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Midweek Market 28 Feb 2019

Feb 28th, 2019 No comments

Executive summary

The counter-trend rally in the US equity market is moving into its 10th week now and is beginning to finally lose some investor sentiment and momentum as it nears the end of its advance. Whilst most indicators are signalling a decline, including Elliott Wave, the wave structures are also indicating the potential for impulsive up waves and corrective down waves which are opposite in structure to those during a market decline. This is not confirmed yet, although once confirmed would indicate further advances before a market top is achieved. This is counter to recent thinking and would require a complete new wave count to establish new parameters. Fundamentally, the bearish evidence is overwhelming, and this would support non-confirmation of the above, and a continued market decline from the high achieved in Oct 2018.

The US$ continues to decline correctly in accordance with the technicals and fundamentals. However, incorrectly, gold is also declining after completing its rally and is now likely to correct down into a 6-month cycle low, before the next up cycle. The larger advance is still forecast for most of 2019. It is also possible that the dollar will increase sharply in accordance with an Elliott Wave alternative wave count which is not confirmed yet, and if activated, this would be in line with lower gold prices.

We remain in a critically important time, as many component parts in the composition of the world financial and monetary structure are poised to shift tectonically in the next period, perhaps as soon as a year or two.

US Dollar

The dollar continues to decline within a bearish reducing wedge formation, whilst the longer term trend towards weakness remains in place. This is in accordance with ultra long term charts as well as fundamentals which all point to a weaker dollar.

The 12 month chart illustrates the dollar turn down more prominently as it moves from resistance towards support, still propelled by negative divergence with the MACD. Both oscillators are dropping in support of this.

The short term 3 month chart illustrates the downward move after completing an Elliott Wave ABC pattern, together with oscillator support. However, there is an alternative Elliott Wave count which could activate, indicating a sharp increase into or above the resistance zone. This is counter to all the normal indicators, although it would also conform to a declining gold price which seems almost certain.

Japanese Yen

The US$ / Jap Yen currency pair continues rising in a $ bear flag and Yen bull flag. This reflects Yen weakness continuing despite the recent dollar weakness which is contradictory, but should in due course see Yen strength, dollar weakness, and higher gold price as and when there is a breakout from the flag. Until then, the confines of the flag remain in place with the added threat of a sharply higher dollar, as previously described.
The Slow Stochastic indicates a flag breakout sooner rather than later.

US Treasuries

The benchmark US 10 year Treasury yield is trending sideways against the Elliott Wave expectation of an increase as wave (iii) starts. The wave (iii) start is sluggish, caused mostly by the US Fed pause in its rate hike cycle which has thrown the market into believing the end of US quantitative tightening and the potential start to the next round of quantitative easing. The oscillators too are moving sideways, but with an upward bias in support.
The market is beginning to discount the next easing cycle as it stalls the bond market collapse and supports the rally in equities that started in late Dec 2018.

Gold

Gold is turning down into a 6-month cycle low, after completing its rally at $1347. The Slow Stochastic is turning down from the top of its in support of lower gold prices.

The 12 month chart illustrates gold turning down towards support from its completed rally. The higher support region is between $1304 and $1276, while lower support is at $1237. The gold price is still well above 200-Dema which is likely to provide additional support at $1276.
Both oscillators are dropping in support of lower gold prices.

The 3 month gold chart indicates gold about to penetrate diagonal support, which is highly likely. It also illustrates the likely support levels with $1276 getting additional support from 200-Dema.

South African Rand

The South African Rand continues to strengthen against the dollar within the reducing wedge formation, which might also act as a Rand bear flag. This reflects dollar weakness over this time line, but could be jolted into Rand weakness if the dollar rises sharply in accordance with the alternative Elliott Wave count.
Both oscillators are dropping in support of further Rand strength.
Political and economic fundamentals are not improving yet with Eskom and its financial and operational woes threatening, and much depends on Moodys rating on 29 March.

HUI / Gold Ratio

The ratio has broken back down from its peak in declining faster than the price of gold. It is now positioned at 200-Dema but is likely to get small support as it moves further into the support zone with both oscillators dropping.

HUI Index

The HUI index itself is more positive than the HUI / Gold ratio as it also breaks back down from its peak. It is still above 200-Dema but is likely to get small support as it moves further into the support zone with both oscillators dropping.

GDX US miners ETF

GDX is moving back towards the centre of its range-bound region with its decline this week to just below 200-Wema. 50-Wema (equivalent to 200 day moving average) is likely to provide additional support at the strong diagonal support line, which can hopefully hold the downward correction in the face of the Slow Stochastic turning down at the top of its range.

The GDX 12 month chart is similar to the HUI Index chart except it is yet more positive in its bias, and also with a break back down from its peak. together with a breakout from the bull flag. But both oscillators are at the top of their range and a correction down is imminent. It is still above 200-Dema but is likely to get small support as it moves further into the support zone with both oscillators dropping.

