Market Demons

Executive summary

World equity markets continue to move sideways with a few exceptions like the UK, while in the US the Dow Jones continues to form a micro-topping pattern. But the big news this week is the accelerated decline in US$ value and breakouts in gold and the precious metals complex generally.

The US$ index has broken down through support to close at $91.83 and looks set to test critical support at $90.99, below which it confirms its bear trend which will take it down much further. Gold broke up above $1300 to close at $1302.76 which confirms the low at $1238, and silver broke up above $17 to close at $16.93 which confirms the low at $15.63.

There will no doubt be pullbacks from these levels, in the nature of markets. One negative impact is the miners are not racing ahead yet and this may assist a pullback, but the die is cast for a positive 2018. Bond market yields steadied this week, taking some pressure off an inevitable general equity collapse at some stage in 2018.

US$

The US$ index broke down through support decisively this week and now has to cope with testing critical support at 90.99. If this level is breached it will confirm the Dollar bear market with much lower levels to come.

The Slow Stochastic is very low and a minor correction is possible although the MACD suggests otherwise.

One of many different US$ long term charts is the 30 year chart displayed below. This illustrates substantial devaluation over the next 5 years which will see a Dollar value some 30% lower than present values at an index value in the low 60s.

Observe the negative divergence that occurred during years 2000 and 2001, and as this is a powerful indicator it produced a drop in Dollar value of 40% over the following 5 years. It has now been repeated, almost exactly, during the years 2015 and 2016, and will also result in a substantial drop in Dollar value over the next 5 years, after penetrating down through 200-Wema in both cases.

This will result in a US Dollar Index value in the region of 62 sometime around the year 2023/4.

US Treasuries

The short term 1 year chart of the US Treasury 10 year yield steadied this week, breaking back below the H&S neckline to a yield of 2.40% from 2.48%. The trend continues up however, in line with increasing inflation as reflected in the very weak Dollar, and will again breach the H&S in time.

As inflation increases, so treasury yields increase, and as yields increase so the bond bubble will rupture which in turn will collapse equity markets. Steadied rates this week therefore take some pressure off an inevitable general equity collapse at some stage in 2018.

Gold

Gold broke up through resistance this week to confirm the bottom at $1238.30 which is also now well above 200-Dema. The Slow Stochastic is topping out which suggests a correction soon although the MACD is still rising strongly.

The medium term potential for gold remains very strong as illustrated in the massive pentagon-shaped base pattern which, once price increases above $1380, will catapult gold to $1800 later in 2018.

GDX US miners ETF

GDX, representing US gold miners, has broken through resistance above the previous high at $22.98 and is poised to attack the Oct high at $23.76. GDX is underperforming gold though and this has a negative impact on price increases going forward. Also, the Slow Stochastic is topping out and this suggests a correction soon although MACD is still rising.

DUST US Gold Miners bear index

The inverse picture in the US Gold Miners Bear Index (Dust) indicates the exact opposite of the GDX chart. DUST has dropped well into the region of support (red) but shows signs of a correction with the Slow Stochastic bottoming out although MACD is still dropping.

Silver

Silver broke up through resistance this week to confirm the bottom at $15.63 which is also now well above 200-Dema. It is now free to attack the Oct high at $17.50, but the Slow Stochastic is topping out which suggests a correction soon although the MACD is still rising strongly.

Gold : Silver Ratio

The ratio dropped strongly for the last 16 trading days but is now approaching 200-Dema and previous lows lower down. The reducing gold / silver ratio represents rising metal prices and is bullish, but much further progress is necessary to even approach the previous low at 73.5. The oscillators are dropping which suggests a lower ratio for a short while yet, before a correction sets in.

General Equities

Developments in the bond market suggest lower equities soon, but in the meantime prices may well grind higher. The Dow Jones seems to be forming a micro-topping pattern and we look at this in an ultra short term 3 month chart.

The micro-topping pattern includes a double top within a negative divergence with the Fast Stochastic. The MACD indicates a breakdown which suggests lower prices in the short term.

