to underperform gold during this correction period, but it also has positive divergence between price and MACD which promises higher prices to come. The oscillators are topping out threateningly.

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 has started underperforming gold during this time of metal corrections, declining more than gold. The ratio has therefore increased slightly to 82.73 with the oscillators turning up.

General Equities
The Elliott Wave analysis of the Dow short term chart illustrates the potential for further declines. Strong declines are likely from here to take prices below the Dec 2018 lows, and beyond.

• The (1)(2) is in place;
• The 12 is in place;
• The i(circle) – ii(circle) is in place;

From this point the longer and stronger iii(circle) of 3 of (3), or the milder 5 of 3, is about to happen once the counter-trend rally is complete. This will take prices down in a severe and relentless downturn.

The counter-trend rally may be complete because it is exhibiting muted tendencies compatible with loss of upside momentum. The opposite may still be true for a short while longer. However, the market is soon to start more meaningful surges to the downside.

The major divergence in the Dow is still evident in the 12 months chart and this will trigger as the bearish rising wedge pattern breaks. The trigger level is the Jan 2019 low at 22638, and this will provide ignition to the next decline wave to take prices below the Dec 2018 lows. The extended rising wedge in the counter-trend rally (or dead cat bounce) is due to the continued total lack of fear in the minds of still extremely optimistic investors . The emotional wheel has not quite begun to turn yet and the mindset of ‘holding on’ and ‘buying the dips’ still applies.

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).

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Midweek Market 10 Jan 2019

Jan 10th, 2019 No comments

Executive summary

World markets remain poised in a secular bear market although still enjoying the current counter-trend rally from the lows achieved during 2018. But there is still a singular lack of fear, generated by the popular media and others, in the belief that equities are still in a long term bull market. In fact, using the Dow Jones Industrial Average as a proxy for US equities (and indeed world equities) it can be seen that the current counter-trend rally includes 8 higher closes out of the last 10, illustrating another ‘buying panic’ and the increased investor appetite for risk. The variety of different impact factors propelling the index to yet much lower levels may have secured an end to the current rally, which could of course also continue higher for a while longer.

One of the more powerful determinants is that the US bond market counter-trend rally has ended after 2 full months with the long term bear market resuming it’s collapse.

The US$ index has begun accelerating down into a multi-month decline phase, just as the similar (but in reverse) gold multi-month rally continues to gain momentum. The gold rally has gathered pace from silver which is now outperforming gold, a usually strong propellant, although both are consolidating into a micro correction. The Yen has also accelerated gains against the dollar, which augers well for further gold gains.

US$
The US$ index is rolling over and breaking to the downside, well into the earlier support zone (red). The chart structure, together with corroborating data such as still extremely positive investor sentiment and bearish Cots data, indicates a continued multi-month dollar decline in the period ahead. The oscillators are both declining in support, although towards the bottom of their range.

Investor optimism remains strong together with negative Cots data which both indicate more dollar weakness. The continued wide dilation in the graphic (red circles) supports dollar weakness ahead.

The negative divergence between price and MACD illustrated in the 12 month chart is now realising the net effect of reduced dollar value. The effect of this price movement has created new support and resistance zones with the potential of drop values further down into the new support zone well below 200-Dema, with both oscillators declining in support.

The longer term 3 year weekly chart illustrates dollar value rolling over into decline towards support starting at $94.50, with the oscillators declining in support. The chart structure suggests more bearishness ahead.

Japanese Yen
The Yen continued to strengthen this week, pushing fleetingly right down to the bottom of the support zone. The chart structure supports yet stronger Yen, weaker dollar, and higher gold price.

US Treasuries
Using the benchmark US 10 year Treasury as a proxy for the US bond market, it can be seen that the 2 to 3 month counter-trend rally has terminated with the US bond market now likely to resume it’s long term collapse. In Elliott Wave terminology:
• The 5 wave decline (i)-(v) has completed;
• The a(circle) to c(circle) has completed;
• The 1-2 has completed;
confirming that yield has bottomed and setting up the data for resumption of the longer and stronger wave 3 yield increases in a resumption of the long term bond market collapse.
Both oscillators have bottomed and are rising in support.

US Yield Curve
The US yield curve continues to trend lower towards 1 and below, when it is said to invert as it registers a US recession (probably soon in 2019). The red zone indicates the timing of the US Treasury counter-trend rally which has now ended. This is logically also likely to now accelerate the decline as the US bond market resumes it’s collapse. The last inversion occurred in 2006 – 2007 just before the Global Financial Crisis.

