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Midweek Market 13 Sep 2018

Sep 13th, 2018

Executive summary

Several markets are at crucial turning points including equities, bonds, and precious metals. World equity markets continue in their fractured mode of non-confirmations across all platforms, while the US bond market approaches inversion in the yield curve which usually heralds recession or worse. The US treasury countertrend rally is all but complete with new evidence that yields are going to continue rising which means the continued collapse of the bond market is about to resume. This will put immense pressure on the equity market which is at the tail end of its countertrend rally.

The US$ has resumed its decline in a multi-month correction which is, albeit slowly, propelling gold into its multi-month rally. US gold miners have sparked a rally after a long decline and the whole sector worldwide seems ready to move up.

The Emerging market contagion seems to have stalled for the time being although it could gain momentum again in the next period.

 

US$

The US$ index has resumed its daily decline after the recent relief rally, closing below 50-Dema once again. The oscillators are dropping suggesting further dollar weakness.

 

 

 

The longer term 12 month chart illustrates the decline potential, through the various levels of support in the consolidation zone, towards the 61.8% Fibonacci retracement level at $91.57.

The oscillators are turning down in support of further weakness.

 

 

The even longer term weekly 3 year chart ended on a bearish Engulfing candle as price re-entered the support zone. The overall decline should be multi-month towards the target decline zone at the 61.8% Fibonacci retracement target at about $91.00 in line with the Sep 2017 low.

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.

 

 

 

US Treasuries

The benchmark US Treasury 10 year note continued to weaken this week with yield increasing to 2.97%, with more indication now that the countertrend rally is very close to completion. The evidence continues to grow that the blue arrow is gaining in momentum more powerfully than the red arrow.

If the bottom blue diagonal line holds then the countertrend rally will be complete, and the US bond market will resume its collapse.

 

 

The longer term 5 year chart illustrates the breakout through the top line of the triangle, supporting the proposition of an end to the countertrend rally and resumption of the main trend towards higher yields.

 

 

 

US Yield Curve

One of the bond market indicators of economic health or otherwise in the US is inversion in the ‘yield curve’. This is derived by comparing the US Treasury yield in the 2 year and 10 year notes. When the 2 year yield increases above the yield on the 10 year it is said to ‘invert’, and this has usually heralded recession or worse. The trend towards inversion has been gathering momentum since the start of 2014 and is close to inversion. The last inversion occurred in 2006 – 2007 just before the Global Financial Crisis.

The yield curve will invert on the chart below when the graph reaches zero.

 

 

Gold

The gold price has a confirmed bottom and the multi-month rally is underway, although very fragile. The indications are positive with a weakening dollar, very positive COTs data, and investor pessimism at extreme levels. The increased buying interest that the market needs now came in the form of a strong bounce in the US miners GDX ETF on Tuesday, and hopefully this will manifest in breaking through the first initial level at $1221.

The underperformance of silver continues though and for the expected gold rally to continue the first priority is to at least hold the earlier bottom at $1168.

The short term oscillators are turning up in support of higher prices.

 

 

The gold COT chart indicates a continuing even tighter convergence that now continues at a narrowed point. This presupposes a successful gold rally, as has happened historically.

 

 

 

The longer term 3 year weekly chart illustrates a positive candle configuration since the bottom as well as positive oscillators.

 

 

 

HUI / Gold Ratio

US miner underperformance against gold was jolted up on Tuesday with a sharp revival in share prices, after a prolonged deterioration. This is only an early sign of a revival and the bottom in the ratio still needs to be confirmed.

The oscillators are turning up in support of further improvements in the ratio.

 

 

GDX US miners ETF

The GDX chart is of course similar to the Hui:Gold ratio chart and the same commentary applies. US miner investors have started to develop buying interest after the near capitulation of the past 10 weeks.

The oscillators are also beginning to look more positive.

 

 

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 downwards. It provides an early warning system of what is likely to happen to gold and gold miners, but the sharp drop is only the beginning and a top still needs to be confirmed.

The oscillators are also beginning to look more positive with a potential drop to come.

 

 

Silver

The silver price continues to underperform gold although with a very slight reversal this week. Another consolidation is developing at the bottom but confirmation of a bottom has not occurred yet. Indications are improving with a weakening dollar, very positive COTs data, and investor pessimism at extreme levels. But, like gold, the market needs to develop stronger buying interest after the recent price devastation, and hopefully will manifest in finally developing a price bottom.

The oscillators are also looking more positive with a potential rise next.

 

 

 

USLV US Silver Miners Bull Index

The US silver miners USLV (bull index) still exhibits a strong negative bias but, like silver, is beginning to develop a consolidation at the bottom although confirmation of a bottom has not occurred yet

The oscillators are also looking more positive with a potential rise next.

 

 

Gold : Silver Ratio

The short term 6 month ratio illustrates the negative bias, closing at 84.72. But a fragile reversal is occurring at the top which has a way to go before confirmation of a top.

The oscillators are turning down in support of a top which is promising.

 

 

A long term view of the gold:silver ratio illustrates the dips at gold peaks in the green zone and the peaks at gold troughs in the purple zone. In accord with this it can be seen how the next gold peak will probably result in a ratio down at the 10 level while the next gold trough might result in a ratio up at 100 or slightly higher.

It places the current 84.72 in context.

 

 

 

General Equities

World equity markets continue in their fractured mode of non-confirmations across all platforms, and the Dow Jones in the US market continues to endure low-energy peaks as it nears the end of the countertrend rally. The rising wedge fracture is still inconclusive, but any break now will have to test the critical support at 24950 which will finally confirm completion of the countertrend rally.

The oscillators are mixed which indicates more sideways movement in the short term.

 

 

Two troublesome impact factors in the US equity market, in addition to the  fragmented nature of the market with all its non-confirmations and low energy levels, are in the bond market. The US bond market approaches inversion in the yield curve which usually heralds recession or worse, and the bond market itself is very close to completion of its countertrend rally.

Both these impacts will result in severe devastation of the equity market. The US treasury countertrend rally is very close to completion with new evidence that yields are going to continue rising which means the continued collapse of the bond market is about to resume. This will put immense pressure on the equity market which is at the tail end of its countertrend rally.

 

 

 

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