Home > Uncategorized > Midweek Market 17 Jan 2019

Midweek Market 17 Jan 2019

Jan 17th, 2019

Executive summary

World markets are in a counter-trend rally which, using the Dow Jones Industrial Average as a proxy for equities generally, is now exhibiting muted tendencies compatible with loss of upside momentum. They remain poised in the early stages of a secular bear market which is soon to start more meaningful surges to the downside, as equities begin to assume the more correct behaviour of the US bond market which has been declining since mid-2016 in sympathy with the variety of different factors negatively impacting the world financial and monetary system.

The US bond market has now changed trend, ending a 2 month long counter-trend rally, with yields beginning to increase once again as US bonds resume their long term collapse. This will now begin to impact the rest of the world, principally the other remaining nations in the G7, as the interest rate differentials cannot continue to diverge.

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. Both the dollar and gold have been correcting during this past week but are expected to resume their primary paths soon. The correction has seen silver correct more than gold and consequently has begun underperforming gold, which is expected to reverse as the rallies resume their natural path.

The US$ index correction is evident in the chart. The oscillators are rising which might support a short delay before the main trend down resumes. 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.

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 one of the primary drivers of dollar weakness. The correction up has the dollar rally stopping at the start of the resistance zone (blue), and the stair step nature of the dollar decline now anticipates the next drop down towards the support zone (red).

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 corrected this week in line with the dollar rally. It has created a bull flag which suggests further declines down into the support zone as the dollar continues to weaken. The chart structure supports yet stronger Yen, weaker dollar, and higher gold price.

US Treasuries
The benchmark US 10 year Treasury yield has changed trend from down to up, which is in line with higher yields and a continued collapse in US bond prices. From a Elliott Wave point of view, (i) will decline to (ii), through abc (black circle), and thereafter increase to the longer and stronger (iii) as yield increases gather momentum.

The longer term weekly 5 year chart illustrates the end of the US bond bull market (blue arrow) and the start of the US bond bear market (red arrow), with the turning point at the yield bottom (1.3%) in Jul 2016.
It also illustrates the multi head and shoulders penetrations (small black circles) which are all likely to propel yields up by the depth of each head. The short term projection for the US 10 year yield is therefore in the region of 5%, as the bear market gains traction.

The Gold multi-month rally continues to gain momentum as price consolidates during the dollar correction. During the dollar rally the gold price actually only moved sideways, and not down, which illustrates inherent strength in gold. The bullish Gold Cross is also now decisive, which portends higher prices to come. The oscillators are also reasonable supportive in a sideways drifting mode.

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 12 month chart illustrates the recent resistance penetrations as well as the decisive bullish Gold Cross. But of note is the positive divergence between price and MACD which indicates higher gold prices to come. This positive divergence is also evident on a number of ancillary charts later in the document, which collectively supports higher gold prices.

South African Rand
The South African Rand has penetrated the diagonal support line as well as a breakout through the first key strength level at $13.84. But, it is now reaching overbought levels, judging by the oscillators.
The struggle continues between expected dollar weakness (stronger Rand) and expected South African political and economic trauma (weaker Rand), especially with elections looming and ever-present potential downgrades because of structurally weak conditions at ESKOM, et al.
Key strength and weakness levels remain at $13.53 and $14.70 respectively.

HUI / Gold Ratio
The ratio declines as US miners underperform gold during this time of corrections. The fact that miners are not out-pacing gold is negative for the whole complex, and the oscillators are dropping fast.

HUI Index
The HUI index itself, although negative, is more positive than the HUI / Gold ratio, as it bounces off support. There is a more positive bias to the chart, and of note is the positive divergence between price and MACD (as on the gold chart). This promises better times ahead.

GDX US miners ETF
The GDX chart is similar to the HUI Index chart except it is even more positive; also bouncing off support, and also with positive divergence.

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 maintained although with a turn-up in the tail during the corrections.

Silver begins to underperform gold during this correction period, but it also has positive divergence between price and MACD which promises higher prices to come. The oscillators are 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 has started underperforming gold during this time of metal corrections, declining more than gold. The ratio has therefore increased slightly to 82.73 with the oscillators turning up.

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 12 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 counter-trend rally may be complete because it is exhibiting muted tendencies compatible with loss of upside momentum. The opposite may still be true for a short while longer. However, the market is soon to start more meaningful surges to the downside.

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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