Market Demons

Executive summary

 World equity markets continue sideways but with the US and Hong Kong rising strongly, unabated. Bond markets continue to move down with the US treasury benchmark 10 year yield at 2.66% (breakout at 2.5% and last Friday at 2.64%), with the prospect now of much lower bond prices amid the return of inflation. Precious metals are taking a breather and could move either way in the short term.

The US$ index, having already penetrated down through critical support at $91, has now dropped below $89 to close the week at $88.89. The Japanese Yen (as well as other currencies) has strengthened in terms of their inverse correlation to reach a critical level, which is supporting gold. Gold strength in its current cycle has consolidated, although silver is finally strengthening faster which has jerked the gold / silver ratio down a bit, but is still bound in its recent range of 80.00 to 73.50. The US gold miners (in the GDX ETF) in its gyrations in the past 2 weeks has moved up, down, up, down, to close with an Harami candle which indicates a trend change which could be either way. It seems too soon for the gold cycle to move down and the choice is either a high in early Feb or a short cycle and a move down now.

But, in spite of all this, it would also appear that the US$ could first rally more strongly in what has been a severe weakening over the past 3 months, as well as some suspicious market activity on Friday supporting this. It would result in the precious metals complex turning down into an early cycle low before resuming the bull market.

General equities remain elevated and by any standard are due for a major correction. The Dow Jones continues ever higher to new highs with no sign of a correction. Movement in the bond market with increasing yields signalling an end to the bond bull market, is now increasingly threatening the equity markets, for good reason.

US$

The US$ index has penetrated down through earlier support to close at $88.89 in what appears to be a continued free fall. There was considerable reversal from lows on both Thursday and Friday, together with stalling in gains throughout the precious metals complex, to suggest a rally in the US$ is overdue. This is supported by the slow Stochastic which appears to have bottomed although the MACD is still dropping.

Many other different long term technical analyses indicate the US Dollar Index is expected to decline towards the low $60s in the next 5 year period, and the one illustrated below is based on a repeat of the negative divergence with the RSI. Whilst this is a likely long term outcome it also accommodates a short term Dollar rally in what has been a recent severe drop.

US Treasuries

Bond markets continue to move down with the US treasury benchmark 10 year yield at 2.66% (breakout at 2.5% and last Friday at 2.64%), with the prospect now of much lower bond prices amid the return of inflation. Yield is consolidating at 2.66% on its rise towards 3.0% with rising oscillator support.

The US bond market collapse is now underway and when you combine this with the prospect of 3 or 4 rate hikes from the US Fed in 2018, it really confirms the notion that the cycle of higher interest rates is now in urgent progress. This will of course prick all the asset bubbles from the stock market to the bond market to all the other asset classes except precious metals.

Gold

Gold is taking a breather and could move either way in the short term, although it is maintaining its upward bias. But, in spite of this, market activity late on Friday with the US$ recouping losses and gold losing some ground, we could see a Dollar rally and gold turning down into an early cycle low before resuming the bull market.

The oscillators are still rising however suggesting a continued upward bias in gold to extend the cycle high into early Feb.

The medium term potential for gold remains very strong with the pentagon-shaped base pattern in place. The next target is penetration of the level top of the pattern at $1375 (green), or the sloping top at $1365 (blue), which will catapult the gold price to $1800 later in 2018.

GDX US miners ETF

GDX, representing US gold miners, in its gyrations in the past 2 weeks has moved up, down, up, down, to close with an Harami candle which indicates a trend change which could be either way. It has filled the 2 gaps that opened on the way up and maintains an upward bias.

The oscillators are still rising, just, to suggest continued upward bias.

 The slightly longer 6 month chart illustrates the breakout through the H&S neckline which should take the price to $27.50 in time, despite strong resistance at the previous high at $25.40. The oscillators are still rising providing support to this notion.

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 reached $19 to create a double bottom, having filled both gaps in the process. The downward bias seems to be intact, but the oscillators are turning up to suggest a correction soon which will mean a lower gold price.

Silver

Silver has both a breakout and a breakback in a formation with a positive bias. The oscillators are supporting another breakout.

