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Midweek Market 25 Jul 2019

Jul 25th, 2019

Executive summary

Major US equity indices have completed forecast rallies to new highs and are now expected to start a 6 month decline phase towards new year which could decrease values by up to 20%-22%. This may be delayed until after the US Fed meets next week (31st Jul 2019) to decide on the rate cut which is now a near certainty, as short term US Treasury yields are dropping further below the Fed Funds rate which will force the rate cut decision. In the short term this will also extend the countertrend rally in longer term US Treasuries as yields continue to remain depressed in a world of slowing economic growth and the fight to stall the approach of global recession.

Much depends on pronouncements from the ECB today and the US Fed meeting next week, as the values and directional movement in the US dollar and other major currencies (especially the Euro) remain relatively undecided. Market digestion will presumably delay directional movement as we await some key central bank decisions.

The whole precious metals and miners sector has come alive with many very positive-looking charts, suggesting a runaway advance of some magnitude is now in process. However, there are also many negative aspects which need to be considered. US equity declines will strengthen the dollar as investors switch into cash, and all the precious metals charts include some disturbing elements. All volumes are down markedly and most charts indicate overbought positions including expanding triangle formations with price at the upper limits. So, caution is perhaps necessary especially with Elliott Wave analysis, as well as some conventional technical analysis, indicating gold is only in a bear market rally with much lower prices still to come.

US Dollar

The US$ is in long term decline (black lines) although in a rally since 2008 (blue lines). The dollar index may well reach 100 in due course as the financial market chaos escalates, but is likely to decline towards the low 60s in the next 5 years (as forecast by other long term models).

The dollar is still testing the rising wedge breakout in the 3 year weekly chart, and may well now break up higher with both oscillators turning up. Negative divergence with MACD is prominent though and this will induce lower prices later on.

The short term 3 month daily chart illustrates recent strength and a breakout through the expanding triangle pattern. Price is moving up within a bear flag with MACD still with space to rise, but the pattern indicates a breakdown later on.

Japanese Yen

The dollar / Yen currency pair has a negative bias (weak dollar / strong Yen) with little dollar support below the support zone. But there is a consolidation within the reducing wedge (circle) which is likely to break up into resistance, as is the nature of reducing wedges. Both oscillators are in support of further dollar strength, together with negative divergence in the MACD.

US Treasuries

The US Treasury countertrend rally is close to completion but is still not complete, as indicated in the benchmark US Treasury 10 year yield. This is supported by short term US Treasury yields dropping further below the Fed Funds rate as yields continue to remain depressed in a world of slowing economic growth and the fight to stall the approach of global recession.

Gold

The long term weekly gold chart illustrates price holding at higher levels within the expanding triangle. Gold is overbought at the upper limit with both oscillators overbought and volumes turning down. This picture is repeated throughout the precious metals and miners complex.

The Pennant breakout is pulling back to test, within the overall expanding triangle formation with price at the upper levels. A breakout at the upper levels is very bullish, but both oscillators are declining, and volumes are beginning to drop.

The short term 3 month chart illustrates the very constructive chart structure promoting a breakout to higher levels. The key breakout level is $1453 and a downside break below $1385 will test lower support levels. Both oscillators are drifting lower.

South African Rand

The South African Rand continues to hold at stronger levels against the dollar within the falling wedge pattern, and now very close to the apex. Price closed at $13.88 below all the MAs after 25 consecutive closes below 10-Dema, which illustrates the strong run against the dollar. This is likely to reverse soon, given the structure of the falling wedge and the oscillators beginning to turn up.

HUI / Gold Ratio

US miners continue to outperform an increased gold price as the ratio consolidates after the breakout at the upper perimeter of the expanding triangle. A reversal is likely from here with both oscillators overbought and turning down from the top of their range.

A longer term view of the ratio illustrates the breakout through diagonal resistance with price positioned midway between support and resistance. Recovery in this 5 year view is only partial, which indicates the ground lost during the past years.

GDX US miners ETF

The GDX breakout from the 2½ year range-bound region continues as the next leg up unfolds. It is subject to a degree of pullback before the next leg up can continue, and it remains to be seen whether this does in fact still move higher.

The daily 12 month chart illustrates GDX holding to the new high, but price needs to break up or else will drop down to test support. This is another expanded triangle pattern with price at the upper limit which indicates weakness ahead supported by the overbought oscillators.

Dust US Miners Bear Index

The US Miners Bear index breakout has lead to the next leg down, promoting continued strength for US miners. The chart structure is the near opposite of the GDX in an expanding triangle format with the need to now break down or else move up to test resistance. Both oscillators are at the bottom of their range in support of price moving up: Negative for GDX.

Silver

Long term silver has broken up through diagonal resistance, although still in a negative bias chart. The silver spike is unconfirmed by gold which is bearish and could end the rally. The breakout completed and activated the bullish W bottom pattern and both oscillators have more room to move further up.

The daily 12 month chart is a very powerful chart to a new high that is holding above the breakout level. Both oscillators are overbought indicating some kind of pullback next.

The short term 3 month daily chart is also a very powerful chart holding the breakout level and new high. It also is in an expanding triangle pattern with price at the upper extreme with oscillators that are overbought.

Silver Miners

Silver miners are at a new high in a very strong chart, after the breakout from the pennant. It has also completed and activated the bullish W bottom pattern, and has indeed ignited the silver price itself. The only negative is that the oscillators are overbought and that price is therefore likely to correct down before anything else.

USLV US Silver Miners Bull Index

The short term US Silver miners bull index (Uslv) 3 month chart is at a new high in a very strong chart. It is also in an expanding triangle pattern with price at the upper extreme with overbought oscillators. The index is very constructive and could easily move higher.

Gold : Silver Ratio

The gold / silver ratio declined another 4% this week to the level of 3 months ago. It has a breakout through the bottom of the 1 year long bear flag and has arrested the relentless rise in the ratio. This is bullish for the whole precious metals complex, but the question is whether it can be sustained. The oscillators have plummeted to the lower region of their range, indicating that the next move might well be a correction up, or worse.

General Equities
Major US equity indices have completed forecast rallies to new highs and are now expected to start a 6 month decline phase towards new year which could decrease values by up to 20%-22%. This may be delayed until after the US Fed meets next week (31st Jul 2019) to decide on the rate cut which is now a near certainty, as short term US Treasury yields are dropping further below the Fed Funds rate which will force the rate cut decision.

Much depends on pronouncements from the ECB today and the US Fed meeting next week, as the values and directional movement in the US dollar and other major currencies (especially the Euro) remain relatively undecided. Market digestion will presumably delay directional movement as we await some key central bank decisions.

This is all in accordance with the continued development of a major global topping pattern that is likely to eke out a recovery peak towards the end of 2020 to coincide with US presidential elections at that time.

Our view of US equities, using the Dow Jones as a proxy, illustrates 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.

The market, using the Dow Jones Ind Ave as a proxy, has now probably completed a new high at D. It is forecast to traverse the complete ABCDE pattern to complete a decline phase at E(4) by the new year 2020 at an index value of approximately 20 000. Thereafter, the Dow will enjoy an increase through 2020 to yet another new high at approximately 28 000 at (5) which is likely to be the final market top before a serious decline starts in early 2021.

A more detailed view of this is illustrated below.

  1. Dow has completed its rise to D (July) at a new high of approximately 27 300;
  2. Declines to E (4) by Dec 2019 at approximately 20000;
  3. Advances to (5) by Dec 2020 at approximately 28000;
  4. This is the final market top;
  5. Start of major collapse in early 2021;
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