DUST US Gold Miners Bear Index

The Dust chart has similar commentary, except in the opposite direction being a US miners bear index. The chart is even more positive than GDX and also has a break back towards resistance which it is likely to penetrate. But 200-Dema is above the resistance zone and will likely add more resistance to prevent penetration through the zone.

Silver

The silver 3 year chart illustrates silver turning down after its rally completion, up towards resistance but without a breakout and still shy of 200-wema. Any correction down now will only get support from 50-wema (equivalent 200-dema) which is still above the support zone. This means silver has further to fall with support starting only at a level of $15.20, some 6% lower down.
Silver has had a brief period of outperforming gold recently, but overall still continues to underperform, which is one of the reasons precious metals are not likely to breakout during this rally, but only potentially during the next.

The silver 12 month chart illustrates the rally terminating on a small double top at the bottom of the resistance zone, plus 200-Dema at the first support level of$15.43. The oscillators are dropping in support of further price declines, and the next support level is at $14.95.

The 3 month chart illustrates that price is likely to decline with penetration of the diagonal support, followed by the support zone although 200-Dema is likely to add additional support at $15.43. Both oscillators are dropping in support of lower prices

Gold : Silver Ratio

Silver continued to underperform gold during the metals rally and will continue to do so during the correction down. The chart illustrates that despite developing micro-patterns the overall rising wedge pattern is dominant and continues to elevate the ratio. The development of the 3 micro-patterns will in time activate a lower ratio once the downward correction in metals is complete.
Eventual breakouts in these will assist in reducing ratio value and providing bullish support for precious metals, but activation will have to wait until the next upswing.

General Equities

The counter-trend rally in the US equity market is moving into its 10th week now and is beginning to finally lose some investor sentiment and momentum as it nears the end of its advance. Whilst most indicators are signalling a decline, including Elliott Wave, the wave structures are also indicating the potential for impulsive up waves and corrective down waves which are opposite in structure to those during a market decline. This is not confirmed yet, although once confirmed would indicate further advances before a market top is achieved. This is counter to recent thinking and would require a complete new wave count to establish new parameters. Fundamentally, the bearish evidence is overwhelming, and this would support non-confirmation of the above, and a continued market decline from the high achieved in Oct 2018.

A powerful bear flag has been created in the process, and when this activates via a breakout it will be one of the first trigger signals that the next decline is underway.

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Midweek Market 21 Feb 2019

Feb 21st, 2019 No comments

Executive summary

The counter-trend rally in the US equity market is moving into its 9th week now as it enjoys very high investor sentiment which usually appears near the end of a market advance. The current rally in the Dow has been stimulated again by the US Fed pause in its rate hike cycle which has thrown the market into believing the end of US quantitative tightening and the potential start to the next round of quantitative easing, caused largely by the threat of the world economic slowdown and threats of recession.

The market is beginning to discount the next easing cycle as it supports the rally in equities that started in late Dec 2018. US bonds are trending sideways against the Elliott Wave expectation of an increase in yield at the start of wave (iii) up.

The US$ has begun to turn down as it should in accord with the dovish US Fed utterances 2 weeks ago, and gold has advanced strongly. The price of gold has probably completed its rally towards the $1350 target level and is now likely to correct down into a 6-month cycle low, before the next up cycle. The larger advance is forecast for most of 2019.

But this remains a critically important time, as many component parts in the composition of the world financial and monetary structure are poised to shift tectonically in the next period, perhaps as soon as a year or two. To add credence to this statement we look at how currency values are threatened by the credit crisis: This, at the start of the gold market analysis later in the document.

US Dollar

The dollar turned down this week as it continues to advance towards resistance in a bearish reducing wedge formation, whilst the longer term trend towards weakness remains in place. The oscillators are rising which largely reflects the earlier rally while ultra long term charts, as well as fundamentals, all point to a weaker dollar.

The 12 month chart illustrates the dollar turn down more prominently as it fluctuates between support and resistance. The negative divergence will continue to support a weaker dollar going forward, and the oscillators agree.

The very short term 3 month chart illustrates the downward move after completing an Elliott Wave ABC pattern. The oscillators are both turning down which supports continued dollar weakness, but both oscillator wave structures also indicate an upward bias which could alternatively propel the dollar up which would also concur with a weaker gold price after its very strong rally.

Japanese Yen

The US$ / Jap Yen currency pair continues rising in a $ bear flag and Yen bull flag. This reflects Yen weakness continuing despite the recent dollar weakness which is contradictory, but should in due course see Yen strength and dollar weakness as and when there is a breakout from the flag. Until then, the confines of the flag will maintain a stronger dollar and weaker Yen (and weaker gold).
The oscillators indicate a flag breakout sooner rather than later.