All this is bearish for the Dow which might nevertheless break up higher with the support of the very much weaker Dollar.

Executive summary

World equity markets continue to move sideways with a few exceptions like the US. The Dow Jones seems to be forming a micro-topping pattern having got their tax reform bill, and some think they have been buying the rumour and will now sell the fact as many investment portfolios are reconfigured into the new year: Prices could of course continue up in 2018. But movement in bond market yields, edging up to reflect generally increasing inflation, has activated a small trigger which is leading to a bigger trigger, as increase in rates begin to gather momentum.

The US$ index continues to be weak despite a slightly better Friday to close at $92.92, and gold closed stronger at $1 278.80. This is all in accord with expectations, but final trend confirmation still awaits:

• The US$ needs to break up above resistance at 94.1 or is subject to breaking down below support at 90.99;
  • Above 94.1 it could rise further towards 200-Dema at about 95, or even higher;
  • Below 90.99 will confirm its bear trend which will drop Dollar value dramatically by 40% over the next 5 years;
• Gold is enjoying a rally from the recent low at $1238 and is likely to rise into the $1270 – $1290 region (which is where it is now);
  • If the US$ breaks down below 90.99, gold will break up above this rally region and confirm the low at $1238;
  • this will therefore be the start of the next leg up in the gold bull market which will take price up dramatically;
  • if the US$ breaks up above 94.1, gold will delay its rise and drop to a delayed low at about $1200 in Jan 2018, before resuming its inevitable rise;

US$

The US Dollar is the world’s reserve currency and is on the cusp of major change as threats from China (especially) to alter this Dollar hegemony increase. Also, the US$ moves in cyclical changes in its value, with respect to other currencies, and is about to accelerate the move downwards in the current cycle. When you add this to the effect of devaluation due to money printing, you can appreciate the period of currency value change that lies ahead, as well as the value of gold which correlates inversely to the US$.

3 (three) Long term US$ charts are included in this document as well as starting with the normal short term view, to more easily assist in understanding the trend in Dollar value, and therefore reciprocal gold value.

The US$ index is hovering at diagonal support, and could attempt to break up through the failed ‘head and shoulders’ neckline, for the 3rd time, in which case it might meet with resistance at 200-Dema and the previous high at 95.1. It does not seem to possess any real strength though and may simply penetrate diagonal support to then have to cope with critical support at the previous low of 90.99.

If the Dollar breaks down through critical support at 90.99 this will confirm the Dollar bear market. If it breaks up to resistance at 200-Dema this will only delay the inevitable downward penetration.

 The 1st long term chart covers 14 years and illustrates the potential for powerful Dollar weakness to come. The Dollar index has already penetrated down through the 1st stage decline target (red) and sits at 200-Wema at the top of the region of support (green). This is the prelude to further weakness toward and beyond the 2nd and 3rd stage decline targets.

This long term forecast of Dollar weakness is corroborated by other different technical analysis validations, and suggests a 4 to 5 year period of decline that will take the index well below 70, and during the same period will propel gold in its bull market.

The 2nd long term chart covers 30 years and illustrates the negative divergence that occurred during years 2000 and 2001 between price and the RSI oscillator. This is a powerful indicator which produced a drop in Dollar value of 40% over the following 5 years.

It has now been repeated, almost exactly, during the years 2015 and 2016, and will also result in a drop of 40% in Dollar value over the next 5 years, after penetrating down through 200-Wema in both cases.

This will result in a US Dollar Index value of 62 in the year 2024.

The 3rd long term chart covers 40 years and illustrates the near exact cycle repetition of 16 years to coincide with US presidential elections (as does gold of course). The Dollar Index peaks every 16 years and troughs every other 16 years.

This will result in a US Dollar Index value in the low 60s in the year 2024.

It is this US$ drop in value that will reflect in massive increases in gold and silver values in the next period of the gold bull market.

