Home > Uncategorized > Midweek Market 29 Aug 2019

Midweek Market 29 Aug 2019

Aug 29th, 2019

Executive summary

Trade wars continue to impact markets, up and down, but consensus indicates heightened conflicts ahead as the Trump tirade continues. In the meantime, US equities continue to consolidate before the next decline phase while US Treasuries complete the 11 month long countertrend rally before resuming the long term bear market, which is imminent. The US Treasury yield curve confirmed inversion below 1.00 this week as 10 year yield dropped below 2 year yield to 0.98, indicating the drift towards recession as economic conditions continue to deteriorate, probably more so globally than in the US itself. Although interest rates are probably near bottom, there still remains a period of central bank ‘silly season’ with more than $17trn global bonds yielding negatively, and the increasing (unthinkable) threat of US Treasuries actually going negative as well. This period will provide a few more potential (Trump prompted) rate cuts to try and fend off recession.

Gold is enjoying a powerful 3-month thrust after penetrating long term resistance at $1375 and is spiking in the region of $1550 in a rally which is busy terminating, give or take another $50. Silver finally came to life and spiked to $18.50, forming a non-confirmation with gold as silver starts to outperform gold after a period of lethargy. The investment community is ‘alive’ with commentaries of the new gold bull market, and is therefore completely opposite in view to Elliott Wave analysis (plus some others) which contends that gold has been in a bear market rally and is likely to still decline below $900-$1000 before reaching true bottom. Gold is likely to move much higher in the coming years, as confidence in currencies erodes, but not before declining substantially first as the USD Index soars.

US Dollar

The continued format in the US$ index is a rally since 2008 within overall long term decline. Despite any likely short term decline the dollar index may well strengthen as gold continues to decline, before eventually declining towards the low 60s in the next 5 years as the next gold bull market gathers momentum.

The dollar index increased slightly again this week as it continues to rise in the rising wedge as it drifts towards the triangle apex. This is a bearish pattern, and although it could strengthen further from here, the next phase is weakness as also indicated by the still active MACD divergence.

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 indicates more strength first before a likely weakening phase for the dollar ahead.

The short term 3 month chart highlights the expanding triangle portion with the dollar now strengthening up to resistance, with all the MAs moving higher over the last 8 weeks. Both oscillators have more room to increase before the likely period of weakness starts.

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 continues to hold more risk than at any time in history, with more than $17 trillion issued negative yield bonds worldwide. The US Treasuries 11 month long countertrend rally is all but complete and resumption of the long term bear market is imminent. Although interest rates are probably near bottom, there still remains a period of central bank ‘silly season’ with continued issuing of global bonds yielding negatively, and the increasing (unthinkable) threat of US Treasuries actually going negative as well. This period will provide a few more potential (Trump prompted) rate cuts to try and fend off recession.

The US Treasury yield curve confirmed inversion below 1.00 this week as 10 year yield dropped below 2 year yield to 0.98, indicating the drift towards recession as economic conditions continue to deteriorate, probably more so globally than in the US itself.

Inversion of the US yield curve this week is the first time since 2007, just before the Global Financial Crisis. Recession is coming to the US and it may take another 6-18 months to finally arrive, as it has already in a number of coutries.

Gold

Gold is enjoying a powerful 3-month thrust after penetrating long term resistance at $1375 and is spiking in the region of $1550 in a rally which is busy terminating, give or take another $50. There is non-confirmation between gold and spiking silver which is an indication of potential trend change. Gold is likely to move much higher in the coming years, as confidence in currencies erodes, but not before declining substantially first as the USD Index soars.

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 in the upper regions of range in support of a correction soon.
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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.

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 a breakout to a new high, at the upper limit of the expanding triangle. Momentum is likely to strengthen the ratio further, especially with both oscillators increasing. The MACD has a distinctly rounded and bearish shape, and negative divergence is developing.

GDX US miners ETF

Similar commentary to the HUI/Gold ratio with GDX in a breakout to a new high, at the upper limit of the expanding triangle and rising wedge. Momentum is likely to strengthen the GDX further, especially with both oscillators increasing. But, the MACD has a distinctly rounded and bearish shape, with negative divergence becoming evident.

GDX closed at 30.41 and, as is evident in the long term 8 year chart, there is strong resistance at 31.50. So, momentum is positive but there are a number of negatives creeping in. Obviously, to penetrate 1.50 is very positive.

Dust US Miners Bear Index

The US Miners Bear index, as the inverse of GDX, has a breakout down to a new low. As with GDX, price has reached the bottom of the patterns and negative divergence is now in place to suggest a potential trend change soon.

Silver

Long term silver spiked up in multiple breakouts through earlier levels and patterns, in finally coming to life after a period of lethargy as it starts to outperform gold. In spiking to $18.50 silver formed a non-confirmation with gold which is an indication of a potential trend change.

The short term daily 3-month chart illustrates the spike to the top of the bear flag with both oscillators rising to the top of their range. The thrust up will be equalled or exceeded by the thrust down once a reversal starts, which will test support. This starts at $17.50, and if $15.92 is breached support will have failed.

Silver Miners

Silver miners have been the equal of silver itself also spiking up to a new high in multiple breakouts, in sympathy with the metal. The same implications apply to miners as to silver, with the new high at the top of both the rising wedge and the bear flag, with bearish implications. Also, negative divergence is developing as the MACD stair steps down.

Gold : Silver Ratio

The gold / silver ratio has a breakout in closing at 83.93 down below the previous low: A drop of 5% on the previous week. This is positive for the whole precious metals complex, provided the trend holds without reversing up again. 83.93 is as low as the ratio was 6 months ago, but unfortunately both oscillators are plummeting towards the bottom of their range, and the non-confirmation with gold is an indication of a potential trend change.

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.


Interestingly, Elliott Wave analysis indicates that because the decline in the Dow towards the end of 2018 comprised a corrective ABC wave count, it indicated that the decline was only temporary and that a further increase to a new high would follow. This proved correct, and the Dow increased to a new high at D.

Now, the Dow is again declining towards the end of 2019, and a comparison with 2018 is available as well as clear identification of the nature of the wave structure in the decline.

Consider the chart below which includes both periods and an hypothesis of what clues it may hold.

The 2018 decline from B to C was an ABC corrective wave count that extended over a period of 3 months.


Options for 2019 (Red and Blue on the chart):

Red If the decline replicates 2018 and is a corrective ABC, it will be quicker in terminating in Oct 2019, to be followed by an impulsive wave count to a new high into 2020, before the final market collapse;
Blue If the decline is impulsive (5 waves) from D down to E (blue) it may be slower in terminating in Dec 2019, to be followed by a corrective ABC up into 2020 and then down into the final market collapse;

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