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Midweek Market 3 Oct 2019

Oct 3rd, 2019

Executive summary

The US Fed cut the rate in Sep 2019, but the US economy is indicating a lot more is needed in yet lower rates and increased new credit. But rates are already perilously close to zero and the usual leeway is no longer available.

As US recession looms, the news just keeps getting worse:
• Manufacturing decreases to levels last seen in 2008;
• Treasury yields weaken as recession fears increase;
• Gross national debt jumps by $1.2 trillion to $22.7 trillion;
• Growth keeps declining;
• Student loan debt now totals $1.6 trillion in 2019;
• A Repo ‘squeeze’ resulted when banks stopped lending to each other and the US Fed had to step in to ease liquidity;
• Mid-west economies are faltering and begin spreading pain nationwide;
• Equities finally respond with the Dow Jones dropping 1000 points yesterday;

The US economy, and its president, requires even lower rates and increased money supply to avoid financial and monetary arrest. Are we now to witness the US join the EU and Japan in a coordinated round of aggressive easing, possibly joined by the rest of the world.

US Dollar

The long term monthly US dollar index chart edged down this week from highs at the rising wedge apex. Although both oscillators are neutral they reflect the negative divergence which is now likely to weaken the dollar in the next phase.

The daily 12 month chart illustrates the dollar starting to weaken although still well within both rising patterns. Negative divergence is evident in the MACD and this is likely to continue to weaken the dollar.

The 3 month daily chart provides a closer view of the dollar turning down after 6 consecutive closes above 10-Dema. The closing candles have long shadows above indicating weakness next, together with the force of negative divergence.

Japanese Yen

The dollar has started weakening against the Yen as it maintains position within both declining channels, and the overall essence of a negative bias chart. This would suggest further Yen strength and dollar weakness.

US Treasuries

The US Treasury countertrend rally is still incomplete as yield in the 10 year US Treasury continues to drop. It is assisted by the fear of US recession which in turn provides the US Fed with cause to cut the rate again as yield declines. Yield needs to increase and penetrate the top down-sloping trendline before completion of the countertrend rally can be confirmed.

Gold

Long term gold has turned down from peak overbought levels, but is rising again in a correction which, once completed, will see gold drop to new lows. The correction is likely to increase further before again resuming the decline which will test minor support down to $1383 before serious support levels are reached further down. $1383 is likely to provide a serious platform for additional potential upward corrections.


This leg down in the gold bear market is likely to witness prices below the Dec 2015 low before true bottom is reached and the eventual start of the next gold bull market. There are a number of additional support levels indicated on the chart and these will of course provide temporary price improvements as they are reached.

Gold is correcting up after the first wave down and, once complete, the next wave down should test minor support down to the $1383 level. Both oscillators are moving down from overbought levels in sympathy with eventual lower gold prices.

The daily 12 month chart illustrates the topping pattern which has formed to promote further potential price declines. Key support levels are indicated on the chart which will also provide bounce potential.

The 3-month daily chart illustrates in more detail the formation of the topping pattern as well as the key $1465 level at the top of the support zone.

South African Rand

The Rand weakened sharply into earlier resistance, as it closed above 10-Dema on the last 10 consecutive trading days. The RSI is approaching oversold levels as the Rand moves closer to the top trendline in the rising channel, which suggests a reversal soon. If this coincides with a weaker dollar then the support region is likely to be tested, perhaps even down towards 200-Dema (green).

HUI / Gold Ratio

Successive breakouts in the ratio is building toward more breakouts as US miners underperform gold. Criss-cross H&S necklines are about to be breached which is likely to test the support region below.

GDX US miners ETF

Similar commentary to the HUI/Gold ratio with GDX indicating the start of a bearish negative bias as the trend change develops. The breakout from the rising wedge is followed by a developing H&S pattern which could activate soon. Both oscillators are just below neutral.

Dust US Miners Bear Index

The US Miners Bear index, as the inverse of GDX, is similar but in reverse direction. A bottom is in development with the bias changing to up as the trend change develops. There is now potential for a thrust up into resistance to confirm the bottom, which is in support of lower US miner prices.

Silver

Silver is correcting up after the first wave down and, once complete, the next wave down should test minor support down to the $15.62 level. Both oscillators are moving down from overbought levels in sympathy with eventual lower silver prices.

The daily 12 month chart illustrates the topping pattern plus the correction up after the first wave down. The chart structure promotes further potential price declines to test support down to the $15.90 level. Both oscillators are still trending down in support of lower silver.

The 3-month daily chart illustrates in more detail the formation of the topping pattern as well as the key $16.90 level at the top of the support zone.

Gold : Silver Ratio

The gold / silver ratio continues to bounce around within a rising channel which indicates that gold is slowly assuming the leadership role, which is negative for the whole precious metals complex.

General Equities
US equities have started to decline with the Dow Jones dropping by 1000 points yesterday, and with every indication of further declines. Using the Dow as a proxy for US equities it can be seen that there are basically 2 (two) outcomes developing out of the massive topping pattern of the last two years:
• Strong decline now leading into strong recovery into 2020 to new highs to coincide with US presidential elections in Nov 2020, before the final market collapse begins (marked in red on the chart);
• Continued advance now to new highs, invalidating the Elliott Wave expanding triangle pattern, before the final market collapse begins in 2019 (marked in blue on the chart);
In watching these two options carefully, it appears that the former is in fact happening, and that the latter is not.

Consider the chart below which includes the two options.

Option 1 (red) This pattern is playing out. It will decline towards E to complete (3)(4)(5) before the start of the final market collapse probably at the start of 2021.

Option 2 (blue) This pattern is not playing out, because the Dow is declining now and not rising now. This would have meant a new high in 2019 and the start of the final market collapse in 2019.

Since the Dow is following the Red option, we nevertheless need to still verify the chart structure to make doubly sure that this option is in fact playing out. Consider the chart below:

If option 1 (red) is playing out, it needs to decline to E now in a replica ABC format (similar to the end of 2018 decline), to be followed by an impulse (1-5) wave count to a new high in 2020.
But if the decline to E is in fact an impulse (1-5) wave count (blue), then it is likely that the top of the market was in fact Sep 2019 and that the final market collapse is already happening.

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