US Treasuries

The cornerstone of the financial market is the bond market, and this has enjoyed a 35 year bull market in the US which has ‘driven’ everything. It is mainly the bond market that is the vehicle worldwide that has driven:

• inflation to current low levels;
• interest rates to current low and even negative levels;
• global debt to massive and uncontrollable levels;

It has also assumed ‘bubble’ proportion, and when the bond bubble bursts everything will collapse. Put simply:

• when inflation rises, so do bond yields;
• when bond yields rise, bond prices fall;
• when bond prices fall, the bond bubble bursts;
• when the bond bubble bursts, the Everything bubble bursts;

Inflation is beginning to rise and the end of the bond bull market has already happened. Below is the chart of the US Treasury 10 year yield which illustrates the end of the bond bull market in a massive ‘double bottom’ pattern, followed by rising interest rates from the low point in mid-2016.

Observe the 5 year chart of the US Treasury 10 year yield and note the cycle bottom in mid-2016 at 1.37%. The yield has increased since to close on Friday at 2.48% with the upward trend potential of breaching the ‘inverted head and shoulders’ pattern in progress at 2.6%. This is well above 200-Wema in a base formation that will provide continuing increases.

Now observe the short term 1 year chart of the US Treasury 10 year yield and note the cycle bottom in Sep 2017 at 2.05%, at the bottom of the ‘inverted head and shoulders’ pattern which has been breached. We have a breakout above the neckline and well above the supporting 200-Dema.

This breakout will lift interest rates by the depth of the ‘head’ to approximately 3.0% which in turn will breach the neckline in the 5 year chart to 6%, as the trigger in the short term chart activates so it activates the trigger in the longer term chart.

The oscillators are both pointing up in support of higher interest rates.

The bond bull market is over and the bond bubble is bursting!

Gold

Gold is the beneficiary of a lower Dollar and an end to the bond bull market and an end to the share bull market which will follow.

Gold has rallied from the potential bottom at $1238.30 to well into the rally target zone to close at $1278.89, which is also above 200-Dema. Resistance is at the Nov and Oct highs above $1300 which will need to be breached to prevent any retest of the previous low at $1238.30. It all depends on US$ strength / weakness, whether gold confirms the bottom at $1238.30 or whether it still declines towards a final bottom at $1200-$1210 later in Jan 2018. The oscillators are rising, supporting increased gold prices.

Note also, we are now at the diagonal resistance (green), and penetration here will add strength to the gold rally.

The medium term potential for gold remains very strong as illustrated in the massive pentagon-shaped base pattern which is a powerful launch pad for further gold strength which will take price up toward the region of $1800, being the price rise equivalent from the neckline to the single point bottom of the pattern at $1045.

GDX US miners ETF

GDX, representing US gold miners, has rallied from $21.10 to close at $22.89, above 200-Dema but a fraction below the previous high at $22.98. It needs to close above the previous high with resistance lurking at the Oct high which needs to be breached to prevent a retest of the previous low at $21.10. The oscillators are rising, indicating a continued rise in GDX prices.

DUST US Gold Miners bear index

The inverse picture in the US Gold Miners Bear Index (Dust) indicates the exact opposite of the GDX chart. DUST has dropped from the previous high at $32 to just below the Nov into the region of support. The oscillators are dropping which indicates further weakness towards the Oct low and further gold strength.

Silver

Silver rallied up from a potential bottom at $15.63 to above $16.18, confirming the bottom, but still well below 200-Dema. The close at $16.44 is well into the target rally zone and the oscillators are rising suggesting still higher prices. Resistance lies ahead in the moving averages and further ahead in previous highs, so it is important to hold at least $15.63 to prevent testing much lower prices.

Gold : Silver Ratio

The ratio dropped during the last 12 trading days but remains well short of 200-Dema and previous lows. The reducing gold / silver ratio represents rising metal prices and is bullish, but much further progress is necessary to even approach the previous low at 73.5. The oscillators are dropping which suggests a lower ratio.

General Equities

Developments in the bond market suggest lower equities soon, but in the meantime prices may well grind higher.

