Home > Uncategorized > Midweek Market 18 April 2019

Midweek Market 18 April 2019

Apr 18th, 2019

Executive summary

Charles Dow once wrote, “To know values is to know the meaning of the market.” That quote may surprise many analysts, because Dow’s work is usually thought of as nothing more than divergence in the Dow Jones Industrial and Transportation averages. But Dow’s actual views, best elaborated by writers like Robert Rhea, were actually about something much more fundamental: Identifying the position of the market in its complete bull or bear cycle. That’s a concept that investors have forgotten, encouraged by the illusion that the Federal Reserve’s buying of Treasury bonds is capable of saving the world. That illusion is likely to prove costly.

Probably the most useful exercise we can do at present is to examine where the US markets are in their respective cycles.


Robert Rhea in 1932 wrote the following in The Dow Theory:
There are three principal phases of a bull market:
• 1st is represented by reviving confidence in the future of business;
• 2nd is the response of stock prices to the known improvement in corporate earnings;
• 3rd is the period when speculation is rampant – a period when stocks are advanced on hopes and expectations.

There are three, and opposite, principal phases of a bear market:
• 1st represents the abandonment of the hopes upon which stocks were purchased at inflated prices;
• 2nd reflects selling due to decreased business and earnings;
• 3rd is caused by distress selling of sound securities, regardless of their value, by those who must find cash.

The recent bull market clocked in as the longest in history, already exceeding those leading to the 1929 and 2000 peaks. There is little doubt that the market is long into what Rhea described as the final phase of the bull market; “the period when speculation is rampant – a period when stocks are advanced on hopes and expectations.”


However, that doesn’t preclude a temporary improvement in the US economy and markets. China is stimulating again, and global equities have recovered with the Dow (and others) on the cusp of a new high. This all means a US Fed rate cut in the next 12 months is less likely, although still not unlikely.

Precious Metals are now beginning to look more bearish on these changing expectations plus higher highs in equities and some increased stabilization in the economy.

US Dollar

The US dollar index continues to drift sideways into the triangle apex, as it continues to strengthen overall within the rising wedge pattern. Price is well ahead of all the MAs and looks set to move higher in the next up cycle.

The dollar has formed a barrier triangle pattern since Sep 2018 which is, technically, set to catapult the dollar index up to $100.00 or higher, providing E(B) holds and is not penetrated on the downside. From an Elliott Wave point of view price has established the (A) (B) at E and is constructing the 1-2 in the 5 wave rise to (C). After completion of 2 the wave turns up to the longer and stronger 3 leading on to complete the corrective Elliott Wave (A)(B)(C) before the next impulsive 5 wave down.

The dollar is beginning to cycle up after the recent down wave which should increase momentum after the bullish Hammer candle. Price is above 200-Dema and both oscillators are beginning to turn up in support of higher prices.

Japanese Yen

The Yen weakened up through penetration of the diagonal resistance in accordance with the stronger dollar, which should continue as the US$ barrier triangle plays out to completion. Therefore the Yen will continue to weaken well up into the resistance region, together with the implications for a weaker gold price.

US Treasuries

The benchmark US 10 year Treasury yield has bottomed and is increasing as US bond values weaken. The Elliott Wave 1-2 is now launching into the longer and stronger wave 3, having bottomed at 2 C(circle) (5). This should increase yield to above the Feb 2019 high and potentially even the Oct 2018 high.


This will confirm and resume the earlier collapse in the bond market which has been disrupted by a 5 month countertrend rally.

Gold

The gold price dropped this week in resuming creation of the next cycle low which should complete within the indicated red circle, in the region of $1250-$1225. As the US$ index strengthens towards $100.00 and beyond so too will the gold price drop down into its cycle low. The next up cycle may well take gold to the $1500 region later in 2019.

Gold continued to decline this week into the cycle low. Both oscillators are dropping in support of this with the MACD some way to go yet.

The 12 month chart illustrates the bearish dome top that has formed, indicating further downside to come. There have now been multiple penetrations with every indication the gold price will descend well into the support region.


Gold has penetrated 200-Dema, the diagonal support, as well as an incline H&S pattern, and these together with the dome top should propel price further down.

The short term 3 month chart illustrates the decline acceleration and the penetrations. Penetration of 200-Dema removes the earlier divergence with silver which penetrated 200-Dema some while ago.

South African Rand

The South African Rand is consolidating in the region of confluence with the MAs, after strengthening over the last 3 weeks. This reflects also as a sideways move over the last 6 months, which might now weaken as the dollar barrier triangle pattern plays out to completion.


The Rand is positioned between support and resistance, but above 200-Dema, and the balance of probabilities with oscillators beginning to bottom and turn up suggests weakness before strength.

HUI / Gold Ratio

The ratio turned down to support and is threatening to break down further. It is below the MAs and the oscillators are dropping in support of further downside. This translates into weaker US miners compared to the weaker gold price, and could be the end of the 7 month rally in US miners.

US Miners Matrix

The chart includes the HUI Index, GDX ETF, and the Dust Bear Index, which illustrates the potential break line and the dome top pattern which indicates the likely penetration of the break line.


The HUI penetrated 200-Dema, the GDX not quite, and Dust not yet, but it seems that penetrations will occur nevertheless. It portrays a somewhat sombre picture of US miners in relation to a dropping gold price in the short term.

Silver

The 3 year chart continues to have a well-defined negative bias and silver continues to drift down further in the reducing wedge. Price has broken down into the support zone, just, and with dropping oscillators indicating further price declines.

The 12 month chart illustrates silver dropping further down into a reducing wedge pattern, as price moves toward the triangle apex. In the nature of a reducing wedge pattern, silver may enjoy a bounce before further declines although this is unlikely.


Silver actually outperformed gold in the last 4 of the last 5 days and the Slow Stochastic has turned up at the bottom of its range. But if there is a bounce it will soon be followed by further declines.

The 3 month chart illustrates silver breaking down to lower levels and below the MAs., although with comparatively stronger 4 days out of the last 5. The momentum is decidedly down to lower prices. Also, the silver miners chart is decidedly negative which is bearish for silver (see next).

Silver Miners

Silver miners, like US gold miners, also displays a bearish dome top and penetration of the break line. There are other breakdowns including 200-Dema, and diagonal support line with every indication of lower prices to come.


It portrays a somewhat sombre picture of US silver miners in relation to a dropping silver price in the short term, although the Slow stochastic is turning up at the bottom of its range.

Gold : Silver Ratio

The gold / silver ratio continues rising overall although it actually declined this week to close at 85.47. 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 elevated, characterised by a number of contrary indications pointing to a market top and pending trend change. There include continued lower volumes, lower volatility, higher optimism and positive sentiment, which are all classic symptoms of exhaustion and pending trend change at the market top.


Every intelligent indication points to the US rally being in the very late stages of maturation supported by overwhelming fundamental evidence of impending collapse. So, it is simply a matter of preparing for the collapse and waiting.

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