Home > Uncategorized > Midweek Market 15 Aug 2019

Midweek Market 15 Aug 2019

Aug 15th, 2019

Executive summary

Fear of market contraction is resulting in the decrease in interest rates and the push to ready central banks for additional QE applications, because the global economy has not only partially recovered from 2008 but is now moving steadily towards a much bigger systemic crisis. This process is setting up global markets for a massive rotation event over the next year or two.

Also, other factors continue to plague markets such as US/China trade issues, global debt, and various other economic output issues. The US Fed and other global central banks set up an easy money process over the past 10 years that continued to depreciate the value of money that is now moving toward a shift in confidence from fiat currencies to hard assets, such as gold.

However, much is still to develop as the current gold rally runs its course to eventual price decline before reaching true bottom in what is still only a bear market rally. US dollar strength is likely to be a given in the chaos that lies ahead as the rotation event materialises in many different areas of collapse. US Treasuries have peaked in a countertrend rally with extreme investor optimism which has driven yields to lows last seen at the end of the bond bull market in mid-2016.

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.

US Dollar

It is good to remember the US$ is in long term decline (black lines), although still 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 also forecast by other long term models).

The dollar index increased slightly this week as rises in the rising wedge in drifting towards the triangle apex in the chart. It could move either up or down from here in the short term in accordance with two opposing arguments, but is continually attracted down by the still active MACD divergence and the eventual break from the rising pattern in the chart.

The daily 12 month chart illustrates dollar retracement up within the rising expanding triangle formation, which could still extend gains. Both oscillators are turning up in support of this.

The short term 3 month chart illustrates the dollar advance which now includes 2 consecutive closes above 10-Dema (blue), having bounced off support at 50-Dema (red). Both oscillators look set to turn higher.

Japanese Yen

The dollar / Yen currency pair maintains a negative bias (weak dollar / strong Yen), declining into a 6-month run of stronger Yen. Price is once again dropping towards the bottom edge of the declining channel with no further support below the support line (red). However, both oscillators are turning up from the bottom of their range and the MACD divergence should start price retracement up soon (strong dollar / weak Yen).

US Treasuries

The US Treasury countertrend rally is now potentially complete and is about to enter a new phase of increasing yields. At the potential end to the countertrend rally, yield on the US Treasury 10 year note closed at 1.59% which is virtually as low as the 1.37% reached at the end of the US bond bull market in mid-2016. Gearing is now at its greatest with small yield increases reflecting large bond losses which is likely to energise the US bond market collapse in the next phase.

While the world watches attentively to the global economic slowdown and encroaching recession, the US yield curve (10 year / 2 year) inverted intraday this week. This is said to herald on-coming recession in the US and the yield curve obligingly moved in the correct direction after a 6 month hiatus.

Gold
Gold commentary is not much different from last week, except to say that precious metal miners are beginning to react down. This could have the effect of pulling the metals down into a correction as well.

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. US miners have moved down which is likely to pull gold with it.

The daily 12 month chart illustrates the consolidation above the mini-break at the top edge of the expanding triangle, as price spikes up toward rally completion with both oscillators at the top of their range and starting to turn down.
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Gold has strong support in the consolidation below the spike with the key break level at $1490, below which the support zone will be tested. Support extends down to $1383, below which support will have failed.

Cots data has the Commercials building extremely large short positions and Large Speculators building extremely large long positions. This combination, reflected in extended dilation (red circle), is extremely bearish gold with strong indication of price reversal soon. Dilation in the red / green graph heralds lower gold prices while narrowing heralds higher prices. 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 3 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. Price closed yesterday on a large Engulfing candle which indicates yet higher dollar value / lower Rand. But both oscillators are oversold with the Slow Stochastic starting to turn down, indicating a potential correction likely soon.

HUI / Gold Ratio

The ratio ratcheted down this week penetrating earlier support indicating lower US miners against the strong gold price. Miners tend to move ahead of metals and this move could provide the energy for a downward gold correction. Both oscillators are moving down in support of lower prices and the MACD has a distinctly rounded and bearish shape.

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 with price well ahead of the MAs. But the chart shape and oscillator behaviour indicate a correction soon.

The daily 12 month chart illustrates GDX correcting down from the peak, against the continued strong precious metal prices. This is a negative divergence, with price still within bearish rising chart patterns. Both oscillators are poised to weaken and MACD has formed a distinctly bearish and bowed top pattern.

Dust US Miners Bear Index

The US Miners Bear index, as the inverse of GDX, has a small correction up from the bottom of the expanding triangle formation which includes a close above 10-Dema for the first time in 10 trading days. This could be the start of a correction with both oscillators looking to turn up. A turn up is negative for US miners.

Silver

Silver has a breakout through long term diagonal resistance, but the chart still has negative bias. The rally from Oct is positive in an expanding triangle with price at a new high at the upper limit of the pattern. Silver now needs to penetrate resistance or face testing of support lower down. Both oscillators are rising but close to the end of their range. Silver has started once again to underperform gold, as reflected in the gold/silver ratio which increased slightly again 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.

The 3 month chart illustrates the advance to a new high with both oscillators at the top of their range. There is also divergence with silver miners turning down which may well provide the energy for a downward silver correction soon.

Silver Miners

Silver miners turned down from the new high and are close to testing support. Miners usually lead the metals and with both oscillators trending down this may well develop further into a more severe correction which will in turn lead to lower silver prices.

Gold : Silver Ratio

The gold / silver ratio increased slightly again this week as gold continues to outperform silver. This is negative for the whole precious metals complex, and the drift toward higher ratios may continue. Both oscillators are negative, but with MACD divergence providing some downward energy the ratio may yet turn lower.

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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