Gold : Silver Ratio

Silver is finally strengthening faster than gold which has jerked the gold / silver ratio down a bit (positive), but is still bound at 77.52 in its recent range of 80.00 to 73.50. Unfortunately, this drop includes a gap that will need to be filled which can only occur with an upward reversal (negative).

The ratio is teetering on 50-Dema, and the oscillators support a further drop (positive).

General Equities

General equities remain elevated and by any standard are due for a major correction. The Dow Jones continues ever higher to new highs with no sign of a correction. Movement in the bond market with increasing yields signalling an end to the bond bull market, is now increasingly threatening the equity markets, for good reason.

The oscillators remain at extreme (high) levels with the MACD over 1100 which is crazy. The market is algorithm driven with euphoria at a continued peak, which cannot last.

The die is cast for major trends in 2018, with the interest rate cycle turning up decisively, supported by rising inflation and a weakening Dollar. This all points to equity markets correcting down any time soon with the backdrop of excessive debt and the increased cost of servicing debt.

Executive summary

 World equity markets continue sideways at elevated levels while bond markets start to move down. The benchmark US treasury 10 year yield has already broken up through resistance at 2.5% to cause all the commotion about the end of the 35 year bond bull market and its continuing collapse. Since then it has extended the breakout to close Friday at 2.64%, amid much talk about the return of inflation and the dire effect this will have on markets. Even the German and Japanese yields are now rising, and in spite of this equities maintain their elevated levels.

The US$ index, having penetrated down through critical support at $90.99, is now consolidating between $91 and $90 with the precious metals complex beginning to dither as a consequence. Gold has had a strong run since mid-Dec and is due a correction of sorts as big US banks enter large short positions, reflected in the COTs on Comex.

Movement in the bond market is very positive for gold, and the die is now cast for major trends in 2018. The interest rate cycle has turned up decisively, supported by rising inflation and a weakening Dollar. This all points to equity markets correcting down any time soon with the backdrop of excessive debt and the increased cost of servicing debt.

US$

The US$ index is consolidating in a cluster of indecision, within a region of support. The low point reached is $90.00 and penetration below this level will take the Dollar well on its way in the bear market it has now entered. Price is dropping well below the moving averages and the MACD points to further declines.

Many other different long term technical analyses indicate the US Dollar Index is expected to decline towards the low $60s in the next 5 year period, and the one illustrated below is based on cycles. The US$ peaks every 16 years to coincide with US presidential elections, and troughs every other 16 years. This indicates a Dollar index value in the low $60s in about 2023-2024.

US Treasuries

The US treasury 10 year yield has accelerated its rise above the H&S at 2.5% to close the week at 2.64%. The oscillators are rising and they support further increases in a collapsing US bond market which has dire consequences for the economy and the equity market.

This rise should extend up by the depth of the head which will take the yield to 3% or more.

The increase in yield has now penetrated the neckline of the deeper ‘head & shoulders’ pattern stretching back 4 years which is the trigger to rise to about 5% in the next period. The US bond market collapse is now underway and when you combine this with the prospect of 3 or 4 rate hikes from the US Fed in 2018, it really confirms the notion that the cycle of higher interest rates is now in urgent progress.

This will of course prick all the asset bubbles from the stock market to the bond market to all the other asset classes except precious metals.

Correlation between US Treasuries and Gold

The gold market continues to look very positive and 2018 looks like the year of a very strong extension to the gold breakout. There are many reasons for this and one of them is the relationship between gold and the bond market which will now become the catalyst that could extend and drive the gold breakout in 2018.

Traditionally, in an environment of low inflation, US Sovereign bond yields decline (bond prices rise) and the gold price increases, and vice versa. However, with inflation the yield curve steepens when long bond yields rise faster than short-term yields. Now that inflation is beginning to rise, worldwide, US treasuries (especially the price of the benchmark 10 year bond) are dropping towards a breakdown and gold is rising towards a breakout.

This creates a fascinating picture of positive correlation for the earlier portion to mid-2013 and negative correlation for the later portion since then, and a very powerful trigger for a very strong gold breakout extension in 2018.

Now notice the breakdown of US Treasuries as yield rises.