US Treasuries

The benchmark US 10 year Treasury yield is trending sideways against the Elliott Wave expectation of an increase as wave (iii) starts. The wave (iii) start is sluggish, caused by the US Fed pause in its rate hike cycle which has thrown the market into believing the end of US quantitative tightening and the potential start to the next round of quantitative easing, caused largely by the threat of the world economic slowdown and threats of recession. The oscillators too are moving sideways.
The market is beginning to discount the next easing cycle as it stalls the bond market collapse and supports the rally in equities that started in late Dec 2018. This is the subject matter of the analysis at the start of the gold portion later in this document.

The US Treasury yield curve is an excellent indicator of potential recession. It is said to invert at 1 (one) and lower when the US 2 year yield rises above the US 10 year yield, which happens as the US moves into recession. The yield curve has been dropping since 2011 and has been getting perilously close to activation as it moves towards 1 (one).
But, as can be seen on the 12 month chart above, the ratio has been reducing less steeply since Aug 2018, and can almost be said to be levelling off despite much slower declines.
Will the US Fed stave off recession, and will the collapse in the US bond and equity markets be prevented? This is also the subject matter of the analysis at the start of the gold portion under the next heading in this document.

Gold
Continuing on with our series of examining factors that are likely to drive the gold price in 2019, today we look at how currency values are threatened by the credit crisis. Once again, this is adapted mostly from original thoughts by Alasdair Macleod at GOLDMONEY.

Currency Values Threatened by the Credit Crisis
What are the similarities between the current economic situation and that of 1929, and what is the threat to today’s un-backed currencies? There is the coincidence of trade protectionism at the top of the credit cycle, as well as the inflationary events that precede it. The main difference today being the modern macroeconomic delusions which hold that regulating inflation of money and credit will solve everything. Economic salvation is only possible by returning to monetary stability through credible gold exchange standards, and by discarding today’s macroeconomic theories.

Introduction
There is an assumption in economic circles that when the general level of prices change, it is always due to changes in supply and demand for goods and services. But actually, changes in the general level of prices are due to changes in the purchasing power of money, and not from supply and demand. This is a basic error in modern monetary theory (MMT), which revives the theory of money that permitted Bismarck’s inflationary pre-war armament financing and the subsequent collapse of the German currency in 1923. The divine right of the state to issue currency distracts from the inconvenient truth that purchasing power is not actually fixed as its quantity increases, but reduces in value all the way down to hyperinflation. The perpetuation of MMT unites inflationists in their drive to buy off the consequences of their disruptive actions with yet more monetary inflation as the credit cycle matures.
This analysis comparison is based on 1929 and now, but first we must remind ourselves of the depressing events that occurred then.

The 1930s experience
Until 1933, the American dollar was on a gold exchange standard, whereby members of the public could exchange their dollars for gold at the rate of $20.67 to the ounce. By then the great depression was well advanced, and prices of commodities and raw materials had fallen heavily, down between 30% and 60%. This led to the dollar’s devaluation to $35 per ounce of gold in January 1934, which by then was no longer available for public exchange. The dollar’s devaluation was an attempt to manage an economic outcome through price manipulation, but the reason for the collapse in prices was the dollar was tied to gold, and preference for gold increased compared with preference for products.
In effect, the issue was prices measured in gold through the medium of the dollar. Because, as noted above, when the general level of prices shift, it is always because the purchasing power of the money they are measured in changes. Therefore, measured by an index of raw material prices, gold’s purchasing power doubled between September 1929 and Spring 1933. By the time of the dollar’s devaluation ten months later, the index of raw materials had recovered to a level which indicated a new dollar-gold relationship of $35 to the ounce was roughly correct.
Today, there is no such relationship between the dollar and gold, as it was de-linked by Nixon in 1971. While the US Treasury holds gold reserves, they are not available for monetary exchange. Furthermore, it is the stated objective of monetary policy to maintain a rate of price inflation targeted at 2%. Therefore, if we repeat the 1929 Wall Street Crash then it is the purchasing power of gold that will rise, while that of the dollar will fall. This assumes the general price level can be controlled, which is never the case. And to the extent that other currencies use the dollar as their international yardstick, they will lose purchasing power as well.

The next crisis could be worse than 1929-34
There are enough common factors between 1929 and now to suggest the next financial and systemic crisis may well be similar or even greater than the collapse in 1929 and the great depression that followed. Factors common to both periods are summed up in the following four bullet points, plus additional factors specific to the current credit cycle in the 5th bullet:

