Market Demons

Executive summary

World equity markets all moved sideways this week as the US bond market took a breather with yields correcting down. Everything seems to be at an inflection point with all the monetary and fiscal ills gathering momentum with precious metals waiting in the wings.

Despite this, general equity momentum is up with the 10 year US Sovereign bond yield touching a high at 2.95% after the US Fed minutes were released on Wednesday and then correcting down to close the week at 2.88%. There is much concern at the rising bond yields and this correction is providing some comfort to the equity markets, as it appears bond yields will drop further. The balance between high stock market prices and rising inflation will reach a tipping point beyond which nothing will prevent a collapse, and the main drivers toward higher US inflation are in place with rising CPI, rising interest rates, Trump strategy, rising deficits, and the rising commodity cycle.

The US$ index has increased slightly this week, causing gold to dither, although it has again stalled to close at $89.81. There may be some more Dollar upside but all the impact factors are in place for Dollar weakness in the medium to long term. Gold closed down at $1328.88 and seems to be moving into a monthly cycle low (still far from a 6 month cycle low), and with silver continuing to underperform gold it will probably be a while longer before any meaningful rally.

US$

The US$ index rallied this week again but stalled at resistance to close at $89.81. It is holding above 10-Dema with 4 consecutive closes and could move either way with the Slow Stochastic preparing to turn down and the MACD still rising.

There may be some more Dollar upside but all the impact factors are in place for Dollar weakness in the medium to long term. The overall picture remains intact and weak, with the ultimate drop towards weakness in the region of the low 60s towards the years 2023-2024.

US Treasuries

The benchmark 10 year US Sovereign bond yield spiked at 2.95%, after the US Fed minutes were released on Wednesday, and then started correcting down to close the week at 2.88%. It appears bond yields will drop further because the oscillators are turning down, and this should support equity markets in the short term.

However, the long term remains up and the yield climb should resume in due course.

US bond market values (as opposed to yield) have reached an inflection point, as illustrated in the chart below, as value has:

• Dropped below the rising wedge pattern (red);
• Dropped down to the H&S neckline (black);
• Dropped down through 200-Wema (just);

Further value declines are supported by the oscillators, and this will all reflect in higher long term rates, as penetration occurs decisively through the neckline of the H&S. This will in turn drop bond values by the hieight of the head into a long term bond bear market, which will ultimately collapse world asset values.

Gold

Gold continues to hold above the support line at the Oct low ($1308.40), and continues to bounce along off 50-Dema. However, the most recent 4 consecutive closes are below 10-Dema, and the gold price needs to move up above this resistance line if it is to breach previous highs.

The slow Stochastic looks like it might be turning but the MACD is still dropping which suggests probable further weakness and not strength. It is important to hold above $1308.40.

The medium term chart illustrates gold nudging the main resistance line which it needs to penetrate before any real increases can occur. This can still be achieved in this 6 month cycle which is still early in development. The diagonal supports (blue) are well intact and the oscillators are mixed.

The long term potential for gold remains very strong as illustrated in the massive pentagon-shaped base pattern which, once price increases above $1375, will catapult gold to $1800 later in 2018.

GDX US miners ETF

GDX has dropped down below the earlier region of resistance (green) and has remained below 10-Dema for 5 consecutive closes, despite a stronger Friday. This down cycle has endured 21 trading days and is due a rally if it is to fill the 2 small gaps that are still waiting to be filled. Any attempt at this and the eventual penetration of the previous high at $24.86 needs first to break through the interim high at $23.18.

Oscillator support is encouraging with the slow Stochastic rising and the MACD potentially bottoming.

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 is increasing towards the double top and has remained above 10-Dema for 4 consecutive closes, despite a weaker Friday. The 2 small gaps are still waiting to be filled, and any attempt at this and the eventual penetration of the previous low at $19 needs first to break through the interim low at $22.80.

Oscillator support is encouraging with the slow Stochastic turning down and the MACD potentially turning down.

Silver

Silver continues to underperform gold and has stalled below 10-Dema with 4 consecutive closes. This situation needs to be turned around if precious metals are to start a meaningful rally, and this can only start if the interim high at $16.97 is penetrated. The oscillators look positive which might well assist in potentially higher prices next week.

Gold : Silver Ratio

Silver continues to underperform gold in a trend which has lasted more than a year now, and this mould needs to be broken if the precious metals complex is to enjoy any meaningful advance. However, this is probably now imminent after the index broke above 80 with history indicating this to usually trigger a turnaround. A slight improvement can be seen in a drop from the top line in the upward sloping reducing wedge (red), down to the top of the earlier resistance (green). This remains negative for precious metals although the chart indicates further moves in the index probably will be down, which is positive.