World equity markets continue to move sideways with a few exceptions like the US. The Dow Jones seems to be forming a micro-topping pattern having got their tax reform bill, and some think they have been buying the rumour and will now sell the fact as many investment portfolios are reconfigured into the new year.

Conclusion

World markets are generally moving sideways with the US grinding up to new highs, just, as we enter the year end which usually enjoys a rally. More of a post QE world beckons in 2018 with the prospect of increased ‘tightening’ to follow the US example of another rate hike this week and 3 or 4 more likely next year. Small signs of inflation around the world were highlighted this week with the UK reporting 3.1%.

The US$ index strengthened slightly to touch resistance at 94.21 but it seems incapable of any real strength. If the Dollar fails to break up through the ‘head & shoulders’ neckline then it is likely to break down below support at 90.99 in which case the gold bottom at $1238.30 will be confirmed, to coincide neatly with the US rate hike this week.

Alternatively, if the Dollar continues to rally and breaks up towards or through 200-Dema then gold will delay a final drop towards a final bottom at $1200 in Jan 2018.

If the US$ breaks down through support at 90.99 this will confirm a bear market which will take the Dollar much lower over the next 4 or 5 years.

US$

The US$ index continues its 2nd attempt to breach the neckline of the failed ‘head and shoulders’ neckline towards the earlier rally target at 97, which might meet strong resistance at 200-Dema instead. The oscillators are dropping to suggest this 2nd attempt will fail.

If the Dollar fails to break up through the ‘head & shoulders’ neckline then it is likely to break down below support at 90.99 which will confirm the Dollar bear market.

The long term chart of the US$ illustrates the potential for powerful Dollar weakness to come. It seems likely to fail penetration of the 1st stage decline target (red) in dropping down through 200-Wema into the region of support (green), as the prelude to further weakness toward and beyond the 2nd and 3rd stage decline targets.

This long term forecast of Dollar weakness is corroborated by other different technical analysis validations, and suggests a 4 to 5 year period of decline that will take the index well below 70, and during the same period will propel gold in its bull market.

Gold

The gold rally from $1238.30 touched $1263 and needs to continue up towards at least $1270 to confirm a bottom. If not, gold will still decline towards a final bottom at $1200-$1210 later in Jan 2018. The oscillators are rising, supporting increased gold prices.

The medium term potential for gold remains very strong as illustrated in the massive pentagon-shaped base pattern which is a powerful launch pad for further gold strength which will take price up toward the region of $1800, being the price rise equivalent from the neckline to the single point bottom of the pattern at $1045.

GDX US miners ETF

GDX, representing US gold miners, has rallied from $21.25 to touch $22.32 but needs consecutive closes above $22.40 to confirm the bottom. Failure to achieve this might encourage a drop towards and below $21.25 and a delayed bottom at $21 or below in Jan 2018. The oscillators are rising, indicating rising GDX prices.

DUST US Gold Miners bear index

The inverse picture in the US Gold Miners Bear Index (Dust) indicates the exact opposite of the GDX chart. DUST has dropped from $32 to test the H&S neckline, and with the oscillators dropping this indicates further weakness towards the region of support between the Nov and Oct lows.

Silver

Silver rallied up from a low at $15.63 to touch 1st resistance at $16.05 but needs to close at least above $16.18 to confirm the low. The oscillators are turning up suggesting higher prices toward the region of $16.33-$16.62. Failure to hold the low at $15.63 will test much lower prices. But in this next period it looks like silver may well lead gold higher.

General Equities (Dow Jones)

World markets are generally moving sideways with the US (represented by the Dow Jones) grinding up to new highs, just, as we enter the year end which usually enjoys a rally. More of a post QE world beckons in 2018 with the prospect of increased ‘tightening’ to follow the US example of another rate hike this week and 3 or 4 more likely next year.

Small signs of inflation around the world were highlighted this week with the UK reporting 3.1%, and this will increasingly affect the bond market negatively with a negative knock-on effect on equities. The euphoria continues….

