Weekend Market Analysis 25 Feb 2018
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.
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