The slow Stochastic is turning down (positive) although the MACD is holding up (negative).

General Equities

World equity markets all moved sideways this week, as did the Dow Jones, as the US bond market took a breather with yields correcting down. Despite this, general equity momentum is up with bond yields correcting down which is providing some comfort to the equity markets. Bond yields appear set to drop down further and equities to increase further in the coming week.

The balance between high stock market prices and rising inflation will reach a tipping point beyond which nothing will prevent a collapse, and the main drivers toward higher US inflation are in place with rising CPI, rising interest rates, Trump strategy, rising deficits, and the rising commodity cycle.

This rally in the Dow is accompanied by lower volumes and supportive oscillators, as well as a small gap that still needs to be filled (green). What appears to be unfolding is the development of a double top, as the rally continues, and the real test will be once this double top pattern is fully developed and the bond yields start to increase again.

Executive summary

World equity markets all had a good weak, right across the board, in line with the Dow correcting up strongly. The anticipated upwards correction after the dramatic fall has therefore occurred, and the question now remains whether this is market stabilisation for the bull market to continue or whether this is the breather before the bear market continues. One of the strongest causes of the earlier collapse is rising interest rates (and rising inflation) with the benchmark US 10 year sovereign bond yield breakout at 2.5% likely to rise further towards 3% and then 5%. The 10 year yield peaked at 2.93% this week and then corrected slightly to close at 2.87%, and it was this that assisted the Dow to correct strongly this week. The balance between high stock market prices and rising interest rates will reach a tipping point beyond which nothing will prevent a collapse.

The US$ index has stalled and dropped below $89, assisted by Donald Trump’s plans for massive increases in deficit spending which assisted the whole precious metals complex into a strong week. However, this all turned around slightly in Friday afternoon’s session with the Dollar closing above $89 and gold dropping to close at $1347.27. Silver continues to underperform gold, and the balance between paper money and hard assets seems to be on a very sharp edge at the moment. One gold-positive aspect is the Japanese Yen enjoying a breakout which has the history of supporting gold.

US$

The US$ index cycle peaked in the region of resistance at $90.455 and dropped down to a double bottom from where it rallied slightly on Friday to close at $89.01. This includes 3 consecutive closes below 10-Dema and the oscillators support further declines with the MACD turning down.

The commentary in the long term US Dollar Index chart is the same as last week, in a rally that started at interim support and rising towards the region of resistance (red). The overall picture remains intact and weak, and failure or success in penetrating resistance lines at 91.5 and 92.5 will define the next moves, before the ultimate drop towards long term weakness.

US Treasuries

The commentary is the same as last week, with increasing yield in the benchmark US Treasury 10 year bond stalling slightly on Friday, adding strength to US equities to close up on the day. But the die is cast and yield is likely to climb further towards 5% after the recent breakouts. The oscillators support further yield increases.

The commentary in the iShares 20+ Bond ETF illustrating US bond market values (as opposed to yield) is also the same as last week, indicating the breakdown through the bottom trendline of the rising wedge (red), plus movement down to penetration of the H&S pattern. This is confirmation of and will herald higher long term rates to follow.

This supports the notion that the long term bull market in bonds is over and is replaced by a long term bear market, which will ultimately collapse world asset values.

Gold

The support line at the Oct 2017 high of $1308.40 has catapulted gold up to a double top where it closed the week at $1356.20. Friday’s candle is a Doji which indicates a potential reversal, although this includes 3 consecutive closes above 10-Dema and the oscillators support higher prices with the MACD turning up.

The medium term chart illustrates gold nudging the main resistance line which it should now penetrate as it is still early in the 6 month cycle. But the oscillators are turning down with potentially lower prices next week.

The long term potential for gold remains very strong as illustrated in the massive pentagon-shaped base pattern which, once price increases above $1375, will catapult gold to $1800 later in 2018.

GDX US miners ETF

The GDX rally stalled at 50-Dema and the price dropped into the earlier region of resistance, but this includes 3 consecutive closes still above 10-Dema. The 2 small gaps still remain unfilled and the oscillators support higher prices. If gold breaks up then GDX will penetrate the previous high at $24.86 with plentiful upside in the miners. However, an important interim high at $23.18 needs to be breached before any of this can happen.

 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 down from a double top which includes 3 consecutive closes below 10-Dema. The 2 small gaps still remain unfilled and the oscillators support yet lower prices, which is positive for gold.