Conclusion

World markets are generally moving sideways to slightly up as positions are squared into the year end. We are slowly moving into a post QE world with the EU next in line to start decelerating the rate of money printing with probably Japan to follow, as small signs of inflation begin to be noticeable. This will of course lead to others following the US in rate hikes in due course as the momentum starts to gain traction.

The US jobs report came out Friday (8 Dec) indicating 228K new jobs (est 195K) still with a lagging labour hourly rate, and generally a labour market which still has some slack. But nevertheless the US Fed rate hike next week looks to be almost a certainty. The US$ improved slightly this week and gold finally broke down through the Oct low at $1262.80 and is set to probably still drop down to test $1200 in a 6-month cycle low in Dec-Jan. However, the Dollar is forecast to weaken considerably in the medium term and this will propel gold in 2018.

Equity markets are in the final euphoric ‘blow off’ stage as momentum begins to reduce into the yearend close.

US$

The US$ index is gaining strength as it makes a second attempt to breakout through the H&S and downtrend channel in a rally towards the bounce target of 97, which it failed to achieve earlier. The oscillators are moving up in support of this.

However, the long term chart of the US$ illustrates the potential for powerful Dollar weakness thereafter.

• In 2000-2001 the RSI registered a meaningful negative divergence which subsequently reduced Dollar value down through 200-Wema and a continued drop of 40% in total value over a period of 5 years.
• Now, in the 2015-2017 period, an identical pattern is unfolding with a meaningful RSI negative divergence followed by penetration down through 200-Wema. This is likely to be followed by a similar total drop of 40% over a similar 5 year period to an eventual Dollar value of 62 in the year 2022.

This forecast of Dollar weakness is corroborated by other different technical analysis validations.

Gold

Gold has finally broken down and plunged through the:

• bear flag bottom;
• Oct low at $1262.80;
• Head & Shoulders neckline;

Gold is likely now to drop further and retest $1200 in a 6-month cycle low, aided and abetted by the US Fed rate hike next week, with near total certainty. The gold bottom may be delayed until late Dec or early Jan 2018 as the Oct low was in fact breached.

The medium term potential for gold remains very strong as illustrated in the massive pentagon-shaped base pattern which is a powerful launch pad for further gold strength, as the price breaks downwards to test $1200 in the short term. Gold closed the week further down the right flank at $1248.40 and, despite further weakness, it is likely to propel gold to $1800 eventually (being the price rise equivalent from the neckline to the single point bottom of the pattern at $1045).

GDX US miners ETF

GDX, representing US gold miners, has broken down below the bear flag bottom, the Nov low at $22.25, and the H&S neckline. It is leading gold down and is now approaching critical support at 21.0, despite a stronger Friday. All indications point to weaker precious metal prices ahead.

DUST US Gold Miners bear index

The inverse picture in the US Gold Miners Bear Index (Dust) indicates the exact opposite of the GDX chart. Finally, there is a breakout through the Oct high and the H&S neckline with a region of resistance and 200-Dema some 25% higher. DUST therefore supports lower gold prices in the short term.

Silver

Silver has decisively broken down through all the supports to strengthen slightly on Friday just short of mild support at $15.58. The break through the H&S neckline suggests Silver is now likely to test $14.35, further down by the height of the head, in leading gold further down in the short term into a 6-month cycle low.

Bitcoin

Crypto currencies are no doubt part of the future and will play a key role in the future, but why the price mania and why mania in Bitcoin and not all the others, of which there are perhaps more than a thousand. Bitcoin price is driven by momentum by investors who know nothing about crypto currencies and their role in the future. If it is the money of the future then why is it not priced at US$0.01 (1 cent) so that it can be used as money? Why is it priced at near to $16000 with all the other crypto currencies at varyingly lesser values? So, what we are witnessing is an orchestration designed to drive the price higher, and yet higher still.

Below is a 3 year chart of the Bitcoin price. The chart is in a parabolic rise which defies logic, because it is probably the most vertical chart in history.

Bitcoin is neither an asset nor a commodity, therefore it actually has no value; except the momentum that is likely to increase the price. Also, of course, the reverse is true on the way down when momentum drives the price lower. It is in a bubble which will continue up until it bursts, and situations such as these always end in disaster.

