Home > Uncategorized > Midweek Market 3 Jan 2019

Midweek Market 3 Jan 2019

Jan 3rd, 2019

Executive summary

World markets remain poised in a secular bear market after a recent counter-trend rally from the lows achieved during Dec 2018. Many more commentaries are now suggesting markets are likely to collapse in 2019 for good sound reasons, but there is still a singular lack of fear generated by the popular media and others with the general approach to hold on and even buy the dips.

Using the Dow Jones Industrial Average as a proxy for US equities (and indeed world equities) it can be seen that a variety of different impact factors are propelling the index to yet much lower levels. These include Elliott Wave theory, activation of a strong H&S pattern, and a strong negative divergence, all as can be seen in the charts that follow. Also, the countertrend rally in the US bond market is now probably completed with the long term bond bear market likely to resume very soon.

The US$ index has begun a multi-month decline phase since recent peaks, albeit still sluggishly, just as the similar (but in reverse) gold multi-month rally continues to gain momentum. The gold rally has gathered pace from silver which is now outperforming gold, a usually strong propellant. The Yen has also now strengthened against the dollar, but all (Dollar, Yen, gold, and silver) are due for a correction before the main trend continues again.

Two weeks ago we examined what ‘other’ factors are likely to drive the gold price in 2019, and today we look at the arrival of the new credit crisis which is likely to wreak financial havoc as it bolsters gold and the whole precious metals complex.

US$
The US$ index has begun declining after recent peaks, but is still doing so sluggishly. In moving largely sideways it is in fact even starting to construct a bear flag with a negative breakout earlier this week and a breakback into the flag yesterday. The chart structure, together with corroborating data such as still extremely positive investor sentiment and bearish Cots data, indicates a continued multi-month dollar decline in the period ahead. The oscillators though are dithering in denial, suggesting more dollar strength first.

Investor optimism remains strong together with negative Cots data which both indicate more dollar weakness. The continued wide dilation in the graphic (red circles) supports dollar weakness ahead.

The negative divergence between price and MACD illustrated in the 12 month chart has still got to work it’s way through the system as a propellant for dollar weakness. There may well be some dollar strength first, but the divergence is likely to drop dollar value well below 200-Dema (probably towards $93.80), despite the oscillators dropping towards the bottom of their range.

The longer term 3 year weekly chart illustrates dollar value slowly beginning to roll over with the support of the oscillators turning down in support.

Japanese Yen
The Yen strengthened strongly against the dollar this week, reaching a level last achieved 7 months ago. This, supports the stronger gold price. Although, the Yen, dollar and gold may well correct slightly soon before continuing the main trend.

US Treasuries
The US bond market collapse enjoyed a 3 month reprieve in a counter-trend rally during Oct-Dec 2018. This rally has seen the yield on the US Treasury 10 year note decline from 3.2% down to 2.66% which in Elliott Wave terms completes the 5 wave decline ((i) to (v)) from b (circle) to c (circle). This should now resume the main trend in a continued US bond market collapse as yields start rising again.
Both oscillators are bottoming in support of this.

Gold
Continuing on from our series of 2 weeks ago, examining what ‘other’ factors are likely to drive the gold price in 2019, today we look at the arrival of the new credit crisis. This is likely to wreak financial and monetary havoc, and in the process bolster gold and the whole precious metals complex. This is adapted mostly from original thoughts by Alasdair Macleod at GOLDMONEY.

The New Credit Crisis

Background

Equity markets are finally following the US bond market into a long term bear market as the onset of the new credit crisis is triggered. This was due anytime between the end of 2018 and mid-2019, and the crisis timing is right on schedule with seizure of the US corporate bond market signalling the crisis arrival: Seizure in the commercial bond market has manifested in withdrawal of bank lending for working capital purposes. It is likely to unfold into something more ferocious during 2019, and now is the time to consider what it might all develop into. As with most things economic nothing is exact, and therefore we need to support conclusions from known basics.

