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Midweek Market 4 April 2019

Apr 4th, 2019

Executive summary

US equities remain characterised by a number of indications pointing to a market top and pending trend change. These include divergent non-confirmations between major indices and investor sentiment euphorically high, both of which indicate the US rally is in the late stage of its advance if not now actually complete. Added to this is the global economic slowdown with recession now a reality in some parts of the G20 with recession also pending in the US. Various US yield curves are beginning to invert, especially with the short term treasuries, and this has signalled loud alerts.


The US bond market has started to normalise again, with prices declining and yields increasing, after the 5 month countertrend correction that ended with short term treasury yields spiking in response to the threat of recession. The US Fed is expected to cut rates some time in 2019, and for this to happen the 2- and 3-month treasury yields need to drop.


The US dollar index is progressing through a ‘barrier’ triangle pattern which is expected to increase value by about 3.5% to 100.00 or above. This will correspondingly put other currencies under pressure as well as gold which is forecast to correct down towards the region of $1250 – $1230. Markets are beginning to discount the US Fed’s first rate cut in the next cycle and this will assist the gold price during the remainder of 2019.

US Dollar

The dollar index continues to strengthen within the rising wedge assisted by the bullish Hammer 2 weeks ago which promised further upside. Price is well ahead of all the MAs and looks set to move higher.

The barrier triangle pattern is developing strongly to catapult the dollar up to $100.00 or higher, providing E(B) holds and is not penetrated on the downside. This will complete the corrective Elliott Wave (A)(B)(C) before the next implusive 5 wave down.


The strong rise from E could well correct down short term before the thrust up continues.

The dollar moved up this week despite the down day yesterday. The Slow Stochastic has turned at the top of its range and the dollar could well correct down somewhat before the rise continues.

Japanese Yen

The reversal break back from the flag breakout has weakened the Yen up to the diagonal resistance line (blue). As the US$ barrier triangle option plays out to completion, so too will the Yen continue to weaken well up into the resistance region, together with the implications for a weaker gold price.

Both oscillators are rising which supports further US$ strength and Yen weakness.

US Treasuries

The benchmark US 10 year Treasury rally has probably terminated with the strong bounce in yield from a potential bottom. If this is the yield bottom, which is likely with the excessively high investor sentiment at 93% bond bulls, then the Elliott Wave wave 3 of 3 is in progress which will take yield higher than the Oct 2018 high (and price lower).

This will resume the earlier collapse in the bond market which has been disrupted by partial ‘inversion’ triggered by activity in the shorter term US Treasuries threatened by the next US recession.

US Yield Curve

The official yield curve calculated on the 10 year and 2 year is still drifting sideways at 1.082, and is still some way off the inversion trigger at 1.0 or below. There is probably little doubt that global recession is coming and the media hype of inversion (usually indicating recession) is due to the shorter term Treasuries such as 2 month and 3 month, etc.

Gold

Gold is traditionally pushed to higher prices by the US Fed cutting rates, and especially by the first rate cut in a cycle. Witness the gold price (top chart) after the Fed first cut rates in Jan 2001, and then again in Jul 2007. Both rate cut cycles pushed the gold price up, but action is really started by the first cut in the cycle.

Now, the US Fed is forecast to cut rates in 2019 (as the recession bites), and some would have it that that is probably going to trigger the start of the next gold bull market. That may or may not be, because in this instance the global financial and monetary conditions are just so much worse.

This is somewhat contradictory, because usually it is argued that gold goes up during inflationary times because values deteriorate during those times. Also, during inflationary times rates are increased to counter inflation, therefore it is said gold goes up when rates go up. Well, the answer is in the evidence and the evidence is in the chart above.

And the evidence says that gold goes up when rates are cut aggressively, and that happens when markets collapse and even more importantly when confidence is lost. And we are going to have enough of that in the next period.

The 5 year gold chart illustrates the historic 6-month cycle lows, with the next cycle low in progress. This and the previous cycle low has been slow in coming (at closer to 8 months) but with the anticipated stronger dollar the next gold low should be factored into planning. Timing is always difficult, but the dollar peak may be reached sooner than we think, and gold may be well supported for the rest of 2019.

The 3 year chart illustrates Gold now dropping down towards its next cycle low. The technicals are suggesting weakness ahead but the fundamentals are starting to turn positive. Markets are starting to discount a US rate cut later in 2019, and this is the trigger for the early beginning of the next gold bull market.

US miners (GDX, HUI, etc) have recently been outperforming gold which has been positive for the metal, but now have started to underperform gold with the opposite and negative impact. But silver has steadily been underperforming gold and, except for very short term corrections, this has been negative for the whole complex.

Gold has a breakout from the bear flag, dropping price down into earlier support, although still above 200-Dema. Price is still likely to drop down further into the support zone.

The short term 3 month chart illustrates the clear breakout from the bear flag, and the likely further drop down into support.

The gold Cots data illustrates the development of dilation between Large Speculators and Commercials which is Gold bearish. Price should drop down further.

South African Rand

The South African Rand has strengthened in breaking down through the rising wedge. Both oscillators are dropping indicating further strength, but as the US$ gains disproportionate strength, as forecast, so too will the Rand weaken: Perhaps significantly.

The Rand is supported at the moment by stabilised Eskom and South African economic and political prospects, plus additional support from a stable Moody’s rating.

HUI / Gold Ratio

The ratio has retraced strongly down to 200-Dema as US miners underperform gold. The MAs are providing support in a chart that still displays a positive bias. Both oscillators are dropping and the ratio is probably going lower.

HUI Index

The HUI index itself is behaving in similar fashion with similar commentary, but with slightly more positive bias.

GDX US miners ETF

The GDX 12 month chart is similar to the HUI Index chart, and the commentary is identical.

DUST US Gold Miners Bear Index

The Dust chart and commentary is similar to the GDX chart, except in the opposite direction being a US miners bear index.

Silver

The 3 year chart continues to have a negative bias with silver breaking down from the bear flag, just. Silver is well below the MAs and is likely test lower support. Both oscillators are dropping in support of this.

The 12 month chart illustrates silver dropping well below all the MAs in maintaining the non-conformance with gold and gold miners as they continue above 200-Dema. This is the prelude to further price declines in Silver as well as the whole precious metals complex.

The 3 month silver chart illustrates silver breaking down to lower levels and below the MAs.

Gold : Silver Ratio

The gold / silver ratio is rising to close at 85.77. This reflects the continued silver underperformance of gold which is negative for the whole precious metals complex. The rising wedge pattern continues and seemingly has a way to go yet which presupposes continued lower precious metal prices.

General Equities

US equities remain characterised by a number of indications pointing to a market top and pending trend change. These include divergent non-confirmations between major indices and investor sentiment euphorically high, both of which indicate the US rally is in the late stage of its advance if not now actually complete. Added to this is the global economic slowdown with recession now a reality in some parts of the G20 with recession also pending in the US. Various US yield curves are beginning to invert, especially with the short term treasuries, and this has signalled loud alerts.

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