  1. On 30 October 1929 the Smoot-Hawley Tariff Act was passed at the top of the credit cycle which made the combination brutal for both markets and the economy. The stock market crashed, marking the end of the greatest bull market in stocks since the South Sea bubble, and the destruction of personal wealth was wholly unexpected throughout society.
    Today, we face a similar combination of American trade protectionism being introduced at the top of the credit cycle, and the stock market is equally unprepared today for the consequences.
  2. There has been a prolonged period of monetary inflation since the Lehman crisis which compares with the inflationary period between 1921-29. Furthermore, today’s inflationary phase of the credit cycle is in addition to a series of previous inflationary cycles, leaving a heritage of past distortions still to be unwound. Before the 1921-29 period, a short sharp depression in 1920-21 meant there was an insignificant legacy of economic and financial distortions carried over. Therefore, a credit and systemic crisis today has the potential to be more damaging than the crisis that preceded the great depression.
  3. In 1921-29, the price-inflation consequences of monetary expansion were concealed by benefits from improved farming and manufacturing methods. Today, price inflation is concealed through statistical manipulation. The lack of apparent price inflation in the earlier period coupled with low long-bond yields (less than 4%) fuelled a stock market boom that ended in 1929. The same dynamics today has fuelled a similar stock market boom, which may have already ended last year.
  4. In 1921-29, the growth of bank lending at approximately 50% over the period was similar to commercial and industrial bank lending between 2009-18, which increased by 57%. The reason for this comparison is bank lending in the 1920s was substantially to commercial and industrial customers. Additionally, in the 1920s finance through discounted bills became highly inflationary. The current period commenced with a massive monetary injection by the Fed, and in addition both consumers and the government are also heavy borrowers.
  5. Additional factors specific to the current credit cycle:
    o State finances today are more highly geared to economic outcomes, after massive economic destruction from monetary inflation. This is ignored by inflationists as it transfers wealth away from wage-earners back to banks, their favoured customers, government, and the central bank. This conceals the true extent of an economic slump, making it worse and certainly not curing it.
    o In 1929-34, banks defaulted in large numbers. Central banks today do their utmost to stop commercial banks from collapsing, and the demands for yet more monetary inflation will be impossible to resist because of the need to support both the banking system and rapidly deteriorating government finances.
    o Today central banks are breaking ranks, with Russia and China leading Asian states away from the dollar. Russia already has gold as its principal reserve currency, and China has successfully become the world’s largest gold miner and refiner, while her people take up nearly two-thirds of global mine supply. The consequences for currencies whose issuing banks do not follow this Asian path could be significantly worsened if they continue to insist gold plays no part in their monetary policy.
    o Bond yields in the 1929-34 period fell to levels that are still higher than those of today, with the rate at that time reflecting the dollar’s convertibility into gold. Today, dollar and other currency bond yields remain heavily suppressed, with five out of six major central banks still expanding their balance sheets and three of them still with negative interest rates. The risk is that when markets adjust to this aggressive monetary debasement, a massive interest rate shock will be triggered. In addition to this risk the widespread use today of ETFs and indexed funds divorces investors from investment risk, and as market risk becomes apparent, the public are likely to become indiscriminate sellers of these instruments, accelerating a stock market decline through dumping.
    In summary, there are greater monetary forces today than existed in 1929-34, and therefore the monetary consequences are more serious. But there is one important difference compared with ninety years ago: Today, the purchasing power of gold will rise substantially while currencies collapse.

Our normal gold analysis follows.

The pentagon-shaped base pattern in the gold market stretches back 6 years, forming a massive support base which has been tested at the neckline many times. On each occasion the penetration has been resisted and the gold price has receded to the incline support trendlines. Once penetration is achieved decisively the catapult response will be to propel gold up by the depth of the pattern, towards a price $1900. Is this such a time, and are we to see gold decisively above $1375, having closed at $1347.90 last night.

Gold has probably completed its rally towards the $1350 level and is now likely to correct down into a 6-month cycle low, before the next up cycle. The oscillators are still rising but at the upper reaches of their limit.

The 12 month chart illustrates the breakout to complete the strong gold rally, with the extent of the anticipated downward correction likely defined by the support band down to a level of $1276.00. The rally has penetrated 200-Dema decisively which could now act as additional support.

The 3 month gold chart illustrates he extent of the gold rally and the equally likely correction down towards the support zone. The bottom limit of support is at the $1276.00 level which will enjoy added support from 200-Dema.

South African Rand

The South African Rand has weakened strongly to the top line in the reducing wedge pattern. The Slow Stochastic oscillator is turning down and is likely to support some Rand strength. Key weakness level is at $14.62 with key strength level at the bottom of the support zone at $13.24.
Much obviously depends on dollar performance, but fundamentals are stacking up against the Rand with Moodys rating agency pronouncing later next month on 29 March. Political and economic fundamentals are not improving yet with Eskom and its financial and operational woes threatening the status quo Added to this is the extra volatility and turmoil that the election is likely to add as the country approaches election day on 8 May 2019.

HUI / Gold Ratio

The ratio has a breakout through the previous high as US miners advance faster than the price of gold. But, like gold, is likely to correct down next. 200-Dema is only just penetrated and is not likely to add much support.

HUI Index

The HUI index itself is more positive than the HUI / Gold ratio as it also exhibits a strong breakout in a chart that is more positive than the ratio. But it is also likely to correct down, despite continued positive divergence. 200-Dema has been penetrated and is likely to add additional support at the bottom of the support zone.

