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Weekend Market Analysis 5 Aug 2018

Aug 4th, 2018

Executive summary

World equity markets continued sideways to down this week. The Dow Jones moved sideways as the US digested the weaker jobs report and the continued trade war threat with China. But, the markets remain in their ‘tipping point’ mode as they move, ever so slowly, towards the edge. There is increasing euphoria in equities and bonds and increasing pessimism in precious metals (and to some degree resources in general). There is massive divergence in the US market with investor complacency towards risk evident in the blue chip Dow Jones peaking in January and the high-flying smaller share indices such as the Nasdaq and the Russell 2000 only peaking 6 months later. This ‘flight to risk’ is not only in equities but now also in the bond market with investors piling into higher yield bonds, which by definition is at the junk end of the spectrum. Everything changed on 26 July with Facebook dropping 20%.

The US$ index increased to close at $94.96 and is in process of peaking somewhere just above the previous peak at $95.562, which is forcing gold down and gold pessimism up. The market did not like the US jobs report much and gold spiked a bit, but it is still the dollar that provides gold movement. The period ahead is likely to see dollar weakness after its peak and there is much consensus that gold is about to rally. Elliott Wave structure continues to indicate market reversal patterns are now developing as we slowly begin to move through the powerful ‘tipping point’ moment:

  • The US$ is likely to still move higher before a major drop in value. This will be a precursor to eventual strength again;
  • Gold is likely to bottom soon after again closing at $1223 on Friday and, with sentiment at extreme pessimistic levels, is likely to rally strongly (with silver) in the next period with the added impetus of increasingly favourable COTs data;
  • The period beyond is likely to see strong dollar gains and gold weakness, before the final chapter of complete long term market meltdown;

 

 

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 $93.87 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 rising in support of a stronger short term dollar.

 

 

 

The longer term 12 month chart illustrates the period of dollar weakness after the short term rally, as it tests, and perhaps even penetrates, the broad support zone.

The oscillators are turning up in support of the short term dollar rally.

 

 

 

The yet longer term 3 year chart illustrates the developing rising wedge which, once breached, will test the support zone towards a target zone in line with the Sep 2017 low at about $91.00. The decline will form the beginning of the right shoulder of what could develop into a bullish inverted H&S formation before the next leg up.

The oscillators are holding up in preparation for the decline.

 

 

 

Japanese Yen

The US$/Yen currency pair weakened further from resistance towards the diagonal support (red) as the Yen strengthened marginally. This is likely to continue much further once the US$ peaks, which will test the support zone and even penetrate it during a period of strength in precious metals as well.

The oscillators are dropping and are likely to drop further after the dollar peaks.

 

 

 

US Treasuries

The benchmark US Treasury 10 year yield is at the ‘crossroads’ of either continuing the bond countertrend rally (red arrow) or continuing the main yield increase trend (blue arrow). It closed the week at a yield of 2.95% and 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 price has been churning close to the 6 month cycle low in trying to find rally energy. The bottom still needs to be confirmed with 2 consecutive closes above 10-Dema, and a rally is not likely unless $1238 is penetrated on the upside. Price has been devastated by the extreme investor pessimism although there is much consensus now that a strong gold rally is imminent, especially with the increasingly positive COTs data.

The oscillators are not looking positive and the rally may be held back a short while longer until the US$ peaks.

 

 

The gold COT chart indicates a tightening convergence that precedes a price bottom, and it presents a very positive picture of a strong rally next.

 

 

HUI / Gold Ratio

US miners continue to underperform gold, and although there appears to be a bounce off diagonal support (red) a confirmed bottom still requires 2 consecutive closes above 10-Dema. Once this is achieved the rally is likely to be energetic.

The Slow Stochastic has bottomed and there appears to be a slight bending in the MACD which could be a bottom soon.

 

 

 

GDX US miners ETF

The GDX has dropped to a new low amid extreme investor pessimism, and it is still not a confirmed bottom until 2 consecutive closes above 10-Dema is achieved. This could be soon however and the oscillators are bottoming in support.

 

 

 

DUST US Gold Miners Bear Index

The DUST chart has been thrusting up, reflecting gold’s plummeting price, and the previous close below 10-Dema was 19 trading days ago. There is strong resistance above the current price and although price has reversed down marginally it still requires 2 consecutive closes below 10_Dema to confirm a top.

The oscillators are topping out however and a Dust price turn down is probably imminent.

 

 

Silver

As with gold, the silver price has been churning close to the 6 month cycle low in trying to find rally energy. The bottom still needs to be confirmed with 2 consecutive closes above 10-Dema, and a rally is not likely unless $15.70 is penetrated on the upside. Price has been devastated by the extreme investor pessimism although there is much consensus now that a strong gold rally is imminent, especially with the increasingly positive COTs data.

The oscillators are mixed and the rally may be held back a short while longer until the US$ peaks.

 

 

 

The silver COT chart, similar to gold, indicates a tightening convergence that precedes a price bottom, and it presents a very positive picture of a strong rally next.

 

 

USLV US Silver Miners Bull Index

The US silver miners USLV (bull index) exhibits a similar strong negative bias to Dust’s positive bias, and there is much churning just above the bottom. A rise above 8.25 should herald the start of a strong rally, although mixed oscillators suggest this is only likely a short while later.

 

 

Gold : Silver Ratio

The ratio is still below 80 and is also still holding below both the red and black trendlines (blue circle). So, the chart is still positive rather than negative. However, the oscillators are turning up which is negative.

 

 

General Equities

The Dow countertrend rally is still in progress but after peaking at 25 587 on 26 July it has retreated and in fact broken below the bear flag which developed during July. This may be the trigger for further declines to finally end the rally as the US market appears exhausted. But this is not yet conclusive.

The next significant leg down should be a prolonged  and severe drop.

 

 

 

One of the indicators pointing to exhaustion on the NYSE is the chart of New Highs against New Lows. It continues to illustrate the difference in the energy of 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 an average of about 200 (blue dotted), whereas during the countertrend rally from Apr to now they were outstripped by an average of about 25 (red dotted). 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 82 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 has now been 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 dropping in support of lower prices and the next wave down.

 

 

 

 

 

 

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