Remember also, whether you are in equities, bonds, or gold, when you see similar behaviour in your investment …. it is time to sell, … fast.

Conclusion

World markets are generally weaker except the US which again broke up strongly to new highs except for Friday with Flynn’s guilty plea. But, prices recovered most of the losses by the close with every indication of yet higher prices to come. The market is in the euphoric ‘blow out’ stage at the peak of financial risk in the emotional cycle with a multitude of indications pointing to eventual collapse.

Strange things are happening with currencies and the precious metals complex, moving ever closer to a powerful event which is brewing in the making. The US$ continues to weaken, but so does gold. This is contrary to normal logic, and therefore something is brewing. Silver is weakening faster than gold, as are the miners. This is negative for gold and suggests further weakness, with the potential of moving down into a 6-month cycle low in December. But to do this it needs strength in the Dollar which as yet is still well camouflaged.

US$ continues to weaken in a ‘bull flag’ and if it rallies above 94.2 (on the index) it will re-energise toward the earlier rally target at 97.

US$

The US$ index has been in a downtrend channel since the start of 2017. It failed to break out from the H&S pattern and is now is a ‘bull flag’ (red channel) which it needs to break out if it is to rally to the earlier target at 97. Failure to succeed in this will result in a re-test of the previous low at 91 and continuation of the bear trend. The slow Stochastic is turning up to support a rally.

The short term US$ chart illustrates the failed H&S break out and the failed re-tests at the 94.2 H&S neckline. The downward move has reached support at 92.55 and ended the week with a ‘Spinning top’ candle to suggest indecision and a potential reversal.

Gold

The medium term potential for gold is very strong as illustrated in the massive pentagon-shaped base pattern which is a powerful launch pad for further gold strength, whether gold breaks downwards to test $1200 in the short term, or not. Gold closed the week again halfway down the right flank at $1282.30, and despite likely further weakness, it is likely to propel gold to $1800 eventually (being the price rise equivalent from the neckline to the single point bottom of the pattern at $1045).

Gold enjoyed a $16 surge on Friday (as the Flynn story broke) but closed the day only $7 up at $1282.30, at the bottom of the ‘bear flag’ (red channel). If it breaks down through the flag it will potentially test the Oct low and the H&S neckline, probably below 200-Dema. This is likely to occur mid-Dec in a 6-month cycle low to coincide with the next US Fed rate hike (90%+ certainty). The gold bottom may be delayed until late Dec or early Jan 2018 if the Oct low at $1262.80 is in fact breached.

GDX US miners ETF

GDX, representing US gold miners, has broken down below the ‘bear flag’ in closing very near to the H&S neckline at 22.49. The Oct low at 22.25 beckons as GDX moves ever closer to critical support at 21.0. This is leading gold down together with oscillator support, well below 200-Dema.

DUST US Gold Miners bear index

The inverse picture in the US Gold Miners Bear Index (Dust) indicates the exact opposite of the GDX chart. It too has not dropped powerfully (as gold rallied powerfully), and is about to break out above the Oct high and the H&S neckline which therefore supports lower gold prices in the short term.

Silver

Silver has decisively broken down through the bear flag and the previous low at $16.58, to close a fraction above the Oct low. It is under-performing gold and the miners and therefore represents some trepidation in a potential drop in the whole complex into a 6-month cycle low.

General Equities (Dow Jones)

The US has again broken up strongly to new highs, except for Friday with Flynn’s guilty plea, but prices recovered most of the losses by the close with every indication of yet higher prices to come. The market is in the euphoric ‘blow out’ stage at the peak of financial risk in the emotional cycle with a multitude of indications pointing to eventual collapse.

So the grind continues.

This is where the euphoric ‘blow out’ stage is positioned at the peak of financial risk in the emotional cycle….

….. at a time of massive uncontrollable global financial debt, interest rates that are beginning to cycle up, in a world that is entering the post QE stage, with many indicators that are not only urging caution, but action also.