GDX US miners ETF

The 3 year chart illustrates the powerful run up towards the top of the 2 year range-bound region. This is not likely to breakout and will also correct down accordingly. 200-Wema has only just been penetrated and is not likely to add much support during the correction down.

The GDX chart is similar to the HUI Index chart except it is more positive in its bias, together with a breakout from the bull flag. But both oscillators are at the top of their range and a correction down is imminent.
200-Dema has been penetrated decisively and is likely to add much support in the support zone during the correction down.

DUST US Gold Miners Bear Index

The Dust chart has similar commentary, except in the opposite direction being a US miners bear index. The chart is even more positive than GDX and also has a breakout from the bear flag. Also, 200-Dema has been penetrated decisively and will add much resistance at the top of the resistance zone during the anticipated correction up.

Silver

The silver 3 year chart illustrates the rally up towards resistance but without a breakout and still shy of 200-wema. Any correction down now will only get support from 50-wema which is still above the support zone. This means silver has further to fall with support starting only at a level of $15.20, some 6% lower down.
Silver has had a brief period of outperforming gold recently, but overall still continues to underperform, which is one of the reasons precious metals are not likely to breakout during this rally, but only potentially during the next.

The silver 12 month chart illustrates the rally terminating on a small double top at the bottom of the resistance zone. However, the oscillators are still advancing and the positive divergence is still active, both indicating some further price increase. 200-Dema has been penetrated decisively and will add additional support at the top of the support zone during the correction down.
All things considered, the rally appears to be complete.

The 3 month chart illustrates the extent of the rally which gained 15% from late Dec 2018. 200-Dema has been penetrated decisively which will add additional support at the top of the support zone. But the chart indicates negative divergence with support at $15.20.

Gold : Silver Ratio

Silver continues to underperform gold during the rally except for the final 3 days which reduced the ratio down to 83.32. However, the chart illustrates the development of 3 additional patterns to the overall rising wedge. These will eventually reduce ratio value, and they include:
• H&S pattern developing;
• Downsloping trend developing;
• Bear flag developing;
Breakouts of theses will assist in reducing ratio value and providing bullish support for precious metals, but activation will have to wait until the next upswing.

General Equities

The US market is enjoying very high investor sentiment, including high optimism and fear of missing out which is turning to envy, which usually appears near the end of a market advance. The current rally in the Dow is now into its 9th week, stimulated again by the US Fed pause in its rate hike cycle which has thrown the market into believing the end of US quantitative tightening and the potential start to the next round of quantitative easing, caused largely by the threat of the world economic slowdown and threats of recession. The market is beginning to discount the next easing cycle as it supports the rally in equities that started in late Dec 2018.
A powerful bear flag has been created in the process, and when this activates via a breakout it will be one of the first trigger signals that the bear market is underway again.

The Elliott Wave analysis of the Dow Jones short term 3-month chart indicates that the wave ii (circle) is very near completion, and this wave leads to the longer and stronger wave iii (circle) which is wave 3 of 3 and will take the Dow well below the Dec lows.

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Midweek Market 14 Feb 2019

Feb 14th, 2019 No comments

Executive Summary

Counter-trend rallies in world equity markets appear to now be all but complete, and if we take account on the New York Stock Exchange of the high investor optimism, low portfolio cash allocations, and the Fibonacci relationships, then they are now complete (described in more detail in the body copy). Wave structures in the Dow, indicating the necessary clues that will manifest a trend change, are now evident.

The strengthening correction in the US$ continues in spite of the dovish US Fed utterances last week which will weaken the dollar, while gold undergoes a downward correction within a larger advance which will manifest during most of 2019. But this remains a critically important time, as many component parts in the composition of the world financial and monetary structure are poised to shift tectonically in the next period, perhaps as soon as a year or two.

US bonds have now ended their countertrend rally and yields are again increasing as the US bond market resumes its decline into a long term bear market. We now have a world economic slowdown that is evident, trade wars that are not resolved, Washington chaos that is not abating, and US Fed quantitative tightening that may be turning into the next round of world central bank quantitative easing.

Two weeks ago we looked at another 10 (ten) critical impacts that are likely to drive the gold price in 2019, and today we look at whether the US Fed rate hike pause will save the stock market: This, at the start of the gold market analysis.

US Dollar

The short term dollar rally gained momentum this week as it continues to advance towards resistance in a bearish reducing wedge formation, whilst the longer term trend towards weakness remains in place. The oscillators are rising in support of further gains into the resistance region.
Ultra long term charts, as well as fundamentals, all point to a weaker dollar.

The 12 month chart indicates a dollar break up through diagonal resistance as it starts to consolidate below the resistance zone. However, the chart supports the notion of dollar weakness ahead despite the current strengthening. This is because of general chart bias, negative divergence, plus Elliott Wave analysis, all pointing to a weaker dollar which in the short term is likely to reach 93.80, then 91.0, and finally 88 a while later. The oscillators are mixed but the Slow Stochastic is turning down at the top of its range, indicating weakness next.

