Weekend Market Analysis 24 Sep 2017
Conclusion
International equity markets remain elevated with the US Dow Jones breaking up through a double top from a 2-month long consolidation pattern. It continues to look strong, above a zone of indecision and within an upward sloping trading pattern, as short term oscillators reach the top region which indicates a correction is imminent.
The US$ has decisively broken down through long term support and the short term rally this week has failed to breach earlier highs before weakening into the close. Gold has corrected down to re-test the long term resistance trendline into a region of support, accompanied by reducing volumes which, with low short term oscillators, suggests a return to higher prices might resume soon.
The data suggests a continuation of the US$ bear trend and a resumption of the gold bull trend, except for the relative weakness in the Japanese Yen which needs to strengthen for the gold bull market to resume with any meaningful urgency. Therefore, it is likely that some degree of market churning will still occur for a period before the fundamentals manifest into appropriate market movement.
The gold price seems to be on the verge of a major move in the very early stages of the next leg up in the bull market.
US$
The long term US$ chart illustrates 3 elements of downward penetration, being:
- 1st Stage target penetrated (red) – (with 2nd stage at approx. level 87 and 3rd stage at approx. level 77 now awaited);
- 200-Week moving average penetrated (blue);
- Region of strong 2½ year support penetrated (green);
These all suggest further US$ declines in due course.
The Janet Yellen hawkish announcement (Wednesday) of more rate hikes and reduction of the US Fed balance sheet induced a stronger Dollar initially but which faded into the close. The daily short term chart illustrates how the rally failed to breach earlier highs, suggesting the previous low is likely to be penetrated first.
US$ / Jap Yen currency pair
The long term view of the US$ / Jap Yen currency pair illustrates the inverse correlation with the $gold price. Note the turn up from Aug 2011 when gold reached a peak and the turn down from the Dec 2015/16 period when gold bottomed. The Yen resistance line (red) and support line (blue) forms an angle into the target breakout zone (black square) where the Yen has to either penetrate the red line (positive for Gold) or the blue line (negative for gold). The central resistance line (green) indicates points of contact in either support or resistance mode, and note also that the Yen is on the support side (blue) of 200-Dema, which is negative for gold.
This picture indicates a short term negative implication for gold, resulting from the current relative weakness of the Yen against the Dollar.
Gold
Gold’s breakout through long term resistance has retreated to re-test the resistance line in the current correction mode. This is positive if gold remains above the resistance line and negative if it penetrates.
The short term chart illustrates gold’s current correction in process where it has reached some support. This is accompanied by decreasing volume (positive), together with oscillators that have dropped down: The slow Stochastic to below 20 and ready for a rebound, and the MACD reaching down to normal. Movement in the market early next week will be important.
GDX US miners ETF
The GDX chart mirrors and supports all the above comments for gold.
DUST US Miners bear index
The DUST chart reflects the inverse of all the gold and GDX comments above.
Silver
Silver is correcting down in similar fashion to gold, in also reaching a strong region of support.
Gold / Silver Ratio
The Gold / Silver ratio is a powerful indicator of directional movement in the precious metals market. Here is a long term chart of the ratio since these metals were de-linked from the US$ and allowed to move freely in accordance with supply and demand. The ratio drops during a gold bull market and increases during a gold bear market.
Note the run up from the gold peak in 1980 compared to 2011, and the long term resistance line across the 2 ratio peaks. There is a similarity which suggests the ratio decrease from the 1991 peak is likely to be repeated from the 2016 ratio peak. In 1991 the ratio began a 7 year drop from 105 to 42, and if this is repeated a similar drop from 2016 will be from 85 to 35.
The next phase will be much higher precious metal prices.
General Equities (Dow Jones Industrial)
The US Dow Jones has broken up through a double top from a 2-month long consolidation pattern. It continues to look strong, above a zone of indecision and within an upward sloping trading pattern, as short term oscillators reach the top region which indicates a correction is imminent.
Janet Yellen announced on Wednesday that the US Fed intended to hike the rate in Dec 2017 with a further 3 hikes in 2018. Also that the Fed intended to start reducing the US Fed balance sheet next month from the enormous $4.5 trillion, admittedly only at an initial rate of $10B per month. This, all in spite of weak US inflation and continued heavy EU and Japan QE, claiming the US economy was strong enough.
This caused the US stock market to decline slightly and US bond yields to strengthen slightly. The intention is of course to reverse the whole process of QE from the 2008 financial crisis, but the effect of this reversal will be to extract this vast amount of money from the market which cannot be possible without collapse of some sort. Probably best left to her successor.
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