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Midweek Market 1 Aug 2019

Aug 1st, 2019

Executive summary

The US Fed cut the rate by 25 basis points yesterday, in what is described by many as the first rate cut in the new cycle which by definition means more cuts to come. But they are backed into a corner like never before. The tightening cycle of the last three years, to try and stabilise and prepare for the chaos that lies ahead, has been a dismal failure in a world of slowing economies that face recession, or worse. So presumably they must now resort to further easing, which is described by many as hyper monetary inflation leading to further QE.

If the QE option is chosen then the US Fed must start acting as before by adding bond purchases in order to drop bond yields so they can cut rates further. But this is exactly what caused the bond market crisis in the first place, globally. Some have described that as the new subprime problem: The new Global Subprime Bond which will kill the international monetary system eventually.

The alternative, which is to stall further cuts (or actually raise rates to finally start correcting the ills of the past) will decimate equity and bond markets worldwide.


The rate cut pronouncement yesterday satisfied few (least of all Donald Trump) and prompted lower equities, stronger dollar, and lower gold. This could signal the start of an equity decline phase which will decrease values by up to 20%-22% by the start of 2020. This next phase will also see an end to the countertrend rally in longer term US Treasuries as yields finally begin to bottom in a resumption of the bear market which started in mid-2016.

The US dollar continued to strengthen as precious metals weakened after the US Fed announcement, but could easily correct after market digestion, as volatility levels increase. However, multiple signals in breakdowns of US gold miners as well as bearish silver behaviour indicate that the rally in precious metals has probably run its course.

US Dollar

The US$ long term decline (black lines) is still intact, although so also is the 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).

Dollar strength has invalidated the earlier rising wedge breakout and is starting to test resistance. Both oscillators are rising in support of further strength, although negative divergence with MACD is still active, and this will induce lower prices later on.

The daily 12 month chart illustrates the strong extension of the recent breakout up to a double top which could prompt a correction down as rally exhaustion seems imminent. The whole chart presents as a strong upward sloping pattern that is due a correction down. This is supported by both oscillators at the top of their range.

Japanese Yen

The dollar / Yen currency pair maintains a negative bias (weak dollar / strong Yen) with little dollar support below the support zone. But price has broken up through the reducing wedge (strong dollar / weak Yen) to start testing resistance. Both oscillators are in support of further dollar strength / Yen weakness, 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. Yield continues to weaken and looks set to drop below the previous low at the beginning of July. This is now very close to a bottom as increased signs of divergence become apparent. Once a bottom is confirmed it will herald completion of the countertrend rally which will then resume into the US bond bear market (started in mid-2016).

Gold
The Gold price weakened after the US Fed announcement yesterday but is still not reflected in the Stockcharts data as this document was written. Gold in the charts closed at $1437.80 but is actually $30 weaker in reality.

The long term weekly gold chart illustrates price holding at higher levels within the small bear flag but has actually penetrated down towards support. This reflects on both oscillators hovering at higher levels in their range.

Gold is actually breaching the bottom of the bear flag as it hovers above support.

The short term 3 month chart illustrates the very constructive chart structure which has now been breached on the downside with the gold price at $1407 as this is written.

South African Rand

The South African Rand has a breakout to weaker levels. The falling wedge has been breached up towards resistance after a 2 month strengthening phase, which could now be tested.

HUI / Gold Ratio

US miners reacted negatively to the US Fed announcement with the chart reflecting a sharp drop against gold. Both gold and HUI latest prices are reflected in the StockCharts data as this is written.

GDX US miners ETF

Long term GDX turns down at resistance after its strong rally. The question is whether the rally continues after this correction, and the chart structure and oscillators indicate that lower prices lie ahead.

The daily 12 month chart illustrates GDX dropping through key levels below the recent peak. Both oscillators support further declines in the price.

Dust US Miners Bear Index

The US Miners Bear index corrected up from the recent low with minor breaks through a key level. This is the start of a correction and positioning of both oscillators indicates further increases. Higher Dust prices are negative for US miners.

Silver
The Silver price weakened after the US Fed announcement yesterday but is still not reflected in the Stockcharts data as this document was written. Silver in the charts closed at $16.41 but is actually $0.50 (or 3%) as this is written.

Long term silver breakout is testing diagonal resistance in the chart but has actually penetrated down with the latest price at $15.97. Silver behaviour is bearish and has enabled gold to start outperforming, as long periods before. Price is starting to invalidate the bullish W bottom formation.

The daily 12 month chart is suggesting the silver breakout could be false, which it actually is with the current price below $16. Both oscillators are at the top of their range supporting lower prices ahead.

The short term 3 month daily chart illustrates the break to the downside with actual price below $16, and with support for lower prices from both oscillators.

Silver Miners

Silver miners break down strongly into earlier support as they begin to drop faster than silver itself.

Gold : Silver Ratio

The gold / silver ratio increased this week as gold begins to outperform silver again. The ratio closed at 87.64 which invalidates the earlier breakout from the bear flag formation. Both oscillators indicate further increases in the ratio which is negative for the whole precious metals complex.

General Equities
Major US equity indices have completed forecast rallies to new highs and are now indicating the start of a 6 month decline phase towards new year which could decrease values by up to 20%-22%.

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 started to indicate completion of the new high at D, and has started to decline towards E. This looks the likely course now but is still to be confirmed. 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 27 400;
  2. Declines to E (4) by Dec 2019 at approximately 20 000;
  3. Advances to (5) by Dec 2020 at approximately 28 000;
  4. This is the final market top;
  5. Start of major collapse in early 2021;
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