The very short term 3 month chart illustrates the penetration up through diagonal resistance and the completion of the Elliott Wave ABC pattern which required a C higher than B, before any further decline to be possible.

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 current US$ strength has extended the dollar bear flag / Yen bull flag which therefore continues to develop. Once activated, this flag 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, and this is supported by the Slow Stochastic which has reached the top of its range.

US Treasuries

The benchmark US 10 year Treasury yield has changed trend from down to up (black circle), which is in line with higher yields and a continued collapse in US bond prices. From a Elliott Wave point of view, all options point to higher yields in the start of the longer and stronger wave (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 whether the US Fed rate hike pause will save the stock market. Once again, this is adapted mostly from original thoughts by Michael Pento who is a regular guest on TV channels such as CNBC, CNN, Bloomberg, Fox Business, and is widely read in financial publications such as the Wall Street Journal.

Will the Pause in the US Fed Rate Hike Program Save the Stock Market?
Jerome Powell threw Wall Street a lifeline recently when he decided to temporarily take a pause with the Fed’s rate hike program, and also indicated that the process of credit destruction, known as Quantitative Tightening, may soon be brought to an end. This move caused the total value of US equities to soar back to a level that is now 137% of GDP, over 30 percentage points higher than it was at the start of Great Recession and over 90 percentage points greater than 1985.
So, the burning question now is: Will this be enough to support the massively overvalued market? The S&P 500 is now trading at over 16x forward earnings. But the growth rate of those earnings will plunge from over 20% in 2018 to minus 0.8% in the 1st quarter of 2019, according to FACTSET. It might have made some sense in 2018, but only a fool would pay these earnings ratios if earnings growth is actually negative.
The only reason that would make sense is if investors were convinced EPS growth was about to climb higher (not stall), and for that to happen several stars have to align perfectly.
These include:

  1. Structural problems that are leading to sharp economic slowdowns in Europe, China and Japan all have to be resolved favourably, and quickly;
  2. Global central banks begin another round of massive QE;
  3. The US – China trade war must be resolved quickly and in a way that does not inflict any further damage to the ailing economy in China;
    • China will have to agree to concessions eliminating its trade surplus with the U.S. and renouncing its practice of intellectual property theft;
    • It must also agree to subject itself to rigorous monitoring and enforcement mechanisms;
    • The eventual deal must be constructed in a way that ensures China’s increasing dependence on imports does not negatively affect China’s domestic production;
    • China must be able to re-stimulate growth by forcing yet more debt upon its economy, which is overleveraged and crashing;
  4. The Washington chaos must abate quickly, with future government shutdowns prevented;
    • Presidential indictments from the soon to be released Mueller probe must be eliminated;
    • Consumer sentiment must not be negatively impacted by upcoming conflagrations and brinksmanship over funding the US government or increasing the debt ceiling;
  5. The most important of all these factors is that the US Fed’s quantitative tightening program thus far, including 9 rate hikes and $500 billion worth of currency destruction (in balance sheet reduction), has not already been enough to push the US economy and stock market over the edge;

The US Fed last stopped raising rates in the summer of 2006, just before the global financial crisis, with the stock market collapsing 12 months later. Then, in 2006, the global economy was booming with growth of over 4%. Today, in sharp contrast, global economic growth is slowing rapidly, with parts of Europe in recession, Japan’s GDP contracting, and China’s growth rate at 6% (and slowing) from well over 10% in 2006. Also, the U.S. economy has slowed from 4.2% in the 2nd quarter of 2018 to around 1% at the start of 2019. The world is not growing as it was 13 years ago, it is now teetering on the edge of recession.
So now consider all these facts:

  1. The US Fed stopped hiking the Funds Rate at 5.25% in 2006, whereas now it is doing so with the rate just below 2.5%. Also, some rates in parts of the EU and Japan are still negative, while they were much higher in 2006;
  2. Today world stock markets are much higher than in 2006, by a factor of more than 100%;
  3. Global debt at $250T is now 75% higher than it was in 2006, with much higher servicing costs which all countries have to now bear;
    The world has far less dry powder to manipulate up the next collapse down as central banks again re-engage in quickly cutting interest rates back to zero and negative in the next round of forced, protracted, and record-breaking QE. This will also be combined with a huge global fiscal stimulus package that will serve to push bankrupt nations further into insolvency, as all currencies continue collapsing towards zero value.
    It may be possible to rescue the stock market for a while using this type of fiscal and monetary madness. However, it also means the already endangered middle class will take a giant step towards extinction. And this is why precious metals ownership now will be more crucial than ever.

Our normal gold analysis follows.

Gold

The next 6 month cycle low in the $gold price is due soon. But, it may be that this is delayed for a short while still with many commentaries predicting higher prices first. The decline in volume is now quite sharp, and this may short circuit everything in a strong pullback.

