Market Demons

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.

Conclusion

International equity markets remain elevated but mostly in holding patterns which could move either way. The US Dow Jones continues to form a consolidation pattern, close to the bottom of it’s trading range and still above the interim zone of indecision.

The US$ dropped down through long term support and gold has broken up decisively through long term resistance which now enables the next thrust to test the previous high of $1923. We are in the very early stages of an evolving gold bull market which will yield spectacular gains during eventual market maturation.

The big question now is whether:

• There is first to be a US$ rally followed by eventual retreat and continuation of the bear trend with gold correcting down before the parabolic rise begins;
• or the US$ just continues down and gold is already in the parabolic rise;

US$

The weekly chart indicates the Dollar is still poised to either rally toward 50-Wema (or above) or continue to drop in it’s bear trend. It has broken down through the region of strong support (green) which supports the latter option, but the oscillators are low in pre-bounce mode which supports the former.

The daily chart illustrates the break down below support (black) although recovering most of Friday’s drop. A breakout through resistance (red) may see a rally to 200-Dema with the oscillators moving lower again.

Gold

Gold’s breakout through long term resistance is decisive and the new bull market support (blue) remains well intact after the 8 year cycle low.

Gold has powered up in the current cycle which has extended out to 43 days suggesting a correction is now due, also with very high oscillators. Unlike silver, this increase is accompanied by strong volume.

An exciting aspect of this scenario is the relationship between gold miners (equity) and gold price as illustrated in the GDX : $Gold ratio. The uptrend indicates strike zones (green) through the trendline (0.022) and the previous high (0.024) with the projected target zone (blue) at 0.045, being the height of the revival extended up an equal distance to strong resistance. This ratio increase from 0.023 to 0.045 represents massive equity price gains at something like quadruple the rate of gold price gains.

Silver

Silver has powered up in the current cycle of 43 days, similar to gold, except in the absence of strong volume gains. Silver always leads gold which therefore suggests all is not quite as positive, and together with COTs building short positions quickly now it may yet lead to corrections before the main thrust continues.

GDX US miners ETF

The GDX chart supports all the comments above.

DUST US Miners bear index

The DUST chart supports all the comments above.

General Equities (Dow Jones Industrial)

The Dow Jones continues sideways in a consolidation phase, at the bottom of it’s short term trading range (green) just above the interim zone of indecision. Although the oscillators are normal the MACD still exhibits negative divergence and any downward movement through the zone of indecision (blue) may then reach the main support level (red) at 21 200 which it needs to remain above.

Conclusion

International markets remain elevated although indications are that the bearish sentiment on the US market will reverse and once again enable increases to new highs. A disappointing US jobs report for August came out on Friday indicating 156 000 new jobs (market estimate 180 000) as well as revising July down from reported 209 000 to actual 189 000, causing the Dollar and gold to jerk. The Dollar initially dropped sharply and then rose to close higher than where it started, with gold and silver increasing markedly and then dropping to close higher than where they started. The main effect of the report is that the US Fed is now less likely to hike rates in 2017 which is bearish for the Dollar and bullish for equities, hence the stronger close for the Dow despite losing all it’s gain for the day and ending with a Gravestone Doji.

The main structural elements are that the US$ remains week and gold remains strong, but despite this there will no doubt be reversals. Gold has decisively broken up through long term resistance and completed a short term inverse head and shoulders pattern which could propel price to $1550, as well as a more powerful nearly completed long term inverse head and shoulders pattern which could propel price to $1800. The Dollar has actually still to break down below the previous low as well as decisively break down through the long term region of support (92 to 93), and until it actually does that it remains capable of a meaningful rally up to the region of 95 or more. If that happens gold will still endure a meaningful correction down.

US$

The US$ is still poised in the region of strong support stretching back 2½ years and will either rally up towards 50-Wema or continue to drop down through support and resume the bear trend. The oscillators are still low in pre-bounce mode which suggests a Dollar rally is more likely.

The US$ turned up from a low of 91.55, and potential bottom, and encountered resistance at the trendline (red) and previous high at 93.13 which it needs to penetrate to confirm a bottom and start a rally. A drop below support at 91.55 (green) will be extremely bearish. The oscillators have returned to normal and a Dollar move either way is possible.

Gold

The gold price has broken up through long term resistance decisively extending the new bull market from the 8 year cycle low in Dec 2015.

The gold price is completing a 4 year long inverted head and shoulders pattern with the neckline in the strike zone (red) at $1375 which will propel the price to the target zone (green) at $1800, extending price above the neckline by the depth of the head.

There is also a similar but much smaller completed pattern, extending over the last year, which will propel price to $1500 in a similar fashion. Because this pattern is complete with a price projection to $1500 it will ensure the larger pattern also completes and that the strike zone is activated.

The Gold price has decisively broken up through the triple top formation and is looking particularly bullish for further gains. However the oscillators are high which pre-empts a correction which is overdue in the current cycle, having completed a 6 month cycle low in July at the region of strong support at $1200.

Silver

The silver price has decisively broken up through the pattern of consolidation and is looking particularly bullish for further gains. However the oscillators are high which pre-empts a correction which is overdue in the current cycle.

GDX US miners ETF

The GDX price has decisively broken up through a region of resistance to close at 24.78, forming a double top with a previous high in April. It is looking particularly bullish for further gains, except the oscillators are high which pre-empts a correction which is overdue in the current cycle, in line with precious metals.

DUST US Miners bear index

The DUST price has powerfully penetrated down through the double bottom in line with all the foregoing comments. The oscillators are low which pre-empts a correction up, which is all in accord with the inverse of all earlier comments regarding metals and miners.

General Equities (Dow Jones Industrial)

The Dow has broken up through the downward trading channel (black), well within the upward trading channel (green). This moves away from the interim zone of indecision (blue) and further away from key support at 21 200. The oscillators are normal although MACD still exhibits negative divergence. Consensus is that equities are breaking out of bearish sentiment to reverse up and once again enable increases to new highs.