Gold
The Gold multi-month rally continues to gain momentum as it completes a micro-correction in a consolidation around $1290. 50-Dema is crossing 200-Dema in a bullish ‘Gold Cross’ which usually portends higher prices. The oscillators are also reasonable supportive.

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

The longer term 3 year chart illustrates the gold multi-month rally gaining momentum as it increases towards the next key breakout levels at $1306 and $1315. It is also evident on a weekly basis that 50-Wema has crossed 200-Wema to create a bullish ‘Gold Cross’.
Longer term resistance in the gold market is located at a level $1375, and that will provide the next real test. The chart structure suggests that a major correction is likely at some stage during penetration of the resistance zone (blue), and it will be interesting to observe how gold traverses the region between $1300 and $1375.

South African Rand
The South African Rand broke up through the reducing wedge pattern a number of weeks ago, and has held onto the levels above since. However, it is now positioned exactly on the top line of the wedge at $13.85, and the struggle continues between expected dollar weakness (stronger Rand) and expected South African political and economic trauma (weaker Rand). Technically the Rand should continue to strengthen and fundamentally it should continue to weaken.
Key strength and weakness levels remain at $13.85 and $14.70 respectively. Both oscillators are dropping, supporting further Rand strength, although the Slow Stochastic is at the bottom if it’s range, suggesting Rand weakness.

HUI / Gold Ratio
The ratio continues to drift sideways, reflecting US miners keeping pace with the gold price in it’s micro-consolidation phase after recent gains. The chart has a mildly positive bias, but the fact that miners are not out-pacing gold is negative for the whole complex. The next key breakout level remains at 0.1291.

HUI Index
The HUI index itself is more positive than the HUI / Gold ratio, with the miners not having to compete against the gold price. The positive bias gains momentum despite the break-backs, and the next key breakout levels remain close at hand. The oscillators are drifting in similar fashion.

GDX US miners ETF
The GDX chart is similar to the HUI Index chart except it is even more positive, in a breakout through it’s nearest key level at 21.15. 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 break-backs, and the next key breakout level is close at hand at 21.50. The oscillators are bottoming indicating potential chart reversals, but it could also be said they are drifting sideways as gold completes it’s micro-consolidation.

Silver
Silver’s recent breakouts have boosted momentum, and silver is now outperforming gold which is positive for the whole complex. There is a breakout at $15.71 with the next key level very close at $15.82. Like gold, silver is also completing a micro-consolidation, but the oscillators look like topping out threateningly.

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 continues to outperform gold, which is positive for the whole precious metals complex. But the ratio is in micro-consolidation mode mimicking metals behaviour, and therefore has not moved much this week, deteriorating very slightly to close at 82.11. The oscillators have bottomed and are turning up in denial.

General Equities
The Elliott Wave analysis of the Dow short term chart illustrates the potential for further declines. Strong declines are likely from here to take prices below the Dec 2018 lows, and beyond.

• The (1)- (2) is in place;
• The 1-2 is in place;
• The i(circle) – ii(circle) is in place;

From this point the longer and stronger iii(circle) of 3 of (3), or the milder 5 of 3, is about to happen once the counter-trend rally is complete. This will take prices down in a severe and relentless downturn.

The major divergence in the Dow is still evident in the 12 months chart and this will trigger as the bearish rising wedge pattern breaks. The trigger level is the Jan 2019 low at 22638, and this will provide ignition to the next decline wave to take prices below the Dec 2018 lows. The extended rising wedge in the counter-trend rally (or dead cat bounce) is due to the continued total lack of fear in the minds of still extremely optimistic investors . The emotional wheel has not quite begun to turn yet and the mindset of ‘holding on’ and ‘buying the dips’ still applies.

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).

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Midweek Market 3 Jan 2019

Jan 3rd, 2019 No comments

Executive summary

World markets remain poised in a secular bear market after a recent counter-trend rally from the lows achieved during Dec 2018. Many more commentaries are now suggesting markets are likely to collapse in 2019 for good sound reasons, but there is still a singular lack of fear generated by the popular media and others with the general approach to hold on and even buy the dips.

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 has gathered pace from silver which is now outperforming gold, a usually strong propellant. The Yen has also now strengthened against the dollar, but all (Dollar, Yen, gold, and silver) are due for a correction before the main trend continues again.

Two weeks ago we examined what ‘other’ factors are likely to drive the gold price in 2019, and today we look at the arrival of the new credit crisis which is likely to wreak financial havoc as it bolsters gold and the whole precious metals complex.

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 with a negative breakout earlier this week and a breakback into the flag yesterday. The chart structure, together with corroborating data such as still extremely positive investor sentiment and bearish Cots data, indicates a continued multi-month dollar decline in the period ahead. The oscillators though are dithering in denial, suggesting more dollar strength first.

