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Midweek Market 23 Aug 2018

Aug 23rd, 2018

Executive summary

This week, unlike usual, a very overall overview.

US interest rates bottomed in mid-2016 and after a lengthy delay the EU and Japan are preparing for rate hikes next year. World markets are therefore at a ‘tipping Point’ stage and the next 6 months will witness dramatic changes in world asset values.

US equities are balanced at the terminal end of a countertrend rally as they continue, ever so slowly, into a bear market. The US bond market started to decline in mid-2016 with yield on the 10 Year Treasury Note rising from 1.4% to 2.82% now, as it also enjoys a countertrend rally which is very near its end. Beyond this point the US bond market will continue to collapse as it destroys all asset values in its path.

The US$ index is once again resurgent and, having peaked at $96.984, is currently in a weakening cycle probably down to a level of $91.00. Thereafter it is likely to climb to much higher levels up to $105 and beyond. During all this, gold has been under severe pressure in a bear market that started in 2011, dropping in value from $1925 to its current level of just below $1200 probably en route to $1000-$900. But, with the dollar in a weakening cycle down to $91, gold is likely to enjoy a rally which is still in its reluctant infancy.

But, at the same time global debt is increasing exponentially as national deficits explode seemingly uncontrollably. During the periods of quantitative easing governments were seemingly incapable of generating economic growth and the prospect of ‘stagflation’ grows nearer. So, as the interest rate cycle has turned up and debt will be ever more difficult to service, so the spectre of a collapsing international monetary system draws nearer. Many claim that the next global financial crisis will be exponentially worse than the last and that the international monetary system will collapse and have to be re-tooled anew. At that time we had all better be in gold.

 

US$

The US$ index weakened from the peak at $96.984 moving down to $95.05 with 2 consecutive closes below 10-Dema, confirming the top. It has stalled just into the support zone with a Doji candle, indicating an upward adjustment before further downside.

The oscillators are dropping which indicates further dollar weakness in due course.

 

 

 

The longer term 12 month chart illustrates the decline into the previous consolidation zone and the likely further weakness towards the 61.8% Fibonacci retracement level close to $91.00.

The oscillators are dropping, signalling further dollar weakness.

 

 

The even longer term 3 year chart illustrates the dollar turning down at resistance with a bearish Shooting Star candle, and the likely further weakness towards the 61.8% Fibonacci retracement target zone in line with the Sep 2017 low at about $91.00.

The decline will form the beginning of the left side of the right shoulder of what could develop into a bullish inverted H&S formation which could propel the dollar much higher to $105.00 and beyond later on.

The oscillators are topping and beginning turn down in support of the decline phase.

 

 

 

Japanese Yen

The US$/Yen currency pair weakened through 2 consecutive diagonal supports (red) as the Yen enjoyed recent strength. Although the Yen inexplicably strengthened during the dollar’s strong advance to its peak, it also weakened during the dollar’s recent weakness. Despite this irregularity the Yen is now poised to strengthen further.

Further Yen strength will likely support a higher gold price.

 

 

 

US Treasuries

The benchmark US Treasury 10 year note strengthened this week with yield dropping to 2.82% as the US bond countertrend rally continues, for now. The chart structure indicates a further drop in yield towards perhaps 2.77% as the countertrend rally endures a while longer.

In the final analysis the horizontal blue and red lines need to be penetrated to determine direction. The red horizontal line represents support and the blue line resistance. The main trend will resume once the horizontal blue resistance line is penetrated, after which the US bond market will resume its collapse.

 

 

Gold

The gold price is trying to build a bottom which still needs to be confirmed with 2 consecutive closes above 10-Dema. Very bullish COTs data is supporting this but the market needs to develop stronger buying interest after the recent price devastation. The question remains as to whether this is just a short price ‘blip’ or the beginning of a stronger rally to higher prices.

Price needs to penetrate the resistance zone and break through at least the $1240 level before this will be clarified.

The oscillators are turning up and beginning to look more positive in support of this proposition, and the COTs data continues to look more bullish for a spectacular gold rally.

 

 

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

 

 

 

The longer term 3 year weekly chart ended on a bullish Harami candle which suggests a reversal. The oscillators too are bottoming and turning up which supports this. But gold needs a trigger to counteract the bearish pessimism and earlier price decline to invigorate a revival. This is of course all still dependent on the US$, and it seems almost impossible that that role will probably invert at some time in the not too distant future.

Today sees the US FOMC minutes from the last meeting and next Friday will witness the US Federal Reserve testimony at Jackson Hole in Wyoming. It is no secret that Donald Trump wants a weaker dollar and these events may well include the necessary gold trigger.

 

 

 

HUI / Gold Ratio

US miners continue to underperform gold, and the HUI / Gold ratio continues to decline further with no confirmed bottom yet, reflecting the extreme investor pessimism. But, the chart is starting to build a bottom which still needs 2 consecutive closes above 10-Dema to confirm.

The oscillators are more positive now, indicating more positive price moves next.

 

 

GDX US miners ETF

The GDX chart is of course similar to the Hui:Gold ratio chart and the same commentary applies. Once the gold trigger kicks in so too will these charts ignite.

 

 

DUST US Gold Miners Bear Index

The Dust chart displays a geared version of the inverse of the preceding charts and the same commentary applies, in reverse. Once the gold trigger kicks in so too will this chart ignite. It provides an early warning system of what is likely to happen to gold and gold miners, the oscillators have topped out and are beginning to decline which is positive for gold.

 

 

 

Silver

The silver price is trying to build a bottom which still needs to be confirmed with 2 consecutive closes above 10-Dema. Very bullish COTs data is supporting this but the market needs to develop stronger buying interest after the recent price devastation. The question remains as to whether this is just a short price ‘blip’ or the beginning of a stronger rally to higher prices.

Price needs to penetrate the $15.12 level and break up into the resistance zone, before breaking higher. In so doing hopefully silver starts to out perform gold, which it is not doing at the moment.

The oscillators are turning up and beginning to look more positive in support of this proposition.

 

 

 

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

 

 

Gold : Silver Ratio

The ratio pushed up above 80 and is now at 81.58, having created a triple top. The chart structure is bearish for precious metals and could turn bullish if the triple top is not penetrated. The oscillators are mixed and the data is somewhat trendless.

 

 

 

General Equities

The US stock market remains ‘fractured’ with the main indices not agreeing with each other. The Dow continues to endure low energy characteristics climbing to new low-level highs as it exhibits continued signs of exhaustion. If support at 24950 is breached decisively it will confirm the end of the 4½ month countertrend rally which, until then, is technically still in progress.

That will herald the start of a significant leg down which will be a prolonged  and severe drop. The oscillators are dropping in support of this proposition.

 

 

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 5 since the start of the bear market countertrend rally.

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 and low in energy. The difference in levels between blue and red is distinct and clear.

The index closed at 77 yesterday.

 

 

 

The Dow Jones chart structure illustrates how the index continues to hug the ‘Primary Bull Market Resistance Line’ in the countertrend rally over the past 4½ months. This, in spite of the lower energy levels which are closing in on the end of the rally soon. The next penetration point is 24950 which will lead onto additional penetration points (red circles) down eventually into the support zone (red) between 23650 – 23000. Below this the next wave down starts in earnest which will be prolonged and severe.

 

 

 

 

 

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