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Midweek Market 20 Sep 2018

Sep 20th, 2018

Executive summary

World equity markets continue in their fractured mode of non-confirmations across all platforms, while the US bond market resumes its collapse having ended the countertrend rally. With this as a background, the Dow Jones continues to edge up in exhaustion mode, being propelled by ever less counters as the new lows continue to outnumber the new highs on the US stock market. The interest rate cycle has turned up and is gathering momentum as the US yield curve in the bond market approaches ever closer to inversion which usually heralds recession or worse. Donald Trump continues to ignite trade wars with China, which is all very reminiscent of exactly this behaviour by the US administration in 1929 which then assisted in ushering in the great depression, and which now will probably do much the same by increased multiples of severity.

The US$ has resumed its decline in a multi-month correction which is, albeit slowly, propelling gold into its multi-month rally. US miners have extended their rally of last week and the whole sector worldwide seems ready to move up. This is however a countertrend rally which will falter as the dollar strengthens again in due course, pushing the precious metals complex down towards the ultimate bottom to the bear market which started in Aug 2011.

The Emerging market contagion has stalled for the time being although it will again ignite as the dollar strengthens again at the completion of current weakness.

 

US$

The US$ index gapped lower this week towards a new lower support zone, providing competing currencies and gold with the beginnings of countertrend rallies. The dollar closed below 10-Dema on 6 consecutive trading days and 10-Dema has crossed down below 50-Dema as momentum increases.

The oscillators are dropping suggesting further dollar weakness.

 

 

 

The longer term 12 month chart illustrates the decline potential, through the various levels of support 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 illustrates penetration of previous lows, but turning back from 50-Wema. The multi-month decline should test the target zone at 61.8% Fibonacci retracement at about $91.00 in line with the Sep 2017 low, with declining oscillators providing support.

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

Yield on US treasuries accelerated this week with the benchmark US Treasury 10 year note continuing to weaken as the yield increased strongly to 3.08%. The blue arrow is gaining in momentum more powerfully than the red arrow, and indications are that the US bond countertrend rally has ended.

The yield increase is approaching resistance at the blue horizontal and a relief reversal is due. The Slow Stochastic seems to be topping out although the MACD is rising strongly through a breakout of the rising wedge. This continued collapse in the US bond market is applying severe pressure on equities.

 

 

The longer term 5 year chart illustrates the breakout through the top line of the triangle, plus the much earlier breakouts through all the H&S patterns. The thrust towards higher yields is now underway, and this is likely to reach 5% as the first target followed by much higher yields in a long term bond bear market which has now resumed.

 

 

 

US Yield Curve

A long term 5 year view of the approaching inversion in the US ‘yield curve’ is illustrated in the chart below. It is evident that the trend to zero and beyond is now close at hand, and this is a powerful indication of the usual US recession or worse which is to follow. The last inversion occurred in 2006 – 2007 just before the Global Financial Crisis.

 

 

Gold

The gold price multi-month rally is underway, although still very fragile. The indications are positive with a weakening dollar, very positive COTs data, and investor extreme pessimism which is slowly turning towards optimism. Increased buying interest is becoming evident in the extended rallies that have started in the US miners GDX ETF (ensuing charts).

The underperformance of silver continues though and for the expected gold rally to continue the priorities are to at least hold the earlier bottom at $1168 and start penetration of key initial levels at $1218 and $1221.

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

 

 

The gold COT chart indicates the continuing tight convergence that is now likely to propel the gold rally, as it has done historically.

 

 

 

The longer term 3 year weekly chart illustrates the development of a consolidated bottom that ends in a positive Engulfing candle together with positive oscillators. This all illustrates the multi-month rally is underway.

 

 

 

HUI / Gold Ratio

US miner underperformance against gold was jolted up last week and this has developed into a confirmed bottom with 3 consecutive closes above 10-Dema. The bottom turnaround rally has extended up into the resistance zone and with positive oscillators looks likely to move up further as the gold rally continues.

 

 

 

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. With a confirmed bottom after 3 consecutive closes above 10-Dema this is likely to continue up.

The oscillators are rising strongly in support of further US miner increases.

 

 

 

DUST US Gold Miners Bear Index

The Dust chart displays virtually the exact opposite in support of further US miner increases, as the commentary is exactly in accord with the inverse of the GDX chart. Once the gold trigger kicks in so too will this chart ignite downwards, and it provides an early warning system of what is likely to happen to gold and gold miners.

The top is confirmed and the oscillators are positive with a potential further drop to come.

 

 

 

Silver

Although silver still underperforms gold it is showing signs of an improvement. The silver COT data is very positive and although the bottom is still unconfirmed it closed above 10-Dema for the first time in 16 trading days. ilver closed at $14.28 which is just below the first key initial level at $14.40. Hopefully, to be followed by penetration of higher key initial levels at $14.78 and $14.97.

The oscillators are in support of higher prices 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. However, it does look poised to move up now for the reasons indicated for silver, and it also closed above 10-Dema for the first time in 16 trading days.

The oscillators are in support of higher prices next.

 

 

 

Gold : Silver Ratio

The short term 6 month ratio illustrates the negative bias, closing at 84.61 which is a slight improvement on last week. But the consolidation at the top is still fragile and the top is unconfirmed.

The oscillators are continuing to turn down in support of a top which is promising.

 

 

 

General Equities

The Dow Jones continues to edge up in exhaustion mode, propelled by ever less counters as the new lows continue to outnumber the new highs on the US stock market. The rising wedge of the last 2 months continues to endure low energy peaks, with the critical support level at 24950. Penetration of this level will finally confirm the end of the countertrend rally.

 

 

 

New Highs against New Lows on the NYSE 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.

During the bull market phase New Highs outstripped New Lows by an average of about 140 (blue dotted), whereas during the countertrend rally 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 -26 yesterday.

 

 

 

World equity markets continue in their fractured mode of non-confirmations across all platforms, while the US bond market resumes its collapse having ended the countertrend rally. With this as a background, the Dow Jones continues to edge up in exhaustion mode, against the interest rate cycle which has turned up and is gathering momentum as the US yield curve in the bond market approaches ever closer to inversion which usually heralds recession or worse. Donald Trump continues to ignite trade wars with China, which is all very reminiscent of exactly this behaviour by the US administration in 1929 which then assisted in ushering in the great depression, and which now will probably do much the same by increased multiples of severity.

It is just a matter of time before equities collapse into a long term bear market.

 

 

 

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