Investor optimism remains strong together with negative Cots data which both indicate more dollar weakness. The continued wide dilation in the graphic (red circles) supports dollar weakness ahead.

The negative divergence between price and MACD illustrated in the 12 month chart has still got to work it’s way through the system as a propellant for dollar weakness. There may well be some dollar strength first, but the divergence is likely to drop dollar value well below 200-Dema (probably towards $93.80), despite the oscillators dropping towards the bottom of their range.

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

Japanese Yen
The Yen strengthened strongly against the dollar this week, reaching a level last achieved 7 months ago. This, supports the stronger gold price. Although, the Yen, dollar and gold may well correct slightly soon before continuing the main trend.

US Treasuries
The US bond market collapse enjoyed a 3 month reprieve in a counter-trend rally during Oct-Dec 2018. This rally has seen the yield on the US Treasury 10 year note decline from 3.2% down to 2.66% which in Elliott Wave terms completes the 5 wave decline ((i) to (v)) from b (circle) to c (circle). This should now resume the main trend in a continued US bond market collapse as yields start rising again.
Both oscillators are bottoming in support of this.

Gold
Continuing on from our series of 2 weeks ago, examining what ‘other’ factors are likely to drive the gold price in 2019, today we look at the arrival of the new credit crisis. This is likely to wreak financial and monetary havoc, and in the process bolster gold and the whole precious metals complex. This is adapted mostly from original thoughts by Alasdair Macleod at GOLDMONEY.

The New Credit Crisis

Background

Equity markets are finally following the US bond market into a long term bear market as the onset of the new credit crisis is triggered. This was due anytime between the end of 2018 and mid-2019, and the crisis timing is right on schedule with seizure of the US corporate bond market signalling the crisis arrival: Seizure in the commercial bond market has manifested in withdrawal of bank lending for working capital purposes. It is likely to unfold into something more ferocious during 2019, and now is the time to consider what it might all develop into. As with most things economic nothing is exact, and therefore we need to support conclusions from known basics.

Deteriorating circumstances and the US Federal Reserve

In the US the rapidly falling yield curve is a warning of encroaching recession which, together with declining equities, is persuading the US Federal Reserve to soften monetary policy. However, there is some slight respite from US Treasuries in a recent counter-trend rally due to temporarily reduced inflation pressure because of the collapsing oil price. But, the US Fed will have to continue hiking rates to counter continued price inflation due to Trump’s earlier monetary expansion, some oil price recovery, and increasing consumer prices from escalating tariff wars. All this aggravated by withdrawal of bank lending for working capital purposes. Consumer confidence will decline as the US CPI continues to rise into 2019 and the stock market continues to crash with unemployment starting to rise sharply. This will drain liquidity from the financial markets but inflation will remain stubbornly high. This is the natural trigger for lower bond prices as the bond market resumes it’s collapse in earnest.

Encroaching Recession and devaluing US Dollar

The US enters a severe recession, similar to 1930-33, except that then the US$ was partly gold backed whilst now it is entirely fiat and de-linked from gold convertibility. Foreign owned dollars are sold because of reduced investor confidence in future purchasing power which increases the US deficit. One major difference is that US banks are better capitalised now than they were in 2007 and consequently will act more promptly and decisively to protect their capital by calling in loans which will drive the non-financial economy into a slump more rapidly. This of course will be discouraged by the Fed, seeking to avert deepening gloom and depression.

Rising US Inflation and the Debt Trap

Rising inflation will restrict the Fed’s ability to respond positively as only rate hikes can combat inflation. This debt trap will ensnare the US from which the line of least resistance will be accelerating inflation forcing the Fed to buy US Treasuries under cover of monetary stimulation. The truth behind this forced resumption of QE will be to suppress borrowing costs as the US budget deficit continues to escalate to US$1.5 trillion and beyond. This will announce the arrival of severe ‘stagflation’ economists have been warning against for some time now.
Central bankers who believe in the teaching of John Maynard Keynes fail to understand the seeming contradiction of an economy in recession suffering escalating price inflation at the same time. This is, however, the condition of all monetary inflations and hyperinflations suffered by economies with fiat currencies (un-backed by gold).

