Midweek Market 24 Oct 2019

Executive summary

Markets have become ‘becalmed’ and there is an eerie silence out there, except for currencies: The US$ is weakening with reciprocating strength mainly in the Euro and British Pound. With one or two exceptions, global equities, metals, miners, and Treasuries are where they were a month ago.

The next US QE phase has started, resulting in the weaker dollar and the almost certainty of a US rate cut at the next Fed meeting. So, MMT (Modern Monetary Theory) is again starting to gain momentum in a desperate effort to stall the approach of recession and the inevitable market collapse. But MMT today is in fact the very reason why the next collapse will dwarf any previous collapses in history, because of the collapse in currency values and negative interest rates threatening the sovereign bond market which is traditionally regarded as risk free.

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 is now weakening in the tail of the pattern as it declines to the bottom of the rising wedge under the force of negative divergence. It is now at a confluence with 50-Week moving average (red) which is acting as strong temporary support.

The daily 12 month chart illustrates the breakout through the bottom of the expanding triangle which propelled the dollar into earlier support down to the confluence with the 200-day moving average (green) which provided strong temporary support in a small rebound.

The short term 3 month daily chart provides a closer view of the dollar breakout down to the confluence with the 200-day moving average (green) providing short temporary support.

Japanese Yen

The dollar/Yen currency pair continues to strengthen into the bear flag as it holds strength with Yen weakness exceeding dollar weakness, as it meets the 200-day moving average (green) which should supply strong resistance. The chart is likely to reverse in due course when the bear flag activates into Yen strength and dollar weakness which should continue the negative bias in the large 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 breakout from the declining channel, and 10-Dema (blue) has a cross-over 50-Dema (red) for the first time in 14 months. Yield still needs to increase beyond 1.9% into resistance, but both oscillators are showing strength within respective rising channels.

Gold

Long term gold is still turned down from peak overbought levels and record volumes after meeting strong resistance from 2011 / 2012. Despite short term gyrations gold is initially expected to correct down towards the $1380 level, which is described by many as the greatest buying opportunity of a lifetime. The multi-year basing pattern in the support zone (red) is certainly a powerful propellant for much higher prices, but resistance in the 2011-2013 period will be powerful resistance indeed before penetration is achieved, and the next gold bull market accelerates ahead.

There are numerous arguments for and against gold declining or advancing from here, and some of these are dealt with in more detail later in the document. But either way, gold is still expected to decline to much lower levels below those of Dec 2015.

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. Key levels are indicated on the chart at $1459 and $1526, with volumes declining and both oscillators drifting lower.

The 3-month daily chart illustrates in more detail the formation of the topping pattern and bull flag with potential price movement either way. More time is required to identify which of the key levels are penetrated first.

The gold volatility index chart illustrates gold investors’ are losing interest with a clear flat to down bias over the recent 5 months.

South African Rand

The Rand continues to drift weaker within the rising channel pattern, but with strength during October to coincide the recent dollar weakness phase. This trend is forecast to continue at least over the next short term period. which should test further into the support zone.

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 drifting lower which could perhaps shift the balance of power towards lower price (rather than higher).

GDX US miners ETF

Similar commentary applies to the GDX chart, as well as the GDX Juniors and XAU charts (not shown). GDX actually produced 2 (two) failed H&S activations.

Dust US Miners Bear Index

The US Miners Bear index, as the inverse of GDX, is similar but in reverse direction and perhaps not as accentuated. The bottoming pattern is changing to up bias but price has yet to breakout. There are 3 consecutive breakouts of 3 consecutive reducing wedges, but still no clear breakout to test resistance.

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. But, as with gold, despite short term gyrations silver is initially expected to correct down towards the $16.87 level and much lower levels beyond that.

As with gold, there are numerous arguments for and against silver declining or advancing from here, and some of these are dealt with in more detail later in the document. But either way, silver is still expected to decline to much lower levels than those of Dec 2015 at $13.80.

The weekly 5 year chart indicates Silver is declining to test support at $16.87 which should see price drop towards $15.70 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 both oscillators are moving down in support of lower silver prices.

The top pattern is preparing to break down to lower levels. But, as with gold and miners, a clear bull flag is evident and failure to penetrate $16.87 will activate the bull flag to new highs. 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. More time is required to identify which of the key levels are penetrated first.

Silver miners exhibit the same bullish and bearish symptoms as silver itself, and the key level of $27.45 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 slightly lower this week at 85.08, indicating a slight drop in gold outperformance of silver which is positive for precious metals. But the up and down performance each week only testifies to the ‘becalmed’ nature of the markets. Therefore gold’s overall leadership role continues which maintains the slight negative impact on metal prices, for the time being.

General Equities

The Dow Jones 12 month daily chart illustrates the price rally during October which could now move either way. This is a prelude to unfolding the basically 2 (two) outcomes developing out of the massive topping pattern of the last two years, whether moving to a new high now or not:
• 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);

Because of the Oct rally it is now not obvious which of these 2 (two) options is unfolding.

Consider the chart below which includes the two options.

Neither option is unfolding at the moment and more time is required to forecast which, more accurately. Key elements include whether the rally does not achieve a new high (option red), or whether it achieves a new high and new position for D but still within the expanding triangle (also option red), or whether it achieves a new high beyond the expanding triangle (option blue).

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.

Once we identify which option is unfolding, 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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