Weekend Market Analysis 28 Jan 2018
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.
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