Silver

Silver continues to underperform gold and has stalled at 50-Dema. But this includes 3 consecutive closes above 10-Dema and with rising oscillators indicates potentially higher prices next week.

Gold : Silver Ratio

Silver continues to underperform gold although a slight improvement has the ratio closing just above resistance (green). This remains negative for precious metals although the chart indicates further moves probably will be down, which is positive.

General Equities

A strong correction in the Dow Jones lifts price above 50-Dema, although on reduced volume, and the chart includes many positive indications that higher prices will follow in the coming week. Closing price includes 2 consecutive closes above 10-Dema, a still unfilled gap higher up, and rising oscillators, all of which promise higher prices. It is possible we will see the Dow again up at above 26500.

Unfortunately, the ills of the world monetary system remain and there is a balance out there of rising inflation, interest rates, and debt, together with debasement of currency values. Bond yields continue to rise in consequence of all this and the equity euphoria remains an increasingly baseless endeavour residing in an increasingly nervous ‘departure lounge’. Further increases in the Dow will develop into a threatening double top which now looks inevitable.

Executive summary

World equity markets continued down this week in what looks like the big collapse, which could of course take a year or two to unfold. However, there appears to be an upwards correction coming after what has been a dramatic fall, and the Dow Jones Ind Ave yesterday in fact closed up after being down close to 500 points in a turnaround of 1000 points on the day: Certainly massive volatility and nervousness at the moment. This was caused by the need for a correction plus the bond market also corrected slightly with the US 10 year yield dropping down on Friday. All this was too late for the rest of the world which presumably will enjoy a bounce in the new week.

Unfortunately, the ills of the world monetary system remain and there is a balance out there of rising inflation, interest rates, and debt, together with debasement of currency values. It will be interesting to watch the remedial procedures applied in the balance between hiking rates and reducing balance sheets on the one hand and printing more money and dropping rates on the other. Political pressures will mount during all this to prevent the pain of collapsing markets and applying the correct medicine to cure the ills.

The US$ index rally has stalled just above $90 and precious metals are showing potential signs of bottoming. The US$ may extend its rally further but the longer term view remains negative. Gold looks set to decline further but the derivatives appear ready to correct which will support precious metals.

US$

The US$ index has started to consolidate in the 1st region of resistance,  but may continue up and through the 2nd region towards 200-Dema. This is supported by rising oscillators.

The long term US Dollar Index chart indicates a rally in process that started at interim support, rising towards the region of resistance (red). The overall picture remains intact and weak, and failure or success in penetrating resistance lines at 91.5 and 92.5 will define the next moves, before the ultimate drop towards long term weakness.

US Treasuries

Increasing yield in the benchmark US Treasury 10 year bond stalled slightly on Friday, adding strength to US equities to close up on the day. But the die is cast and yield is likely to climb further towards 5% after the recent breakouts.

The iShares 20+ Bond ETF illustrates US bond market values (as opposed to yield) and the chart indicates a breakdown through the bottom trendline of the rising wedge, plus movement down towards penetration of the H&S pattern. This is confirmation of and will herald higher long term rates which will ensue.

Gold

A support line has developed at the Oct 2017 high of $1308.40 and gold has turned up at this point, having touched the line 4 times. This is a support base that gold needs to hold if higher prices are to follow. The MACD continues to drop but the slow Stochastic is beginning to turn up.

The medium term chart illustrates the drop down into a cycle low towards diagonal support at either $1265 or $1235. Critical support is at $1200, with oscillators moving down also.

GDX US miners ETF

GDX broke down below the confirmed bottom at $21.10 on Friday, but recovered most of the fall by the close with a very long shadow on Friday’s candle with high volume. This could be positive, especially with 2 small gaps which still need to be filled 10% higher up (way above the region of resistance (green)). The slow Stochastic is turning up in support.

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 powered up more than 50% in 2 weeks to a double top close which includes a long shadow on Friday’s candle. This could be positive for GDX (and gold), especially with 2 small gaps which still need to be filled 30% lower down. The slow Stochastic is turning down in support.

Gold : Silver Ratio

Silver continues to underperform gold and this is reflected in the Gold / Silver ratio breaking up through top resistance. This is negative for precious metals and the oscillators are in support. Obviously, to be at the top means further moves probably will be down, which is positive, and this is illustrated in the following chart.

Since 2000, the gold/silver ratio has dropped substantially within 6 months of breaking up above a ratio of 80. This has occurred 3 times with the 4th in red, and we can expect the same ratio drop soon.

