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Midweek Market 10 Jan 2019

Jan 10th, 2019

Executive summary

World markets remain poised in a secular bear market although still enjoying the current counter-trend rally from the lows achieved during 2018. But there is still a singular lack of fear, generated by the popular media and others, in the belief that equities are still in a long term bull market. In fact, using the Dow Jones Industrial Average as a proxy for US equities (and indeed world equities) it can be seen that the current counter-trend rally includes 8 higher closes out of the last 10, illustrating another ‘buying panic’ and the increased investor appetite for risk. The variety of different impact factors propelling the index to yet much lower levels may have secured an end to the current rally, which could of course also continue higher for a while longer.

One of the more powerful determinants is that the US bond market counter-trend rally has ended after 2 full months with the long term bear market resuming it’s collapse.

The US$ index has begun accelerating down into a multi-month decline phase, 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, although both are consolidating into a micro correction. The Yen has also accelerated gains against the dollar, which augers well for further gold gains.

The US$ index is rolling over and breaking to the downside, well into the earlier support zone (red). 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 are both declining in support, although towards the bottom of their range.

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 is now realising the net effect of reduced dollar value. The effect of this price movement has created new support and resistance zones with the potential of drop values further down into the new support zone well below 200-Dema, with both oscillators declining in support.

The longer term 3 year weekly chart illustrates dollar value rolling over into decline towards support starting at $94.50, with the oscillators declining in support. The chart structure suggests more bearishness ahead.

Japanese Yen
The Yen continued to strengthen this week, pushing fleetingly right down to the bottom of the support zone. The chart structure supports yet stronger Yen, weaker dollar, and higher gold price.

US Treasuries
Using the benchmark US 10 year Treasury as a proxy for the US bond market, it can be seen that the 2 to 3 month counter-trend rally has terminated with the US bond market now likely to resume it’s long term collapse. In Elliott Wave terminology:
• The 5 wave decline (i)-(v) has completed;
• The a(circle) to c(circle) has completed;
• The 1-2 has completed;
confirming that yield has bottomed and setting up the data for resumption of the longer and stronger wave 3 yield increases in a resumption of the long term bond market collapse.
Both oscillators have bottomed and are rising in support.

US Yield Curve
The US yield curve continues to trend lower towards 1 and below, when it is said to invert as it registers a US recession (probably soon in 2019). The red zone indicates the timing of the US Treasury counter-trend rally which has now ended. This is logically also likely to now accelerate the decline as the US bond market resumes it’s collapse. The last inversion occurred in 2006 – 2007 just before the Global Financial Crisis.

The Gold multi-month rally continues to gain momentum as it completes a micro-correction in a consolidation around $1290. 50-Dema is crossing 200-Dema in a bullish ‘Gold Cross’ which usually portends higher prices. The oscillators are also reasonable supportive.

The gold COTs data indicates the start of dilation but it is still early days and the gold price continues to rally to higher levels.

The longer term 3 year chart illustrates the gold multi-month rally gaining momentum as it increases towards the next key breakout levels at $1306 and $1315. It is also evident on a weekly basis that 50-Wema has crossed 200-Wema to create a bullish ‘Gold Cross’.
Longer term resistance in the gold market is located at a level $1375, and that will provide the next real test. The chart structure suggests that a major correction is likely at some stage during penetration of the resistance zone (blue), and it will be interesting to observe how gold traverses the region between $1300 and $1375.

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 since. However, it is now positioned exactly on the top line of the wedge at $13.85, and the struggle continues between expected dollar weakness (stronger Rand) and expected South African political and economic trauma (weaker Rand). Technically the Rand should continue to strengthen and fundamentally it should continue to weaken.
Key strength and weakness levels remain at $13.85 and $14.70 respectively. Both oscillators are dropping, supporting further Rand strength, although the Slow Stochastic is at the bottom if it’s range, suggesting Rand weakness.

HUI / Gold Ratio
The ratio continues to drift sideways, reflecting US miners keeping pace with the gold price in it’s micro-consolidation phase after recent 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 gains momentum despite the break-backs, and the next key breakout levels remain close at hand. The oscillators are drifting in similar fashion.

GDX US miners ETF
The GDX chart is similar to the HUI Index chart except it is even more positive, in a breakout through it’s nearest key level at 21.15. 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 break-backs, and the next key breakout level is close at hand at 21.50. The oscillators are bottoming indicating potential chart reversals, but it could also be said they are drifting sideways as gold completes it’s micro-consolidation.

Silver’s recent breakouts have boosted momentum, and silver is now outperforming gold which is positive for the whole complex. There is a breakout at $15.71 with the next key level very close at $15.82. Like gold, silver is also completing a micro-consolidation, but the oscillators look like topping out threateningly.

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 continues to outperform gold, which is positive for the whole precious metals complex. But the ratio is in micro-consolidation mode mimicking metals behaviour, and therefore has not moved much this week, deteriorating very slightly to close at 82.11. The oscillators have bottomed and are turning up in denial.

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, and beyond.

• The (1)- (2) is in place;
• The 1-2 is in place;
• The i(circle) – ii(circle) is in place;

From this point the longer and stronger iii(circle) of 3 of (3), or the milder 5 of 3, is about to happen once the counter-trend rally is complete. This will take prices down in a severe and relentless downturn.

The major divergence in the Dow is still evident in the 12 months chart and this will trigger as the bearish rising wedge pattern breaks. The trigger level is the Jan 2019 low at 22638, and this will provide ignition to the next decline wave to take prices below the Dec 2018 lows. The extended rising wedge in the counter-trend rally (or dead cat bounce) is due to the continued total lack of fear in the minds of still extremely optimistic investors . The emotional wheel has not quite begun to turn yet and the mindset of ‘holding on’ and ‘buying the dips’ still applies.

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).

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