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Midweek Market 31 Oct 2019

Oct 31st, 2019

Executive summary

US equities seem very close to the start of a significant decline. Using the Dow Jones Ind Ave as a proxy for US equities (and indeed global equities) the chart structure indicates lack of breadth and volume plus the usual high level of investor euphoria, all pointing towards an advance that is close to termination. The plethora of inter-market non-confirmations continue which add significantly to this view.

The US$ is weakening with reciprocating strength mainly in the Euro and British Pound, and precious metals and miners remain becalmed and stuck within higher breakout and lower breakdown levels. More time is required to identify whether gold and silver will perhaps breakout to new highs before the inevitable decline to much lower levels.

The US Fed cut the rate again yesterday in an attempt to reinvigorate the economy and prevent the looming recession, having also started the next round of QE during the previous week. The Process of QE includes ‘printing money’ by buying Treasury bonds, and this has the effect of increasing bond values which then have correspondingly lower yields. This is the mechanism central banks use to reduce interest rates to zero and negative in order to reduce servicing costs of ever higher levels of debt. But in spite of this, the US Treasury countertrend rally seems to have terminated and yields are increasing. It looks like this will be validated within the next month or two, and if interest rates are now increasing again this will exert unbelievable pressure on world economies as the global recession draws nearer.

US Dollar

The US$ is in long term decline but has been in a rally since 2008. 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 5 year weekly chart illustrates the steady dollar advance since the start of 2018 within the bearish rising wedge formation. But the dollar has weakened in the tail of the pattern as it declines to test the bottom of the rising wedge under the force of negative divergence. It has gained some strength from the 50-Week moving average (red) with a slight bounce which should prove temporary.

The daily 12 month chart illustrates the temporary support off the 200-day moving average (green) as the dollar tests the bottom of the expanding triangle with a bearish-looking candle formation. The US Fed rate cut yesterday should propel further weakness in the dollar.

The short term 3 month daily chart provides a closer view of the dollar decline from the breakout which is now ready to resume further declines.

Japanese Yen

The dollar/Yen currency pair continues to hold its strength with Yen weakness exceeding dollar weakness, as price continues to edge up into the bear flag formation. It closed yesterday on a negative candle at a confluence with the 200-day moving average which may spark a reversal, all within the continued down-sloping declining channel..

US Treasuries

The US Treasury countertrend rally completion is close to confirmation with the chart now indicating a potential turnaround more clearly: Yield has a more definite breakout from the declining channel, and 10-Dema (blue) has a more definite cross-over 50-Dema (red). Yield still needs to increase beyond 1.9% into resistance, but a small correction is delaying this until later. The next period is critical in clarifying whether this is now the defining moment of the US Treasury market resuming the long term collapse which started in mid-2016 and which has been interrupted by central bank QE and the process of ‘printing money’ by means of buying bonds which has artificially increased prices and depressed yield.

Gold

Long term gold is still turned down from peak overbought levels and record volumes after meeting strong resistance from 2011 / 2012. The process has been somewhat ‘becalmed’ with as yet no clear indication of whether gold is to decline to test support or whether it is first to advance towards a new high before declining. More time is required to clarify this, but nevertheless gold is still expected to decline severely to much lower levels below those of Dec 2015 before the start of the next gold bull market.

Gold is mostly quoted in US$, but can of course be quoted in any currency. It is interesting to observe the long term gold chart quoted in Euros, which illustrates that price has in fact exceeded the previous peak in 2011. Equally, gold in Euros is also expected to still decline severely to much lower levels below those of Dec 2014 before the start of the next gold bull market in Euros.

The weekly 5 year chart indicates $Gold is declining to test the 1st support zone which should see price drop towards $1383 eventually. However, the pennant formation is a continuation pattern which suggests higher prices first, even perhaps to a new high. All the moving averages are pointing up, but price is still in the upper regions of the rising channel which presupposes lower prices from here with support from both oscillators moving down.

The daily 12 month chart illustrates development of the topping pattern within a bull flag with potential price movements either up or down. More time is required to clarify whether the next thrust is up or down, and key levels to be breached are indicated on the chart as $1526 (to break up) and $1459 (to break down). Price is currently at a confluence with the 50-day moving average (red) with the 200-day moving average much lower down in the support zone.

