Home > Uncategorized > Midweek Market 20 Jun 2019

Midweek Market 20 Jun 2019

Jun 20th, 2019

Executive summary

Market confidence in a US Fed rate cut has grown to an anticipated 2 cuts this year, as the short term US Treasury yields continue to decline below the Fed Funds rate which is the trigger for Fed action. This will be the first cut in the new cycle, probably as the anticipated equity selloff in the 2nd half of 2019 gathers momentum.


This has prompted the US equity market, into a rally this month which is likely to take the Dow to yet another new high (±27 000). The market is likely to be much weaker during Jul-Dec 2019 with a severe downturn into the end of the year, followed by a strong recovery through 2020 to the potential final market top close to Dec 2020.


The 16 month rally in the US dollar is now probably complete as the impact of US Fed rate cuts later in 2019 start the process of eroding dollar value. The US$ is in a long term decline and this process is now likely to start gathering momentum.


History has shown that the first US Fed rate cut in the new cycle ushers in a new gold bull market, and market confidence that this is now in process caused a major shift in the gold price this week. The gold price is finally testing long term resistance at the neckline in the massive basing pattern in the gold market stretching back 6 years.

US Dollar

The US dollar has seemingly ended its recent advance and could now have resumed its long term decline. The 40 year chart is a reminder of the dollar’s long term decline, illustrating the 8 year cycles coinciding with US presidential elections in peaks and troughs every 16 years. This is likely to include a trough next in late 2024 with the dollar index declining into the low $60s, as is clearly evident in the chart structure.

The 16 month rally in the dollar is all but complete as it now begins to penetrate the bottom of the rising wedge pattern. The negative divergence in the MACD is finally beginning to draw dollar value down as both oscillators continue declining.


Market confidence in a US Fed rate cut has grown to an anticipated 2 cuts this year, as the short term US Treasury yields continue to decline below the Fed Funds rate which is the trigger for Fed action. This will be the first cut in the new cycle, probably as the anticipated equity selloff in the 2nd half of 2019 gathers momentum. It is this anticipation which is providing energy to a lower dollar, which is now long overdue.

Technically, the dollar is starting to decline because of the bearish rising wedge patterns and the impact of negative divergence with the MACD. A threatening H&S pattern is developing which further declines will activate.

The short term 3 month chart illustrates the threatening H&S pattern in more detail, which a break below $96.33 will activate. 200-Dema (green) is just below that level and penetration will add energy and momentum to further declines.

Japanese Yen

The dollar / Yen chart is developing negative bias (dollar weakness / Yen strength), with an incline H&S (already penetrated) and another level H&S which is about to be activated.

US Treasuries

The US Treasury market is still in a rally with continued extreme investor optimism, as yield continues to break down to lower levels. Reduced bond yields, especially the short term 3 and 6 month T-bills, are providing trigger mechanisms for the US Fed to prepare for the first rate cut in the next cycle.

The market is now anticipating at least 2 such cuts this year which are probably likely as the anticipated equity sell-off in the Jul-Dec 2019 period gathers momentum.

Gold

The massive pentagon basing pattern in the gold market stretches back 6 years, with the inviting neckline at $1365 – $1375 already tested numerously. This gold rally, although closing at $1348.80, has actually penetrated the neckline because gold advanced during the night and is at $1381 as these words are written.

This is all powered by the increasing likelihood of a US Fed rate cut which has caused an appropriate dollar decline. History shows that the start of the next gold bull market will be triggered by the first US rate cut in the next cycle, and it is now virtually a given that this is likely soon.

This is a weekly chart, and what is required now is confirmation of the penetration.

Gold is now testing long term resistance after a breakout from the long term bull flag. As mentioned, gold is now at $1381 but needs to confirm penetration on a weekly basis.

Silver is still non-conforming with a persistently high gold/silver ratio which is a double-edged sword. Either silver enjoys a breakout rally or gold and gold miners reverse to lower prices.

The short term 3 month chart illustrates gold beginning to catapult higher after 3 breakouts. In fact, as of writing, gold is another $33 higher at $1381. The last 10 trading days have provided 10 consecutive closes above 10-Dema which is an indication of increased momentum.

The one negative is still both oscillators at the top of their range, suggesting lower prices next.

South African Rand

The South African Rand strengthened nearly 5% in the last 9 trading days against the weaker dollar. Technically, it has a bullish breakout through the bottom of the rising wedge and it has invalidated the earlier bearish H&S activation. Declining oscillators indicate further strength to come, as the divergence with the MACD plays out correctly.

The short term R186 government bond yield has been steadily declining since Oct 2018 which suggests the Reserve Bank is likely to cut the Repo rate soon. This will have a weakening effect on Rand value.

HUI / Gold Ratio

US miners are outperforming an increased gold price during this rally as the ratio achieves 15 consecutive closes above 10-Dema. The ratio still needs to breakout above the previous high and penetrate resistance decisively. Both oscillators are at the top of their range and the rally is subject to some retracement.

GDX US miners ETF

GDX, likewise, has had a strong rally with breakouts above previous highs as well as 15 consecutive closes above 10-Dema. The oscillators are both at the top of their range and GDX is subject to a retracement of sorts. The advance includes 2 gaps which are still un-filled, and as always, may well be closed later on.

DUST US Gold Miners Bear Index

The Dust index is the inverse of GDX nearly exactly, with penetration of the triple bottom which promises further decline. The triple bottom breakout is very positive for gold miners.
But the oscillators are at the bottom of their range which should invite a price advance which is negative for US gold miners.

Silver

Long term silver breaks out of the reducing wedge but continues to languish below resistance in a chart which continues to look very negative. Either silver breaks up and starts to rally or the whole precious metals complex is likely to continue towards weakness.
Both oscillators are beginning to turn up, promising perhaps some excitement in silver.

The 3 month daily chart illustrates a lacklustre consolidation after the breakout. But silver achieves 7 consecutive closes above 10-Dema which is an indication of building energy for increased momentum. Both oscillators still have some space to rise further.

Silver Miners

Silver miners are enjoying a strong advance with 15 consecutive closes above 10-Dema, indicating more energy than silver itself. Maybe silver miners energise silver into a meaningful rally. But the oscillators are at the top of their range and this could affect negatively.

Gold : Silver Ratio

The gold / silver ratio continues its relentless rise, closing slightly lower this time at 90.17. This continues to reflect the silver underperformance of gold which is negative for the whole precious metals complex, seemingly endlessly.

Either silver generates a meaningful rally soon or gold and gold miners drop prices.

General Equities
Our view of US equities, using the Dow Jones as a proxy, illustrated last week the continued enormous topping pattern end play towards a final market top in the next year or two. We will use this template as a guide against which to measure ongoing performance which at the moment is exactly correct.

US equities of course are a proxy for world markets and as they perform so too will world markets (on average) follow.

The market (Dow Jones) is at the moment moving up towards D during this month (Jun 2019) and is likely to traverse the complete ABCDE pattern before then strengthening from (4) to finally reach market top at (5) probably at the end of the year 2020.

A more detailed view of this is illustrated below.

  1. Dow rises to D this month (June) at a new high ±27000;
  2. Declines to E (4) by Dec 2019 ±20000;
  3. Advances to (5) by Dec 2020 ±28000;
  4. This is the final market top;
  5. Start of major collapse in early 2021;
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