The 3 year gold chart illustrates how gold is in the late stages of its rally towards the target region of $1300 – $1350 and, in terms of Elliott Wave analysis, how the rally is not quite complete until probably hitting $1350. However, the correction down probably has some more downside before the final rally.

The 12 month chart illustrates the consolidation in the target zone, but Elliott Wave suggests the rally is probably not complete until price advances to the $1350 region, enabling a flat-bottom top. A strong correction down is likely to follow into the next 6 month cycle low.

The gold price may decline further towards both the diagonal and horizontal support region before a potential advance to the $1350 level. The oscillators appear to be in a drifting mode of some expectancy.

The gold COTs data indicates dilation is again converging which suggests more strength to the gold rally for a while longer.

South African Rand

The South African Rand has weakened strongly to the bottom of the resistance zone, virtually to the top of the declining channel. This is in line with the stair step down trend of strengthening, and may well strengthen further with any dollar weakness ahead.
However, it is also certainly partly due to fundamentals in a worsening scenario regarding Eskom and its financial and operational woes. Moodys is due to grade South Africa next month and the potential for a downgrade is high. Added to this is the extra volatility and turmoil that the election is likely to add as the country approaches election day on 8 May 2019.

HUI / Gold Ratio

The ratio is correcting down as US miners decline faster than the price of gold. The next key breakout level is 0.1225 and both oscillators are dropping in support of a lower ratio.

HUI Index

The HUI index itself is more positive than the HUI / Gold ratio as it declines from resistance to the top of the support zone. Although the chart still has a positive bias together with the continued positive divergence, the dropping oscillators are supporting further weakness.

GDX US miners ETF

The GDX chart is similar to the HUI Index chart except it is more positive in its bias, together with the formation of a bull flag in the correction down. But both oscillators are turning down at the top of their range which supports lower prices.

DUST US Gold Miners Bear Index

The Dust chart has similar commentary, except in the opposite direction being a US miners bear index. The chart is even more positive than GDX and also has a bear flag forming in its correction. But, the oscillators are equally bearish in turning up at the bottom of their range, and we can therefore also expect a correction up.

Silver

The silver double bottom at the multi-year base of $14 should still see higher prices once the present correction down is complete. Price is likely to remain within the space between support and resistance during this wave action, but is equally likely to advance well into the resistance zone during the next wave action in the period from mid-year towards year end.

The silver rally has terminated in a consolidation between the resistance and support zones that is expected to yield yet lower prices. But the correction down is within a larger advance that will now test support at $15.16 and thereafter advance to test resistance at $16.23. The oscillators are dropping in support of yet lower prices first.
The Silver is structurally stronger than the gold chart with potentially more upside, as well as still possessing positive divergence. But, silver is currently underperforming gold, as can be seen in the gold / silver ratio chart, but this will reverse once the corrections are complete.

The silver COTs data remains positive with dilation beginning to converge slightly suggesting the silver rally is not yet complete.

Gold : Silver Ratio

Silver continues to underperform gold during the corrections, with the ratio increasing to 84.02. But the H&S pattern and the downsloping trendline are still in development which will both provide bullish support once the corrections are complete. The target remains to breach 80 (dotted line) which will provide bullish support for precious metals as silver begins to outperform gold convincingly.

General Equities

The US market is enjoying very high investor sentiment as well as very low portfolio cash allocations as the rally in the Dow begins to terminate. The 6 week long rally has formed a prominent bear flag which is likely to terminate at any moment, and if the Fibonacci relationships evident in the data are taken into account, and believed, then the rally is terminating now.

High investor sentiment is evident at market peaks and low portfolio cash allocations are evident at market peaks, and perhaps the most stunning measure of investor optimism on the New York Stock Exchange at the moment is that the AAII measurement of portfolio cash allocation is 13% at the moment. This is the lowest in the past 20 years, and was only this low in Jan 2000 just before the Dot.com bubble burst.

The Elliott Wave analysis of the Dow Jones indicates that the wave ii (circle) is very near completion, and this wave leads to the longer and stronger wave iii (circle) which is wave 3 of 3 and will take the Dow well below the Dec lows.

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Midweek Market 7 Feb 2019

Feb 7th, 2019 No comments

Executive summary

The counter-trend rallies in world equity markets continue for the time being, although US markets, and many others, do so with ever less momentum and much euphoria hype. The US market is now held aloft by nothing more than thin air as, by every measure, credibility is stretched to breaking point. Patience is the order of the day as we continue to wait for the wave structures to indicate the necessary clues that will manifest a trend change.

Even the US$ is enjoying a strengthening correction in spite of the dovish US Fed utterances last week which will weaken the dollar, especially as the interest rate differentials between the US and the rest of the world (principally Japan and the EU) begin to unwind. During this time of dollar strength gold is correcting down from a strong run adding 12% over the last 6 months. But this is an important time, as many component parts in the composition of the world financial and monetary structure are poised to shift tectonically in the next period, perhaps as soon as a year or two.