Gold

Gold is clustering, including 3 consecutive Dojis, which threatens to perhaps correct down which a break below $1324 would confirm. It has had a strong run since mid-Dec and is due a correction of sorts as big US banks enter large short positions, reflected in the COTs on Comex.

The oscillators are turning down which would suggest a correction, but there is strong support in the region of $1310.

The medium term potential for gold remains very strong with the pentagon-shaped base pattern in place. The next target is penetration of the top of the pattern at $1375 (green) which will then catapult the gold price to $1800 later in 2018.

GDX US miners ETF

GDX, representing US gold miners, has dropped back to the Oct high level at a price reached 5 times in the past 5 months. Price is in consolidation mode and needs to clear $24.50 to break free. There is a gap that needs to be filled and if price drops below this level at $23.40 then a more severe correction could result.

The oscillators are negative which is likely to move prices lower before another advance.

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 penetrated support decisively but has moved up again to test the bottom of the region of resistance. Both oscillators have turned up which suggests higher prices which in turn means lower gold prices.

Silver

Silver has encountered strong resistance and with negative oscillators seems destined to move down further. Price needs to hold $16.80 otherwise a more severe correction might result, although the overall pattern is one of developing a large H&S pattern with the trigger level at $17.50.

The oscillators are negative which suggests a downward correction is next.

Gold : Silver Ratio

The ratio continues to correct up due to relatively poor silver performance, but a stronger Friday turned the ratio back down slightly. The consolidation includes 3 consecutive Dojis which suggests a change in direction soon. The ratio needs to drop down through the moving averages for the advance in precious metals to gather headway. The oscillators are mixed with the Slow Stochastic topping out but the MACD still rising.

General Equities and Crypto Currencies

World equity markets continue sideways at elevated levels while bond markets start to move down which is negative for equities. The die is now cast for major trends in 2018, with the interest rate cycle turning up decisively, supported by rising inflation and a weakening Dollar. This all points to equity markets correcting down any time soon with the backdrop of excessive debt and the increased cost of servicing debt.

Instead of the Dow Jones chart this week which still just continues to grind up, despite virtually everything to the contrary, we display the Bitcoin chart. A clear H&S pattern is developing in the wake of the drop from the peak a month ago, with both oscillators declining rapidly.

Executive summary

 The big news this week is the US$ dropping below critical support to confirm its long term bear trend and US treasury yield breaking up through resistance to confirm the end of the 35 year bond bull market. Both fantastic news for the gold market with the gold price moving up to close the week strongly.

World markets were mixed this week with US and UK up and the rest sideways or down: This grind now cannot continue much longer. This week has seen widespread recognition of inflation rising which has the effect of moving bond yields and the gold price up. As bond yields move up so the value of bonds drop, and a number of US dignitaries have now called the official end to the 35 year bond bull market (although it actually already ended in mid-2016). This was aggravated on Wednesday when China (the largest investor in US bonds) announced it will “slow or halt” US Treasury purchases: This is the so-called NUCLEAR option when China ceases all buying of US debt, which is an absolute game-changer. The US$ value continues to drop and combined with bond values dropping, it becomes attractive to stop purchasing US bonds. The Dow Utilities index has now moved down 11% in the last 2 months, and this is another indication of rising interest rates which all build pressure on the rising market values until the point of final rupture.

The US treasury 10 year yield has broken up through resistance to close at 2.55% in a 9 month ‘head & shoulders’ pattern which should increase the yield to 3.0%. This increase should penetrate a deeper ‘head & shoulders’ pattern stretching back 4 years which should increase yield up to 5.0% in the next period. When you combine this with the prospect of 3 or 4 rate hikes from the US Fed in 2018, it really confirms the notion that the cycle of higher interest rates is now in urgent progress, and this of course will prick all the asset bubbles from the stock market to the bond market to all the other asset classes except precious metals.

The US$ index closed the week down at $90.74, penetrating critical support at $90.99. This confirms its bear market trend which will take it down another 40% over the next 5 years, and is the driver in the gold bull market. Gold miners have been sluggish and holding back, but yesterday the US miners (GDX) broke up through resistance which should now ignite and drive up prices.

US$

The US$ index closed the week down at $90.74, penetrating critical support at $90.99. This confirms its bear market trend which will take it down another 40% over the next 5 years, and is the driver in the gold bull market. Price is now well below the moving averages and both oscillators have turned down, suggesting further declines.

