Weekend Market Analysis 29 July 2018
Executive summary
World equity markets continued up this week, with the Dow Jones reaching an interim high at 25587.20 on Thursday but dropping 136 points to close the week at 25 451.06. This is another example illustrating that markets are not driven by good news but rather by liquidity. The net effect of the US / EU trade pact and the US GDP growth of 4.1% was a drop in prices as the US 10 year treasury yield continued to rise this week to close at 2.96%, with yield (interest rates) continuing to edge up and reduce market liquidity. Elliott Wave structure continues to indicate the market top with the Nasdaq now joining the Dow and S+P500 in having topped out. So, the potential for reversal patterns to develop is now increased as we slowly begin to move through the powerful ‘tipping point’ moment.
The US$ closed slightly up at $94.46 and is likely to still move higher before a major drop in value. This will be a precursor to eventual strength again, and is likely to result in strong precious metal gains in the short term after some dithering. Gold is likely to bottom soon after closing at $1223 on Friday and, with sentiment at extreme pessimistic levels, is likely to rally strongly (with silver) in the next period up to major resistance at $1375 (at the neckline of the 5 year long basing pattern). The period beyond is likely to see strong dollar gains and gold weakness, although the timelines are difficult to forecast accurately.
US$
The US$ short term chart structure indicates the consolidation below the peak is still likely to rally through resistance to a level marginally above the peak. The support region between $93.80 and $93.45 is not likely to be tested until after the rally which could exceed the previous peak at $95.652.
The oscillators are moving sideways in anticipation.
The longer term 12 month chart illustrates the period of dollar weakness after the short term rally. There are 2 support zones which will be tested in a likely decline towards $91.00.
The oscillators are turning up in support of the short term dollar rally.
The yet longer term 3 year chart illustrates the decline towards a target zone in line with the Sep 2017 low at about $91.00. The decline will break out from a bear flag formation and form the first leg of the 2nd shoulder of what could develop into an inverted H&S formation.
The oscillators are holding up in preparation for the decline.
Japanese Yen
The US$/Yen weakened into a small consolidation between 10- and 50-Dema which is likely to reverse up towards resistance in line with the short term dollar rally. However, during the dollar decline after that the Yen will increase and strongly test support (red) during a period of strength in precious metals as well.
The oscillators are dropping and are likely to bottom as the dollar rally begins.
US Treasuries
The benchmark US Treasury 10 year yield is at a ‘tipping point’ to either end the bond countertrend rally (red arrow) or continue with the main yield increase trend (blue arrow). The next week or two will decide which of the two trends will continue. The blue arrow seems to be the more likely as the bond market rally has been losing momentum, and is more likely to start collapsing again, especially if the equity market has also ended its countertrend rally.
The horizontal blue and red lines need to be penetrated to finally determine direction.
Gold
The gold market is exceptionally weak with 40 consecutive closes below 10-Dema, confirming extreme investor pessimism. A consolidation has developed since the 6 month cycle low which has confirmed a bottom. There should now be a strong gold rally with the US$ chart structure indicating a period of weakness soon.
Both oscillators are turning up in support of a gold rally.
The longer term 3 year chart illustrates the extreme investor pessimism with the third straight weekly fall to a new low. A gold rally is very likely as a rebound from this situation, plus the likely decline in dollar value soon.
The Slow Stochastic oscillator is bottoming and starting to turn up in support.
HUI / Gold Ratio
The HUI / Gold ratio has dropped sharply from the 0.1406 level indicating the increased underperformance of US miners against gold: A markedly lower gold price to boot. This is bearish, but the extent of the weakness in the whole complex is it’s strength in that a rebound is likely together with the promising chart structure of the US$.
GDX US miners ETF
The GDX chart delivers the same message of extreme investor pessimism. The resistance and support levels have dropped to new lows, and the only optimistic element is that the oscillators are bottoming.
The longer term 3 year GDX chart illustrates the range-bound nature of the data, but also how the chart is moving down towards support. This is likely to support a rebound, as it has done on previous ocassions.
DUST US Gold Miners Bear Index
The DUST chart exhibits the reciprocal situation and, accordingly, has broken up to higher levels, with resistance and support now also at higher levels. But the oscillators are topping out which could result in Dust reversing down soon.
Silver
Silver is exceptionally weak with 30 consecutive closes below 10-Dema, confirming extreme investor pessimism. A consolidation has developed since the 6 month cycle low which has confirmed a bottom. There should now be a strong silver rally with the US$ chart structure indicating a period of weakness soon. The key breakout level for silver is $15.70.
Both oscillators are turning up in support of a silver rally. Hopefully, the silver rally is more vigorous than gold to continue reducing the Gold / Silver ratio.
The longer term 3 year chart illustrates the extreme investor pessimism with the seventh straight weekly fall to a new low. A silver rally is very likely as a rebound from this situation, plus the likely decline in dollar value soon.
The Slow Stochastic is bottoming in support but the MACD has broken down through the bottom trendline.
USLV US Silver Miners Bull Index
The US silver miners USLV (bull index) exhibits a strong negative bias in dropping through support to a new confirmed bottom at 7.60. A small consolidation has occurred with a key breakout level at 8.25. There should be a strong rally from here and the oscillators have bottomed in support.
Gold : Silver Ratio
The reducing trend continues to be threatened but the ratio actually declined this week to close at 78.94. The oscillators are rising due to the declining prices, but the next period should be more positive. The ratio is still below 80 and may well decline further in the next period.
General Equities
The Dow peaked at 25 587 this week but closed down 136 points from that level. The drop on Friday closed a gap created in the climb to the peak. Although the US market shows strong signs of exhaustion the bear flag still needs to be broken. There may be further small increases next week but most indicators point to the end of the countertrend rally which started on 2nd April 2018.
The next significant leg down should be a prolonged and severe drop.
Another look at the New Highs – New Lows on the New York Stock Exchange continues to illustrate the energy in the bull market leading up to the Jan 2018 peak and the lethargy and lower energy levels of the countertrend rally in the bear market. The chart below highlights the 6 months leading up to the Jan 2018 peak and the 6 months thereafter.
During the bull market phase New Highs outstripped New Lows by about 200, whereas during the countertrend rally from Apr to now they were equal at about 0. In other words, the bull market was powerful with high energy levels whilst the bear market rally is lethargic low in energy. The difference in levels between blue and red is distinct and clear.
The index closed at 31 on Friday.
The Dow Jones chart structure continues to maintain its bear market mode despite the 4 month countertrend rally. A clear and powerful double top is visible and the bear flag is about to be penetrated on the downside.
Once the next wave down starts on the Dow it will quickly test previous lows indicated on the chart in red. The oscillators are peaking in support of the next wave down.
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