US bonds have now ended their countertrend rally and yields are again increasing in line with the world interest rate cycle, as world equities edge closer to the edge of the abyss in the face of a world economic slowdown. The US continues to increase its twin deficits as global debt continues to spiral, and it just maybe that the US Fed has signalled the end of its ‘tightening’ cycle and the inevitable start of the next ‘easing’ cycle which will take the world into stagflation.

US Dollar

The dollar faces a developing problem as it becomes more evident that surplus dollars arising from a world economic slowdown are in fact being switched into other currencies and gold. We saw in last week’s 40 year chart that the dollar is in a long term decline towards the low $60’s, and it can be seen in the short term 2 year chart above how the dollar has broken below the rising wedge, despite current dollar strength.

The 12 month chart supports the notion of dollar weakness ahead despite the current strengthening. General chart bias, negative divergence, plus Elliott Wave analysis all point to a weaker dollar which in the short term is likely to reach 93.80, then 91.0, and finally 88 a while later. However, both oscillators support very short term strength first, probably up into the resistance zone.

The very short term 3 month chart illustrates the strong decline bouncing off 200-Dema. Elliott Wave analysis indicates the (a)(b)(c) structure requires (c) to exceed (a) before any further weakness is possible.

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 trapped in a continued US$ bear flag and Yen bull flag which, once activated, 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.

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 the start of a new longer and stronger wave (iii).

Gold

The 5 year chart illustrates the gold price increase from each Dec month going back 5 years, and how the Dec 2018 increase is powering up.

The 3 year gold chart illustrates how gold is in the late stages of its rally towards the target region of $1300 – $1350 and, in terms of Elliott Wave analysis, how the rally is not quite complete until probably hitting $1350. However, the correction down probably has some more downside before the final rally.

The shorter term 3 month chart illustrates the 2 black reversal candles at the top of the rally which could cause further declines down into the support region. Especially with both oscillators turning down from their peaks.

The gold COTs data indicates dilation of the convergence but gold price gains may nevertheless still continue for a while.

South African Rand

The South African Rand has weakened in a small breakback against the stronger dollar, having created a new key strength level at $13.24. In the process it also broke down into the support zone before the breakback which took the Rand back above support. The chart has a strengthening bias except for both oscillators turning up at the bottom of their range which supports a weaker Rand ahead.
Ramaphosa’s state of the nation address tonight may affect Rand value, either way.

HUI / Gold Ratio

The ratio is holding up in consolidating just below 2 key breakout levels as gold edges down, with US miners therefore slightly outperforming the gold price this week. But the oscillators are starting to turn down at the top of their ranges.

HUI Index

The HUI index itself is more positive than the HUI / Gold ratio as it nudges the bottom region of resistance. The chart structure has a positive bias, propelled by multi-month positive divergence, but the oscillators are turning down from the top of their range which is bearish.

GDX US miners ETF

The GDX chart is similar to the HUI Index chart except it is more positive in its bias. The gain over the past 6 months has been strong at 32% against only 12% for gold. over the same period. The rally has been strong enough to virtually wipe out the positive divergence which is now almost non-existent, and with both oscillators turning down at the top of their range we can expect some GDX downside.

DUST US Gold Miners Bear Index

The Dust chart has similar commentary, except in the opposite direction being a US miners bear index. The chart is even more positive than GDX with nearly a 60% gain over the 6 month period. But the oscillators are equally bearish in turning up at the bottom of their range, and we can therefore also expect a correction.

Silver

Silver is correcting down within a larger advance that is expected to increase further once the downward correction is complete. The chart is structurally stronger than the gold chart with potentially more upside, as well as still possessing positive divergence. Silver is currently underperforming gold, as can be seen in the gold / silver ratio chart, but this will reverse once the corrections are complete.

The silver COTs data remains positive although the convergence pattern is dilating slightly. Because it is still early days the silver rally should still continue for a while.

Gold : Silver Ratio

Silver is again underperforming gold during the corrections, with the ratio increasing to 83.71. In spite of this the H&S pattern is still in development as is the development of the downsloping trendline in the tail of the chart. Once the corrections are complete the gold / Silver ratio is expected to decline, hopefully to below 80 and beyond.

General Equities

The US market is now held aloft by nothing more than thin air as by every measure credibility is stretched to breaking point. Patience is the order of the day as we continue to wait for the wave structures to indicate the necessary clues that will manifest a trend change.

The Elliott Wave analysis of the Dow Jones indicates that the wave ii (circle) is very near completion, and this wave leads to the longer and stronger wave iii (circle) which is wave 3 of 3 and will take the Dow well below the Dec lows.

The US market is losing upward momentum fast and is sustained only by euphoria which cannot last. The large bear flag in the Dow 12 months chart is close to exhaustion and once it 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 take the Dow down below the Dec 2018 lows.

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