General Equities

The Dow Jones dropped another 5% this week with a massive increase in volatility and nervousness. Monday witnessed the largest points drop in the Dow in history, with Thursday more than another 1000 points down. Friday saw more than 1000 point movement (in both directions) to close 1.35% up on the day. This was probably caused by the need for a correction plus bond yields edged slightly lower which added some confidence.

Friday’s candle ended with a long shadow which could indicate the beginning of a correction. It does appear precipitous though, and further severe declines will not surprise anyone.

Executive summary

World equity markets were down this week as bond yields continue to rise. The benchmark US Treasury 10 year yield moved up rapidly to 2.84% and the collapse on Wall Street this week suggests the US market is finally taking notice. The US jobs report on Friday indicated increased inflation which began to push US bond yields higher faster and this caused an already bad day on Wall Street to go a lot worse into the close.

It supported the case for the Fed to definitely continue with its plan for 3 or 4 rate hikes this year which is seriously negative for equities. If the market collapses, as bond yields indicate it will, then rate hikes might even be somewhat modified into rate cuts, depending on the degree of market destruction. At times like this there is a flood back into Dollars, as a safe haven destination which weakens gold, and both are now likely to move into a serious correction.

US$

The US$ index has started to correct up, penetrating earlier support, to close at $89.04. It still remains in consolidated mode but is likely to move up towards the region of resistance (green). This is supported by the oscillators beginning to turn up.

The long term US Dollar Index chart indicates a bounce off interim support which is likely to take it into the region of resistance (red) towards $92.50-$94.0. The long term decline towards the low $60s in the next 5 year period is still intact.

US Treasuries

The 35 year long US Bond bull market is over as a new long term bear market starts to gather momentum. Breakouts in the ‘Head & Shoulders’ pattern of the benchmark US Treasury 10 year yield are decisive, and now indicate further increases in yield towards the region of 5%.

This confirms the US bond market collapse is now underway with a long term period of higher interest rates ahead in the new up cycle.

All US Treasuries now have breakouts, in the 2 yr, 5 yr, 10 yr, and 30 yr.

Gold

Gold has turned down from a double top in a cluster of negative candles. This includes a ‘Shaft of Weakness’ covering 5 previous candles which promises further weakness, and an early decline into a cycle bottom.

The oscillators are dropping which supports further gold declines.

The medium term chart illustrates strong resistance in a triple top with likely declines down towards diagonal support at either $1265 or $1235. Critical support is at $1200.

The oscillators are turning negative.

Elliott Wave dichotomy

Gold is going to correct down. But is it then going to go much lower to perhaps $900 or is it then going to go much higher.

Lower:   Some Elliott Wave practitioners would have it then go much lower, because it is deemed to now be in the corrective down phase ABC. This will validate the Aug 2011 high as the end of the upward thrust wave 5, and the downward corrective wave ABC since.

This corrective wave C could end with gold much lower at $900. This understanding would be contrary to the many technical analysts out there, as well as much fundamental analysis.

Higher:   Other Elliott Wave practitioners believe Gold is still in the upward thrust wave 5, with the Aug 2011 high as only the end of wave 3. This will propel gold much higher still, with the downward corrective wave ABC to follow that much later.

This upward thrust wave 5 is still to play out with prices much higher than wave 3. This understanding would agree with many technical analysts out there, as well as much fundamental analysis.

GDX US miners ETF

GDX, representing US gold miners, has broken down below the moving averages into the support zone (red) to close at $22.91. The H&S pattern has been invalidated and the oscillators are supporting further declines.

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 powered up 26% from the powerful double bottom low to close at $23.97 through 50-Dema. There is now a mild double top plus 2 small gaps which need to be filled, implying a correction down. The oscillators are rising which suggests further increases first, and a lower gold price.

Silver

Silver has dropped below the moving averages and invalidated the H&S pattern. Silver continues to underperform gold (which is bearish) and the oscillators are dropping to support further declines.

Gold : Silver Ratio

Silver’s underperformance has moved the Gold / Silver ratio up to the top of the resistance zone which is negative. Obviously, to be at the top means further moves probably will be down, which is positive.

The oscillators are rising which supports a higher ratio.

General Equities

The Dow Jones dropped 4.6% in the week which is the first sign of a correction in a long time. Developments in the bond market indicate that a new bond bear market is underway as the interest rate cycle is now definitely recognised as up.

In a sense, it matters little now what the Dow Jones does or does not do. It is a simple matter of understanding the new normal, and for investors just to get over it and to get on with it. This means of course to get out of equities or to endure the collapse.