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Midweek Market 8 Aug 2019

Aug 8th, 2019

Executive summary

The gold ‘train’ has been jerked into rapid and exciting movement, seemingly by an exhausted dollar and the stress of the newly-opened currency front of the US – China trade war.

The gold breakout through the multi-year basing pattern at $1370 in June signalled a new bull market for many observers. The initial surge took gold to $1438 before prices consolidated in an upward bias with enthusiasm swamping the need for a correction. The recent breakout at $1453 in early August provided the energy to penetrate $1500, but the frenetic climb is now due an extended multi-week correction. There is powerful resistance ahead from the 2013 price declines near $1525, as well as strong Commercial short positions building in the Cots data which should retard any further price advances, and trigger the correction.

Keep in mind also that Elliott Wave analysis has it that the gold rally is nothing more than further price declines in what has only been a bear market rally. At this stage the correction may prove to be temporary with higher prices still to come, or it may be the end of the rally.

Meanwhile, the general equity decline phase has started which will see the Dow Jones decrease by up to 20%-22% between now and 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 has weakened slightly in its current rally and is likely to continue in zig-zag movement before resuming the rally. Dollar strength is likely to be a given in the chaos that lies ahead in declining general equities worldwide, lower oil prices, increased political friction, and deteriorating trade relations.

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 also forecast by other long term models).

Dollar strength waned slightly in turning down from resistance, as it slowly bends to the force of negative divergence in the MACD. The dollar is likely to weaken further in the short term, but could still move either up or down within the rising wedge pattern. Both oscillators are also stalling in sympathy with this, and more time is required to determine more accuracy in direction.

The daily 12 month chart illustrates strong dollar retracement down within the rising expanding triangle formation. Both oscillators indicate further dollar weakness in the short term. The whole chart presents as a strong upward sloping pattern that is due further correction down.

However, the short term 3 month chart illustrates support at 50-Dema as well as some indecision with the closing Doji candle.

Japanese Yen

The dollar / Yen currency pair maintains a negative bias (weak dollar / strong Yen), declining into earlier support. Price is at the bottom edge of the declining channel which has now run into 5 months of weaker dollar / stronger Yen. Although there is little support at current values (red line) there is MACD divergence which indicates a stronger dollar correction soon.

US Treasuries

The US Treasury countertrend rally is now potentially complete after a 15% drop in yield this week created MACD divergence. This could potentially start correcting into a reversal which may very soon start increasing US bond yields. Once a bottom is confirmed it will herald resumption of the US bond bear market which started in mid-2016.

Gold

Gold has a strong chart from Dec 2016 to now. But it is spiking towards its rally completion, with oscillators at the top of their range. It is enjoying a 30% gain in one year from Aug 2018 to Aug 2019, with the spectre of a sharp correction very soon.

The daily 12 month chart illustrates the flag breakout to the top edge of the expanding triangle, as price spikes up toward rally completion with both oscillators at the top of their range.

Gold has strong support in the consolidation below the spike with the key break level at $1455, below which the support zone extends down to $1383.

In the Cots data the Commercials have large (and increasing) short positions which indicate a decline in the gold price. Similarly, the Large Speculators have large (and increasing) long positions which also indicate a decline in the gold price, because they are notoriously always wrong. Hence, dilation in the red / green graph heralds lower gold prices while narrowing heralds a higher price. And, remember the Cots data is available only on Friday, which means the chart you see is also nearly a week old.

South African Rand

The South African Rand has a breakout to yet weaker levels against the dollar, which now extend to 2 weeks of lower prices, well ahead of the MAs. Value is trending up towards the upper limit of the expanding triangle, with still more room to move which indicates further weakening. But both oscillators are oversold which indicates a potential correction is now likley.

HUI / Gold Ratio

US miners reacted negatively to the US Fed announcement last week but have ratcheted up against gold this week. But despite that there is no new high and the oscillators are mixed and dithering. Perhaps this is the precursor to the start of a correction.

GDX US miners ETF

Long term GDX has a breakout of the expanding triangle pattern but closes back into the pattern. It reflects as a strong rally and is due a correction with overbought oscillators.

The daily 12 month chart illustrates GDX peaking strongly in a bearish rising wedge pattern which could correct down soon with overbought oscillators.

Dust US Miners Bear Index

The US Miners Bear index, as the inverse of GDX, has a breakout to a new low at the bottom edge of the expanding triangle pattern. It too is liable to correct up soon with oscillators at the bottom of their range, which is negative for US miners.

Silver

Long term silver spikes to a new high at the top limit of the expanding triangle pattern, although still in a chart with negative bias. It needs to break up to test resistance otherwise will drop back and start to test support. Silver has started once again to underperform gold, as reflected in the gold/silver ratio which increased slightly this week.

The daily 12 month chart illustrates the silver spike to a new high at the top edge of the expanding triangle pattern, but also the strong advance from late May in what is now a bear flag. This reinforces the need for a breakout which will otherwise have to test support with the threatening penetration down through the flag pattern. Both oscillators are reasonably overbought supporting lower prices ahead.

Silver Miners

Silver miners are lagging the silver price itself in eking out a new high within two bearish patterns in a rising wedge and bear flag.

As with gold although not as pronounced, silver Cots data has Commercials with large (and increasing) short positions which indicate a decline in the silver price. Similarly, the Large Speculators have large (and increasing) long positions which also indicate a decline in the silver price, because they are notoriously always wrong. Hence, dilation in the red / green graph heralds lower silver prices while narrowing heralds a higher price. And, remember the Cots data is available only on Friday, which means the chart you see is also nearly a week old.

Gold : Silver Ratio

The gold / silver ratio increased again this week as gold continues to outperform silver. The ratio closed slightly up at 88.37 which means the drift towards a higher ratio seems to have started again which is negative for the whole precious metals complex.

General Equities
Major US equity indices have started the decline phase which will see the Dow Jones decrease by up to 20%-22% between now and the start of 2020. 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 decline towards E. 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. Optionally, either the Dow continues to collapse from there or 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. The Dow is declining from D to E, and has already penetrated 50-Wema (equivalent of 250 day moving average);
  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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