The 3-month daily chart illustrates in more detail the formation of the topping pattern and bull flag with potential price movement either way. Key breakout levels are indicated at $1526/$1536 (to break up) and $1465/$1459 (to break down).

South African Rand

The Rand continues to drift weaker within the rising channel pattern, with a sharp decline yesterday (despite dollar weakness) caused by statements from the Reserve Bank Governor and the pending rating from Moodys. Further dollar weakness should reverse this trend, but politics is the overriding driver.

HUI / Gold Ratio

The metal miners charts epitomise the ‘becalmed’ nature of markets at present with numerous conflicting patterns in the HUI / Gold ratio indicating indecision. The H&S patterns have not activated, with the expanding triangle, rising wedge, and reducing wedge patterns nullifying each other. Both oscillators are rising to just above neutral and, as with the metals, more time is required to clarify chart direction.

The long term 10 year chart illustrates the large consolidation at the 200-week moving average (green) reflecting the stalled metals market.

GDX US miners ETF

Similar commentary applies to the GDX chart, as well as the GDX Juniors, XAU, and inverse Dust (charts not shown). The topping pattern is held back by the stalled metals market, with the developing H&S still dormant.

The long term 10 year GDX is declining from resistance at a 3-year double top and 6-year triple top in a large consolidation reflecting the stalled gold market. Although this is well above the 200-week moving average (green) which has just been crossed by the 50-week moving average (red) in a bullish ‘gold cross’. More time is required to clarify chart direction from here.

Silver

Long term silver commentary is in essence similar to commentary for gold, except silver is more extreme with the decline from 2011 nearly double that of gold. Long term silver is still turned down from peak overbought levels and record volumes after meeting strong resistance from 2011 / 2012. But the silver decline has actually stalled although with as yet no clear indication of whether silver is to decline to test support or whether it is first to advance towards a new high before declining. More time is required to clarify this, but nevertheless silver is still expected to decline severely to much lower levels below those of Dec 2015 before the start of the next silver bull market.

The weekly 5 year chart indicates the Silver decline is losing momentum into a pennant formation which indicates a new high is still possible (being a continuation pattern). All the moving averages are pointing up with the 200-week moving average still well below which suggests higher prices first, even perhaps to a new high.

The daily 12 month chart illustrates development of the topping pattern within a bull flag with potential price movements either up or down. More time is required to clarify whether the next thrust is up or down, and key levels to be breached are indicated on the chart as $18.78 (to break up) and $16.87 (to break down). Price is currently at a confluence with the 10-day (blue) and 50-day (red) moving averages with the 200-day moving average (green) much lower down in the support zone. Volumes are declining sharply in support of lower prices.

The 3-month daily chart illustrates in more detail the formation of the topping pattern and bull flag with potential price movement either way. Key breakout levels are indicated at $18.78 (to break up) and $16.87 (to break down).

Silver miners exhibit the same bullish and bearish symptoms as silver itself, and the key level of $27.40 needs to be penetrated on the downside to prevent the bull flag from activating price to new highs.

Gold : Silver Ratio

The gold / silver ratio closed much lower this week at 83.77, reflecting recent increased silver outperformance of gold and also the development of a changed chart structure in a downward sloping expanding triangle that promises more positive precious metals performance. All the moving averages are now down-sloping, above the ratio, including a the 50-day (red) crossover of the 200-day (green) in a positive ‘gold cross’.

General Equities

The Dow Jones 12 month daily chart illustrates the price rally during October which may still go higher but is very close to rally termination with declining energy levels by all structural criteria. This is the prelude to unfolding the basically 2 (two) outcomes developing out of the massive topping pattern of the last two years which is now likely to start a serious decline phase:
• 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) – now more likely;
• 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) – now less likely;
Consider the chart below which includes the two options.

It seems option 1 (red) is unfolding and more likely, and option 2 (blue) less likely.

Option 1 (red) Decline from D to E to complete (3)(4)(5) before the start of the final market collapse probably at the start of 2021.

Option 2 (blue) Penetrate up through the top of the expanding triangle before the start of the final market collapse in 2019.

In spite of this, we need still to identify the chart structures as the future begins to unfold. 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 before the final collapse occurs.

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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