External factors create Major Divergence

This scenario is the likely outcome of the developing credit crisis in the US if it wasn’t magnified by external factors. The snag is US monetary policy has long been coordinated with the monetary policies of other major central banks through forums such as the Bank for International Settlements, G20 and G7 meetings.
The surprise election of Trump upset this status quo with his untimely budget stimulus late in the credit cycle and the havoc he wreaks in international trade. The result is a major divergence between, particularly, the Bank of Japan and the European Central Bank. Therefore, unlike before, Japan and the EU enter this crisis with negative interest rates against positive and increasing rates in the US, which creates enormous currency and banking tensions.
The EU is a financial and systemic time-bomb waiting to explode, because it is irretrievably bust. Problems such as Greece, Italy, or the impending rescue of Deutsche Bank are routinely patched over as the ECB and the EU are adept at dealing with issues of this sort. They are mostly brazened out, doing whatever is necessary: As Mario Draghi famously said, “Whatever it takes”.
The disparity between US policies and those of the EU and Japan will almost certainly lead to both the EU and Japan revising monetary policies. Only last month (Dec 2018), quantitative easing in the Eurozone ceased, and bond prices are likely to fall significantly without it. A rise in the ECB’s deposit rate from minus 0.4% will surely follow, and it is hard to see how a developing systemic crisis in the region can then be prevented.
Since the Lehman crisis in America, inflation has been mostly bottled up in the financial sector, while being statistically suppressed in the productive economy. That is now about to change, leading to excess deposits at the banks trying to escape the consequences of their deployment for mainly financial speculation. It will not provide a boost in consumption, because consumers are maxed out and unemployment is rising. It will simply undermine the purchasing power of all increasingly unwanted and un-backed fiat currencies as currency values start to devalue seriously.


Circumstances such as these will bolster gold and the whole precious metals complex which is likely to enjoy most of 2019.


Our normal gold analysis follows.

Gold continued to strengthen this week as the rally gains momentum. But it closed yesterday on a Doji candle (as it did last week, falsely) which reflects indecision and could signal the start of a period of correction. Markets do not move in straight lines and a counter-trend rally is probably now due, before the gold price resumes toward the region of $1300- $1350 at least.

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

The gold rally continues to break through key resistance levels as it gains momentum. A correction is now due before gold continues towards the main resistance zone between $1314 and $1370. The oscillators are still rising but close to the top of their range.

The longer term 3 year chart illustrates the gold multi-month rally gaining momentum as it increases towards the next key breakout level into resistance at $1314. Main resistance is at the multi-year neckline at $1375, which will prove to be powerful resistance.
The longer term picture for gold will probably include major gyrations if and when this level at $1375 is to be breached decisively. Many different commentators hold many different views as to gold’s longer term pathway. Elliott Wave, for example, hold that gold is enjoying a corrective advance that will still drop down towards the $1000 to $900 region, after gyrating up through $1375 towards the $1400 to $1450 region.
2019 will probably be a good year for gold, and once the minor gyrations are complete, perhaps down to $1000 or lower, gold is likely to then move up to much higher levels (eventually in multiples of many $1000 and higher).

South African Rand
The South African Rand broke up through the reducing wedge pattern a number of weeks ago, and has held onto the levels above the reducing wedge. The key strength and weakness levels remain at $13.53 and $14.70 respectively. The struggle continues between expected dollar weakness (strengthening the Rand) and South African political and economic weakness, especially during collapsing markets (weakening the Rand). Both oscillators are dropping, supporting further Rand strength.

HUI / Gold Ratio
The ratio continues to drift sideways, reflecting US miners keeping pace with gold gains. The chart has a mildly positive bias, but the fact that miners are not out-pacing gold is negative for the whole complex. The next key breakout level remains at 0.1291.

HUI Index
The HUI index itself is 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, but the oscillators are moving sideways.

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, and the next key breakout level is close at hand at 22.0. The oscillators are bottoming indicating potential chart reversals are possible.

Silver
Silver’s recent breakouts have boosted momentum, and silver is now outperforming gold which is positive for the whole complex. But a correction is due, with both oscillators overbought. The next key breakout levels are very close at $15.71 and $15.82.

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 outperforming gold, which is positive for the whole precious metals complex. The top is confirmed and the ratio is declining, closing at 82.06 which is the lowest in 12 weeks. Also, the oscillators are dropping in support, although they may be close to a reversal.

General Equities

The Elliott Wave analysis of the Dow short term chart illustrates the potential for further declines. Strong declines are likely from here to take prices below the Dec 2018 lows. If the decline is wave iii (circle) of 3 of (3), the Dow will collapse. If the decline is wave 5 of 3 it will be less severe although also below Dec lows.

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 counter-trend rally is 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).

The VIX has broken back (black circle) into the cluster (red circle) as a result of the counter-trend rally in the Dow. Consciousness on the New York stock exchange is still a singular lack of fear generated by the popular media and others with the general approach to hold on and even buy the dips.

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