The longer term US$ chart illustrates the drop below critical support (black circle) with the next support being the 2nd stage decline target in the region of $68. Below that, the US Dollar Index is expected to decline towards the low $60s in the next 5 year period, in accordance with a variety of different technical analysis validations.

US Treasuries

The US treasury 10 year yield has broken up through resistance to close at 2.55% in a 9 month ‘head & shoulders’ pattern which should increase the yield to 3.0%. This is the equivalent of an increase on the Y-axis equal to the depth of the ‘head’ and should trigger penetration of the longer term ‘head & shoulders’ pattern.

Because of this, a number of US dignitaries have now called the official end to the 35 year bond bull market (although it actually already ended in mid-2016).

Penetration of the deeper ‘head & shoulders’ pattern stretching back 4 years should increase yield up to 5.0% in the next period. When you combine this with the prospect of 3 or 4 rate hikes from the US Fed in 2018, it really confirms the notion that the cycle of higher interest rates is now in urgent progress, and this of course will prick all the asset bubbles from the stock market to the bond market to all the other asset classes except precious metals.

Gold

Gold has broken through resistance at the Oct high strongly, including dropping back to retest that level at $1308.40. This is driven by the weak Dollar with the gold oscillators indicating still further price gains.

The medium term potential for gold remains very strong with the closing price at $1334.90 well up the side flank of the pentagon-shaped base pattern. The next target is penetration of the top of the pattern at $1375 (green) which will then catapult the gold price to $1800 later in 2018.

The 6-month cycle lows are indicated in black circles, confirming the upward trend.

GDX US miners ETF

GDX, representing US gold miners, has been sluggish and holding back, but has now penetrated up through resistance to close at $24.01 with a clear run up to the previous high at $25.40. Both oscillators have turned up suggesting further price gains.

Despite the gap that has opened, and corrections to close gaps occur before further advances usually, GDX is likely to test the previous top at $25.40 first.

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 penetrated support decisively and now has a clear run down to the previous low at $19, supporting higher gold prices. Both oscillators have turned down in support of this.

Silver

Silver is the one cautionary aspect of the current bull trend in precious metals because it is lagging behind in clustering within its band of resistance, instead of breaking up through the Oct high. The oscillators appear to be topping out although the slow Stochastic has a micro uptick due to a reasonably strong Friday for silver. Silver needs to clear $17.50 before any real advance is possible.

Silver prices are ‘coiled’ and despite reason they could explode upwards soon.

The 2 year chart illustrates an inclined ‘head & shoulders’ pattern with the penetration trigger point at $17.70. This is exciting because, when breached decisively, this will propel silver up by the depth of the head to about $22.00.

Gold : Silver Ratio

The ratio has corrected up due to relatively poor silver performance, but a stronger Friday turned the ratio back to 50-Dema. The ratio needs to drop down through the moving averages for the advance in precious metals to gather headway. The oscillators are moving up however which suggests otherwise.

The longer term 2 year chart illustrates the negative congestion between resistance (green) and support (red) which has built up over the last 9 months. The ratio needs to break down through support if the precious metals bull trend is to gain momentum, and the recent impetus provided by inflation, dropping Dollar value, and collapse in the bond market, might provide the necessary ammunition to achieve this.

General Equities

World markets were mixed this week with US and UK up and the rest sideways or down, all within financial and monetary circumstances that have changed dramatically. The Dow shows no sign of correcting, which is long overdue, but dominant uptrends like this can persist much longer than reason permits.

This week has seen widespread recognition of inflation rising which has the effect of moving bond yields up, and a number of US dignitaries have now called the official end to the 35 year bond bull market (although it actually already ended in mid-2016). This was aggravated on Wednesday when China (the largest investor in US bonds) announced it will “slow or halt” US Treasury purchases: This is the so-called NUCLEAR option when China ceases all buying of US debt, which is an absolute game-changer. The US$ value continues to drop and combined with bond values dropping, it becomes attractive to stop purchasing US bonds. The Dow Utilities index has now moved down 11% in the last 2 months, and this is another indication of rising interest rates which all build pressure on the rising market values until the point of final rupture.

