Weekend Market Analysis 29 Apr 2018
Executive summary
The benchmark US treasury 10 year yield finally penetrated the psychologically important level of 3.0% this week, closing at 2.96% after reacting to increased resistance at that level. This is important because this is no ordinary bond; it is the global bond market’s primary benchmark and if its yield goes up then other interest rates also increase making the burden of debt heavier for everyone from individuals to households to corporations and to governments. Global debt is astronomic and servicing this debt is rising with increasing interest rates. The US is leading the way with rate hikes and the rest of the world is beginning to follow gingerly with all eyes on the EU and Japan (with some yields still negative) as we continue to move up into the increased rates cycle which started in mid-2016. The long term bond bull market has ended after more than 35 years and we are now into a long term bond bear market which continues to collapse. The US 10 year yield bottomed at 1.358% on 8 Jul 2016 and at 3.0% (en route to 5% and much higher thereafter) is evidence of a collapse in progress, whilst the stock markets are still at or near their peaks. The process is slow however with the EU indicating this week to again hold rates steady.
World equity markets continued sideways, but are looking precarious with many on sell signals, as they remain largely on the edge of the abyss with the inevitable drawing nearer. Volatility, as measured by the VIX, is also moving sideways as it continues to bounce up off 200-Dema.
The US$ is rallying and has broken up through resistance to close at $91.36, just short of the 200 day moving average at about $92.60. Technically, there are resistances at $91.50 and $92.40, plus 200-Dema, and if it breaks through then it may increase to the $94 / $95 region with considerable reciprocal pressure on other currencies and gold, which is drifting down to close at $1323.40.
US$
The US$ rallied up through the previous cycle top to penetrate into the resistance zone (green) where it appears to have stalled just below the 1st resistance target at $91.50. It closed on a Gravestone Doji which suggests it may now be in correction mode. The rally has been vigorous and is due a correction, but it still needs to clear the 2nd resistance at $92.40 if it is to mount an attempt at $94 or $95.
The slow Stochastic is turning down which supports some short term downside.
The long term picture in the 14 year chart illustrates the penetration into the resistance zone (green) with a number of resistance lines within. The foreboding ‘dead cross’ lies just above together with powerful resistance in the moving averages themselves. So the chart supports the fundamentals which continue to mount towards a weaker dollar in the long term. except in the case of collapsed equity and bond markets causing a flight to safety in the US dollar.
US Treasuries
The benchmark US treasury 10 year yield finally penetrated the psychologically important level of 3.0% this week, closing at 2.96% after reacting to increased resistance at that level. This is important because this is no ordinary bond; it is the global bond market’s primary benchmark and if its yield goes up then other interest rates also increase making the burden of debt heavier for everyone from individuals to households to corporations and to governments. Global debt is astronomic and servicing this debt is rising with increasing interest rates. The US is leading the way with rate hikes and the rest of the world is beginning to follow gingerly with all eyes on the EU and Japan (with some yields still negative) as we continue to move up into the increased rates cycle which started in mid-2016. The process is slow however with the EU indicating this week to again hold rates steady.
The 5 year chart illustrates numerous breakouts, including the large H&S which presumes a yield increase to 5.0% is now underway. But the rate of increase has been rapid and is probably due a correction, assisted by the reluctance of the EU and Japan to start hiking rates in pursuit of the US. Even the UK recently indicated no rate hike is imminent.
The long term bond bull market has ended after more than 35 years and we are now into a long term bond bear market which continues to collapse. The US 10 year yield bottomed at 1.358% on 8 Jul 2016 and at 3.0% (en route to 5% and much higher thereafter) is evidence of a collapse in progress, whilst the stock markets are still at or near their peaks. The process is slow however with the EU indicating this week to again hold rates steady.
The 40 year chart illustrates the end of the 35 year long bull market with a double bottom (red) ending in mid-2016. The projection is now towards 5.0% yield, being the height above the H&S neckline equal to the depth, as US bonds move into a long term bear market. There is a double top (blue), still needing confirmation, which will be invalidated by penetration up through that level. If confirmed, it could lead to a substantial downward correction which would delay everything for quite a long while.
US Treasuries and Gold
As the gold price increases and as the US Treasury 10 year price decreases so the ratio increases. This relationship is illustrated in the chart below which is bullish gold and bearish US bonds. There is a large inverted ‘head & shoulders’ pattern that is ready to penetrate the neckline. This will propel the ratio up by the depth of the head, reinforced also by the recent ‘gold cross’ in Aug 2017 at a ratio of about 9.9.
Any interruption in either the gold price increase or the US bond price decrease will of course delay the process.
Gold
Gold has weakened during the dollar rally and has penetrated down through previous lows to close at $1323.40. The gold price has endured 6 consecutive closes below 10-Dema and is positioned between support and resistance.
The slow Stochastic seems to be bottoming but the MACD is still dropping so gold does not look strong. It may be due an upward correction as the dollar corrects down.
The longer term 3 year chart remains strong with the gold price continuing to build a large consolidation just below main resistance (black), with all the diagonal supports and prominent previous lows still intact and holding.
The yet longer term massive pentagon base pattern continues to hold as it illustrates the gold price build up over the last 5 years towards penetrating the neckline at $1375.00 which, once penetrated, will propel gold up by the depth of the head to $1800.00
The next 6 month cycle low due in Jun / Jul is approaching and will of course threaten this pattern
GDX US miners ETF
The GDX is still maintaining a positive bias as it moves up further within the resistance zone (green) with the moving averages still positively crossed over. But the oscillators are negative suggesting another move lower is imminent.
The longer term GDX chart illustrates how miners have been range bound for 16 months and how stronger price moves could test either support or resistance. Much depends on movement in the US$, metal prices and the gold / silver ratio.
The oscillators are positive.
DUST US Gold Miners Bear Index
DUST is maintaining a negative bias which suggests a lower US$ and higher metal prices. The oscillators are beginning to rise which suggests the opposite.
Silver
The silver surge breakout was false and price has returned to the 3 month old mould between support and resistance once again. The price move up was accompanied by an increase in volume but the price move down was with a volume collapse, which is positive.
But for now the substantial support base and its highly ‘coiled’ nature continues to build which should generate powerful price increases from here, once due.
The bullish reducing wedges over the last 2 years remain intact, as the penetration of 50-Wema is again proved false. Price remains between support and resistance within the reducing wedge patterns, while the oscillators look positive. The MACD is continuing an 18 month process of honing to a point which is likely to break out strongly, either up or down.
Gold : Silver Ratio
The ratio is above 80 once again after the silver false breakout. Nevertheless, there appears to be a positive in the chart pattern which suggests a breakout to below 77 is imminent.
Both oscillators are pointing down in support.
General Equities
World equity markets continued sideways, but are looking precarious with many on sell signals, as they remain largely on the edge of the abyss with the inevitable drawing nearer.
The Dow has penetrated down from the region of critical confluence and the move lower appears to be underway. The final approach to the zone of support is in the region of 23600 down to 23250 (red), and penetration of these levels will trigger further serious declines.
The oscillators are turning down in support of price declines.
Volatility as measured by the VIX is moving sideways as it bounces up repeatedly off 200-Dema. The indicator is still positioned between support and resistance with the oscillators also moving sideways. The next resistance is at 26.2 at the previous highs, and penetration here will trigger large declines in the Dow.
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