Deteriorating circumstances and the US Federal Reserve

In the US the rapidly falling yield curve is a warning of encroaching recession which, together with declining equities, is persuading the US Federal Reserve to soften monetary policy. However, there is some slight respite from US Treasuries in a recent counter-trend rally due to temporarily reduced inflation pressure because of the collapsing oil price. But, the US Fed will have to continue hiking rates to counter continued price inflation due to Trump’s earlier monetary expansion, some oil price recovery, and increasing consumer prices from escalating tariff wars. All this aggravated by withdrawal of bank lending for working capital purposes. Consumer confidence will decline as the US CPI continues to rise into 2019 and the stock market continues to crash with unemployment starting to rise sharply. This will drain liquidity from the financial markets but inflation will remain stubbornly high. This is the natural trigger for lower bond prices as the bond market resumes it’s collapse in earnest.

Encroaching Recession and devaluing US Dollar

The US enters a severe recession, similar to 1930-33, except that then the US$ was partly gold backed whilst now it is entirely fiat and de-linked from gold convertibility. Foreign owned dollars are sold because of reduced investor confidence in future purchasing power which increases the US deficit. One major difference is that US banks are better capitalised now than they were in 2007 and consequently will act more promptly and decisively to protect their capital by calling in loans which will drive the non-financial economy into a slump more rapidly. This of course will be discouraged by the Fed, seeking to avert deepening gloom and depression.

Rising US Inflation and the Debt Trap

Rising inflation will restrict the Fed’s ability to respond positively as only rate hikes can combat inflation. This debt trap will ensnare the US from which the line of least resistance will be accelerating inflation forcing the Fed to buy US Treasuries under cover of monetary stimulation. The truth behind this forced resumption of QE will be to suppress borrowing costs as the US budget deficit continues to escalate to US$1.5 trillion and beyond. This will announce the arrival of severe ‘stagflation’ economists have been warning against for some time now.
Central bankers who believe in the teaching of John Maynard Keynes fail to understand the seeming contradiction of an economy in recession suffering escalating price inflation at the same time. This is, however, the condition of all monetary inflations and hyperinflations suffered by economies with fiat currencies (un-backed by gold).

External factors create Major Divergence

This scenario is the likely outcome of the developing credit crisis in the US if it wasn’t magnified by external factors. The snag is US monetary policy has long been coordinated with the monetary policies of other major central banks through forums such as the Bank for International Settlements, G20 and G7 meetings.
The surprise election of Trump upset this status quo with his untimely budget stimulus late in the credit cycle and the havoc he wreaks in international trade. The result is a major divergence between, particularly, the Bank of Japan and the European Central Bank. Therefore, unlike before, Japan and the EU enter this crisis with negative interest rates against positive and increasing rates in the US, which creates enormous currency and banking tensions.
The EU is a financial and systemic time-bomb waiting to explode, because it is irretrievably bust. Problems such as Greece, Italy, or the impending rescue of Deutsche Bank are routinely patched over as the ECB and the EU are adept at dealing with issues of this sort. They are mostly brazened out, doing whatever is necessary: As Mario Draghi famously said, “Whatever it takes”.
The disparity between US policies and those of the EU and Japan will almost certainly lead to both the EU and Japan revising monetary policies. Only last month (Dec 2018), quantitative easing in the Eurozone ceased, and bond prices are likely to fall significantly without it. A rise in the ECB’s deposit rate from minus 0.4% will surely follow, and it is hard to see how a developing systemic crisis in the region can then be prevented.
Since the Lehman crisis in America, inflation has been mostly bottled up in the financial sector, while being statistically suppressed in the productive economy. That is now about to change, leading to excess deposits at the banks trying to escape the consequences of their deployment for mainly financial speculation. It will not provide a boost in consumption, because consumers are maxed out and unemployment is rising. It will simply undermine the purchasing power of all increasingly unwanted and un-backed fiat currencies as currency values start to devalue seriously.


Circumstances such as these will bolster gold and the whole precious metals complex which is likely to enjoy most of 2019.


Our normal gold analysis follows.