The Dow may correct soon, but it s more likely to collapse soon.

Executive summary

 World markets moved up this week, except for bonds: General equities as well as resources including gold were all strong, which is unusual. Utilities in the US continue down, which indicates increasing interest rates, and US treasury yields continue to trend up which means the bond market is beginning to go down. There is much commentary now on increasing inflation around the world (although still small) and it is this that is nudging bond yields up. It is widely accepted that the 35 year bond bull market ended more than a year ago already, and as this gathers momentum in our post-QE world so will it be accompanied by increased interest rates, increased inflation, and downward pressure on general equities.

The US$ index closed the week at $91.67, just 68 cents above critical support at $90.99. If the Dollar breaks down below this level it will confirm its bear market trend which will take it down another 40% over the next 5 years. This is all in accord with the above mentioned bond market collapse, increased inflation, and interest rates. But, by definition, it is also the driver in the gold bull market. So, interesting counter balances are very prominent at the moment, but it would appear markets are due for a correction, and support and resistance pressures may still see a Dollar rally first. For instance, US gold miners are still sluggish and holding back behind more resurgent gold and silver prices, and this is usually bearish.

US$

The US$ index dropped down into the region of support where it continues to churn, still above critical support at $90.99. The Dollar may enjoy a rally before testing critical support which, if breached, will confirm the Dollar bear market with much lower levels to come.

The Slow Stochastic has bottomed but the MACD continues to drop.

The longer term US$ chart illustrates the drop towards critical support, having penetrated the 1st stage decline target and 200-Wema. Below critical support is the 2nd and 3rd stage decline targets which, if penetrated, will result in a US Dollar Index value in the region of 62 sometime around the year 2023/4.

US Treasuries

The US Treasury 10 year yield continues to increase back to the H&S neckline which, if decisively penetrated, will take yield up by the depth of the head to about 2.8%. The chart illustrates the ‘bouncing’ effect above 50-Dema, as well as in the oscillators, which all suggests a higher yield.

As inflation increases, so treasury yields increase, and as yields increase so the bond bubble will rupture which in turn will collapse equity markets.

Gold

Gold has increased strongly from the 6-month cycle low to penetrate the Oct high at $1308.40 above which it has begun to ‘churn’ slightly. The Slow Stochastic has topped out, suggesting a correction soon, although the MACD is still rising. The gold price is well above the moving averages.

The medium term potential for gold remains very strong with the closing price at $1322.30 well up the side flank of the pentagon-shaped base pattern. The top of the base pattern at $1380 (green) is the next price target for gold to break free above the pattern which will then catapult it to $1800 later in 2018.

The 6-month cycle lows are indicated in black circles, confirming the upward trend.

GDX US miners ETF

GDX, representing US gold miners, encountered resistance at the Oct high ($23.76) and has begun ‘churning’ slightly. GDX is underperforming gold though and this has a negative impact on price increases going forward. Also, the Slow Stochastic has topped out, suggesting 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 penetrated support and has formed a ‘pennant’ which is usually a continuation pattern, suggesting a further drop with rising gold miners. But the Slow Stochastic has bottomed out although MACD is still dropping.

Silver

Silver reached up into the region of resistance and has begun ‘churning’ slightly. It is now free to attack the Oct high at $17.50, but the Slow Stochastic has topped out which suggests a correction soon although the MACD is still rising strongly.

The 2 year chart illustrates a ‘head & shoulders’ pattern with the penetration trigger point at $17.50. This is exciting because, when breached decisively, this will propel silver up by the depth of the head to about $22.00.

Gold : Silver Ratio

The ratio has stalled below 50-Dema and has begun churning slightly, after dropping successfully through the month of Dec. The Slow Stochastic has bottomed out suggesting a correction soon.

General Equities

Developments in the bond market suggest lower equities soon, but in the meantime prices continue to grind higher. This week we take a look at a long term view of Elliot Wave analysis of the Dow Jones in a 23 year weekly chart.

Observe the clear 12345 upward pattern (blue) and the 2 ABC down waves during this time. The chart also suggests the next ABC down wave is about to occur. During this period the RSI has reached its highest level ever, which also indicates the next move is down.