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Midweek Market 21 March 2019

Mar 21st, 2019

Executive summary

The US stock market is clearly not going to top based upon the Fed’s balance sheet or rate manipulation, nor upon stock earnings, nor upon economic fundamentals. Rather, it will top and turn down when bulls run out of money. Stock markets top due to a lack of buying when market sentiment is at extreme bullishness, with bulls “all-in” with no more money allocated to buying. The market seems to be approaching such a point.


Last week was one of the largest inflows into US equities with over $25B, being the 4th largest weekly inflow on record, resulting in a powerful worldwide b-wave rally off the December low. This equates to a top in the Dow at about 26250 (during this week or next), to complete its corrective rally, with the next decline to the region of 21000 to complete the abc pattern off the Oct 2018 high.


This will also be a major buying opportunity. But will it then lead on to an abysmal bear market as predicted by the leading Elliott Wave practitioner, or will it perhaps still go higher to 30000 or even 35000 by 2022-2023 before the bull market that started in 2009 finally tops out. Activity during much of the next 2 years will clarify this.

Gold rallied strongly from Aug 2018 to its recent peak at $1347 in late Feb 2019, while US equities declined to the start of 2019 and then rallied strongly since: Illustrating their inverse correlation with gold now pointing down and equities up.


During this period US miners (GDX) have outperformed gold but have started to decline against equities since the start of 2019. The implication here is not favourable for gold because, despite the miners outperformance against metals, a necessity for the start of the metals bull market is outperformance against general equities. That is only likely to coincide with the US Fed shifting its stance from pausing to actually cutting rates.


Please note the sharp upturn in the gold price (from $1301 to $1320) was not yet available in the charts for this report.

US Dollar

The dollar index extended its decline through the bottom of the rising wedge pattern, based on the US Fed pronouncement on Wednesday not to raise rates again during 2019. This is a bearish signal and the dollar looks set to decline further.

The 12 month chart illustrates the extent of the dollar decline which broke down through 200-Dema. This has occurred in the recent past and acts as resistance for a rebound rally, as can be seen.


There are now actually 2 competing Elliott Wave possibilities for the dollar and we need to watch this carefully as it develops further, having profound effects on the markets (particularly gold): Either continuing down or rallying up. Note the 2 options in the next 2 charts.

Option 1 indicates further declines having completed the rise to B at $97.71 on 7 Mar 2019. This will now lead to further declines to C somewhere below A. This will also complete the decline from (A) down to (B) which will precede an eventual rise to (C) above B.

Option 2 indicates completion of the barrier triangle from (A) down to (B) (having completed ABCDE). The implication here is the resultant strong rally to (C) at or close to $100.00.


Only one of these 2 options will be correct, invalidating the other.

The short term 3 month chart illustrates the strong decline, including 9 consecutive down days, eventually penetrating 200-Dema in a region of relatively high resistance. The Slow Stochastic is at the bottom of its range.

Japanese Yen

The Yen has a breakout through its bull flag and has also penetrated 200-Dema. Both oscillators are declining which supports continued dollar weakness and Yen strength, and this is somewhat accelerated by the breakouts.

US Treasuries

The benchmark US 10 year Treasury yield is continuing to show weakness and has in fact broken to a new low. Yield direction is certainly mixed, with fundamentals supporting further weakness (in line with no further US rate hikes) whilst Elliott Wave is indicating a resumption in yield increases (even exceeding B (circle) in the next wave).

The Cots data for the US 10 year Treasury reflects on the chart as a bearish convergence which indicates lower prices and higher yields, supporting the Elliott Wave view.

Gold

The 5 year gold chart illustrates the historic 6-month cycle lows, with the next cycle low in progress, despite the current rally over the past 3 weeks. Continued lower volumes persist in this rally which suggest lower lows lie ahead.

The 3 year chart illustrates Gold dropping down towards support, despite the current rally, and it should continue lower with both oscillators dropping in support of lower prices.


Gold rallied strongly from Aug 2018 to its recent peak at $1347 in late Feb 2019, while US equities declined to the start of 2019 and then rallied strongly since: Illustrating their inverse correlation with gold now pointing down and equities up.


During this period US miners (GDX) have outperformed gold but have started to decline against equities since the start of 2019. The implication here is not favourable for gold because, despite the miners outperformance against metals, a necessity for the start of the metals bull market is outperformance against general equities. That is only likely to coincide with the US Fed shifting its stance from pausing to actually cutting rates.

The 12 month chart illustrates gold advancing back up out of the 1st support zone, with the support of both oscillators rising. Gold is well above 200-Dema in a 6 month long rally, but is still likely to drop down into the 2nd support zone as it completes the current 6 month cycle low.

The 3 month gold chart illustrates the short term counter rally as it bounces off support at $1276 in a developing bear flag.

South African Rand

The South African Rand has broken down to the bottom of the new rising wedge pattern, as both oscillators decline is support of a stronger Rand.
Much now depends on dollar movements which overrides everything. Also, political and economic fundamentals are not improving yet with South Africa and Eskom and much depends on Moody’s rating on 29 March.

HUI / Gold Ratio

The ratio continues in a 6 month long rally up to test resistance now only slightly higher up, after bouncing up off a confluence of 50- and 200-Dema. Both oscillators are tending sideways.

HUI Index

The HUI index itself is behaving in similar fashion, yet less positively with the beginnings of an ominous H&S developing. There is a bullish Engulfing candle however and probably more upside before likely testing support again. The oscillators are drifting sideways.

GDX US miners ETF

The GDX 12 month chart is similar to the HUI Index chart, and the commentary is identical.

DUST US Gold Miners Bear Index

The Dust chart and commentary is similar to the GDX chart, except in the opposite direction being a US miners bear index.

Silver

The 3 year chart continues to have a negative bias as silver continues to reverse up from support. It is likely to continue testing support as both oscillators continue declining. The confining parameters of the chart remain diagonal resistance and the multi-year base at $14, which hopefully will hold during the coming phase.

The 12 month chart illustrates silver starting to rally out of support at the confluence of the MAs. Both oscillators are turning up, but silver is still likely to drop back down to test both support zones as and when it penetrates below 200-Dema.

The 3 month silver chart illustrates the short term counter rally as silver moves up in a developing bear flag. Both oscillators are turning up as silver tries to push up through the confluence of MAs.

Gold : Silver Ratio

The gold / silver ratio is mixed as it continues to work its way up the bear flag in closing slightly higher on the week at 84.98. The general drift therefore is towards silver underperformance of gold which is negative for the whole complex.


Silver outperformance of gold is dependent on a breakout down through the bear flag and then the rising wedge pattern.

General Equities

US markets are enjoying a 13+ month high in equity investor optimism (Daily Sentiment Index at 90%) plus a bond market volatility collapse to a record low (Merrill Lynch MOVE Index 43.7) which presents as a significant confluence of impacts with investors holding markets aloft at extreme levels of euphoria. US equities abound in major indices non-confirmations which are typical of trend changes like the one in progress now.

Markets top and turn down with sentiment at extremes with bulls “all-in” with no more money allocated to buying. The market seems to be approaching such a point. The powerful worldwide b-wave rally off the December 2018 low is in with the Dow at 26250 and the next wave down has started to complete the c-wave (down to the region of 21000 in The Dow) to complete the abc pattern off the Oct 2018 high.

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