Gold continued to strengthen this week as the rally gains momentum. But it closed yesterday on a Doji candle (as it did last week, falsely) which reflects indecision and could signal the start of a period of correction. Markets do not move in straight lines and a counter-trend rally is probably now due, before the gold price resumes toward the region of $1300- $1350 at least.

The gold COTs data indicates the start of dilation but it is still early days and the gold price continues to rally. A correction is probably now due.

The gold rally continues to break through key resistance levels as it gains momentum. A correction is now due before gold continues towards the main resistance zone between $1314 and $1370. The oscillators are still rising but close to the top of their range.

The longer term 3 year chart illustrates the gold multi-month rally gaining momentum as it increases towards the next key breakout level into resistance at $1314. Main resistance is at the multi-year neckline at $1375, which will prove to be powerful resistance.
The longer term picture for gold will probably include major gyrations if and when this level at $1375 is to be breached decisively. Many different commentators hold many different views as to gold’s longer term pathway. Elliott Wave, for example, hold that gold is enjoying a corrective advance that will still drop down towards the $1000 to $900 region, after gyrating up through $1375 towards the $1400 to $1450 region.
2019 will probably be a good year for gold, and once the minor gyrations are complete, perhaps down to $1000 or lower, gold is likely to then move up to much higher levels (eventually in multiples of many $1000 and higher).

South African Rand
The South African Rand broke up through the reducing wedge pattern a number of weeks ago, and has held onto the levels above the reducing wedge. The key strength and weakness levels remain at $13.53 and $14.70 respectively. The struggle continues between expected dollar weakness (strengthening the Rand) and South African political and economic weakness, especially during collapsing markets (weakening the Rand). Both oscillators are dropping, supporting further Rand strength.

HUI / Gold Ratio
The ratio continues to drift sideways, reflecting US miners keeping pace with gold gains. The chart has a mildly positive bias, but the fact that miners are not out-pacing gold is negative for the whole complex. The next key breakout level remains at 0.1291.

HUI Index
The HUI index itself is more positive than the HUI / Gold ratio, with the miners not having to compete against the gold price. The positive bias has the next key breakout levels close at hand, and the oscillators are turning up in support, but the oscillators are moving sideways.

GDX US miners ETF
The GDX chart is similar to the HUI Index chart except it is even more positive. It seems as if the US miners may well catapult up if these patterns persist.

DUST US Gold Miners Bear Index
The Dust chart has similar commentary, except in the opposite direction being a US miners bear index. The downside bias in the chart is gaining momentum despite the breakbacks, and the next key breakout level is close at hand at 22.0. The oscillators are bottoming indicating potential chart reversals are possible.

Silver
Silver’s recent breakouts have boosted momentum, and silver is now outperforming gold which is positive for the whole complex. But a correction is due, with both oscillators overbought. The next key breakout levels are very close at $15.71 and $15.82.

The silver COTs data remains very positive although the convergence pattern is beginning to dilate slightly. Because it is still early days the silver rally is nevertheless gaining momentum.

Gold : Silver Ratio
Silver is outperforming gold, which is positive for the whole precious metals complex. The top is confirmed and the ratio is declining, closing at 82.06 which is the lowest in 12 weeks. Also, the oscillators are dropping in support, although they may be close to a reversal.

General Equities

The Elliott Wave analysis of the Dow short term chart illustrates the potential for further declines. Strong declines are likely from here to take prices below the Dec 2018 lows. If the decline is wave iii (circle) of 3 of (3), the Dow will collapse. If the decline is wave 5 of 3 it will be less severe although also below Dec lows.

The Dow 12 months chart illustrates the major negative divergence between price and MACD which is the main driver in propelling the Dow down strongly. The counter-trend rally is part of the overall decline process.

The large H&S pattern developed over the last 9 months has been activated, and this is likely to propel the Dow down by 3000 points, being the height of the head. This will drop the Dow down through the next big region of support around the region of 22000 to the next region below that around 21000. This will test 200-Wema (green).

The VIX has broken back (black circle) into the cluster (red circle) as a result of the counter-trend rally in the Dow. Consciousness on the New York stock exchange is still a singular lack of fear generated by the popular media and others with the general approach to hold on and even buy the dips.

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