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Midweek Market 22 Aug 2019

Aug 22nd, 2019

Executive summary

This coming week is important with markets at strong resistance levels and key breakouts will result in meaningful thrusts. Equities are on the brink of resuming major declines through to year end whilst the global bond market countertrend rally has peaked, being fraught with more risk now than at any time in history. There are now more than $16 trillion issued negative yield bonds globally, and earlier this week Germany issued a failed zero interest rate bond maturing in 2050 that was only 41.2% subscribed. Interest rates have bottomed and will now start increasing as the global bond market resumes its long term collapse, putting immense increased pressure on world economies and financial and monetary structures.


Both the US dollar and gold are close to completing their respective rallies: The dollar 12% since Jan 2018 and gold 43% since Dec 2015. Both may of course continue further before correcting down, and at some point will continue moving in opposite direction to each other, as is their normal want with gold quoted in dollars.


Popular on-line commentary has gold at the start of a new bull market, albeit with a correction down first, whilst Elliott Wave analysis had gold in a bear market rally with gold about to continue downward towards triple digits, albeit with a continued spike higher first.

US Dollar

The continued format in the US$ index is long term decline (black lines), although still in a rally since 2008 (blue lines). The dollar index may well vacillate further and perhaps even 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 in other long term models).

The dollar index increased slightly again this week as it continues to rise in the rising wedge in drifting towards the triangle apex. 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 the dollar increasing within the expanding triangle within a rising channel, whilst the negative divergence in the MACD remains active. This is a chart structure that is likely to include a weakening phase for the dollar ahead, although both oscillators are rising with more space for further dollar strength first.

The short term 3 month chart highlights the expanding triangle portion with the dollar now strengthening up to resistance, although with more space to increase further. There is still momentum with 7 consecutive closes above 10-Dema with both oscillators rising in support.

The Cots data illustrates continued dilation, although not really increasing, which should result in the start of dollar weakness.

Japanese Yen

The dollar / Yen currency pair is consolidating at the bottom of both a small declining channel within a large declining channel, at the end of a 6 month long period of stronger Yen / weaker dollar. There is no dollar support below this consolidation, but both oscillators are rising in support of dollar strength / Yen weakness. The negative MACD divergence should start price retracement up soon (strong dollar / weak Yen).

US Treasuries

The global bond market is now fraught with more risk than at any time in history, with more than $16 trillion issued negative yield bonds worldwide. The failed German zero interest rate 2050 bond earlier this week has probably put the final nail in the coffin to herald the end of the global bond countertrend rally and the resumption of the long term bond bear market. This will put immense increased pressure on world economies and financial and monetary structures.


The US Treasury countertrend rally is now potentially complete with yield showing signs of bottoming. Using the past 12 months as a guide, yield probably needs consecutive closes above 50-Dema (red) to confirm the bottom, with the short term target at about 2.13%. This will start the new phase of increasing yields with gearing now at its greatest reflecting large bond losses with only small yield increases, likely to energise the US bond market collapse in the next phase.

Last week’s intraday US yield curve inversion has followed up this week with another drop down to 1.019 which is a small tick from inversion again. This heralds on-coming recession in the US and therefore globally also, although probably many months away. It also indicates equity and bond market declines and gold market strength.

Gold

Long term gold has a strong chart from Dec 2016 to now with price spiking towards its rally completion. The top is still not confirmed and therefore may continue higher still. A correction is forecast and, with both oscillators at the top of their range, this is probably a given. US miners are not as bullish as gold and may be the catalyst for a correction, but much depends on dollar behaviour.

The daily 12 month chart illustrates the consolidation at the peak and signs of a potential top developing. There is a bearish marked drop in volumes, and both oscillators are turning down from the top of their range in support of a correction.
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Gold is developing into a potential top with strong support below. A break below $1490 will test the support zone and support will have failed with a break below $1383. Both oscillators are drifting down in support of yet lower prices.

Cots data illustrates the massive and ever widening dilation which promises a gold correction. This is based on Commercials building extremely large short positions and Large Speculators building extremely large long positions: Also, that Commercials are correct and Speculators are traditionally incorrect. 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 dollar /ZAR currency pair is consolidating into a potential top which is still unconfirmed. Further dollar weakness will see Rand strength. Both oscillators are turning down from their top of their range which supports dollar weakness / Rand strength.

HUI / Gold Ratio

The ratio has vacillated into a consolidation which is developing into a potential top, in the upper regions of the expanding triangle. While the chart structure indicates potential weakness both oscillators are turning up from their downward movement. This presents as a somewhat mixed picture as the standoff between metals and miners intensifies. The MACD has a distinctly rounded and bearish shape.

GDX US miners ETF

Long term GDX is beginning to consolidate at the top of the expanding triangle and, with both oscillators beginning to turn down, presents as a bearish chart structure.

The daily 12 month chart illustrates GDX consolidating just below the peak into a developing top, at the top of both rising patterns (bearish). Also, both oscillators are turning down in support of weakness and the MACD is in a bearish rounded formation.

Dust US Miners Bear Index

The US Miners Bear index, as the inverse of GDX, is consolidating at the bottom of the expanding triangle and reducing wedge. But price is somewhat mixed and has some way to go before developing into a potential bottom: it closed below 10-Dema again. However, both oscillators are rising and the whole chart has a structure which promises higher prices next, which is negative for US miners.

Silver

Long term silver has come down from its peak at the top of the expanding triangle. This may or may not be confirmed as a top with both oscillators still rising slowly. The chart still has negative bias, and a breakout is necessary if moving down to test support is to be avoided. Silver is still underperforming gold, as reflected in the gold/silver ratio analysis, which remains negative for the whole precious metals complex.

The daily 12 month chart illustrates the silver consolidation which could be developing into a potential top at the top of both the rising patterns. There is a bearish marked drop in volumes, and both oscillators are turning down from the top of their range in support of a correction.

Consolidation at the top of the bear flag could develop into a potential top. A break below $16.78 will test support and support will have failed with a break below $15.92. Both oscillators are drifting down in support of lower silver prices.

Silver Miners

Silver miners are consolidating below the peak at the top of both rising patterns, which could develop into a top. Both oscillators are moving down in support of this. Once silver miners start moving down this will in turn develop into lower silver prices.

Gold : Silver Ratio

The gold / silver ratio continues in a slow drift toward a higher ratio, as gold maintains slight outperformance of 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.

This long term 50 year chart of the gold/silver ratio assists in keeping perspective of where we are now in the overall picture. The 2 green verticals are gold peaks and the purple verticals are gold troughs, with the horizontal indicators being the gold / silver ratio read off the vertical scale on the right.
• From the gold peak in 1980 to 1993: increasing ratio;
• From 1993 to gold peak in 2011: reducing ratio;
• from 2011 to now: increasing ratio;
But note the multi-year H&S (red line) which has now been penetrated on the upside. This should lead to yet much higher ratios and much lower precious metal prices.

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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