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Midweek Market 7 Nov 2019

Nov 7th, 2019

Executive summary

US equities seem very close to the start of a significant decline, despite the approach of the festive season which usually produces ‘festive’ markets. 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 correcting up after recent weakness although forecast to extend the weakening phase in due course. Precious metals and miners have been in consolidation mode after responding down from recent peaks. More time is required to identify whether metals and miners will perhaps breakout to new highs before the inevitable decline to much lower levels.

US Treasuries are developing a bottoming pattern which indicates the countertrend bond market rally is potentially over with yields beginning to increase. 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 cost of debt servicing spirals.

US Dollar

The US$ is in long term decline but has been in a rally since 2008. The dollar and gold (quoted in dollars) have been moving in sync (as opposed to opposite) for about 13 months now, and will presumably do so only for a short while longer if judged by history. Therefore, once they start moving opposite again dollar and gold values will move against each other with low gold if high dollar, and vice versa. But the next period is forecast to see lower dollar and gold values which means they are actually forecast to move in sync for longer than usually occurs historically.

The 5 year weekly chart illustrates the steady dollar advance since the start of 2018 within the bearish rising wedge formation which is starting to be tested in the lower regions. 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 support from the 50-Week moving average (red) but once this is breached will lead to significant dollar weakness.

The daily 12 month chart illustrates the temporary support off the 200-day moving average (green) as the dollar retraces some of the recent declines. A breach here will lead to weakness and further testing of the support zone.

The short term 3 month daily chart provides a closer view of proceedings with the dollar at the upper edge of the bracket between the 50- and 200-Day moving averages. Once the dollar correction completes it is likely to resume further declines.

Japanese Yen

The dollar/Yen currency pair continues to hold its strength as current dollar strength exceeds Yen strength. Value is rising within a bear flag which indicates a reversal break down into relative dollar weakness / Yen strength, all within the continued downward sloping large declining channel in a negative bias chart.

US Treasuries

The US Treasury countertrend rally completion is close to confirmation with the chart indicating that the breakouts are holding: Breakout from the declining channel, 10-Dema crossing over 50-Dema, and yield moving toward breach of 1.9% to test resistance. Both oscillators are in rising channels which reflect the developing chart pattern of higher highs / higher lows from the bottom at the start of Sep 2019. This all portends a turnaround more clearly, but yield still needs to increase beyond 1.9% into resistance to confirm whether the US Treasury market is in fact resuming the long term collapse which started in mid-2016. The whole process has been interrupted by central bank QE and artificially depressing interest rates.

Certainly a defining moment with titanic forces against supposedly immovable objects acting in opposite directions.

Gold

Long term gold is still turned down from peak overbought levels and record volumes in a market that has become becalmed as reflected in the consolidation of the last 2 months. The process still depends on 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 forecast to decline severely to much lower levels below those of Dec 2015 before the start of the next gold bull market.

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 still sits at the 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 with potential price movement either way. Key breakout levels are indicated at $1526/$1536 (to break up) and $1465/$1459 (to break down).

The gold volatility index indicates continued weakness reflecting continued loss of investor interest. The chart structure therefore supports the gold weakness option but both oscillators are dropping to the bottom of their range which might support the opposite view.

South African Rand

The Rand gapped down as it gained strength against the dollar because of Moody’s rating, but this only buys more time. The chart continues to reflect a gradual weakening increase in the rising channel, with both oscillators neutral. Much depends on dollar and gold values, and whether these continue to move in sync or start moving opposite to one another.

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, but in fact the ratio has increased into a bear flag due to recent miner outperformance of gold. 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 reflecting the stalled market, as it moves towards the triangle apex. The ratio is bracketed by the 200-Week (green at top) and 50-Week (red at bottom) moving averages, with more time required to clarify chart direction.

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. There is still 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), although silver has a mini-breakout from the expanding triangle to support the break down option. Price has in fact broken down through the 50-day (red) moving average with the 200-day moving average (green) still 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 $18.78 (to break up) and $16.87 (to break down).

Silver miners exhibit a non-confirmation with silver itself and with gold miners, in that there is a mini-breakout from the bull flag, with none in silver or HUI or GDX, etc. This is rather peculiar because normally this would inspire a silver price advance but silver has in fact even underperformed gold this week. Maybe this is pointing towards weaker metals and miners prices finally to break the deadlock.

Gold : Silver Ratio

The gold / silver ratio closed higher this week at 84.84, reflecting recent increased silver underperformance of gold which is negative for the whole complex. However, the development of the downward sloping expanding triangle does indicate silver outperformance of gold, unless the chart structure is about to change into something different.

The long term 10 year chart indicates a potential breakout through the bottom of the rising wedge, unless a broader wedge is in fact in play. It seems to be a pivot point though in the ratio which could have further meaningful implications, still up or down.

General Equities

The Dow Jones 12 month daily chart illustrates the price rally during October is still likely to extend higher into November, despite being close to termination and with continued force from negative divergence. This remains the prelude to unfolding the basically 2 (two) outcomes developing out of the massive topping pattern of the last two years which is soon 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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