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Midweek Market 6 Feb 2020

Feb 6th, 2020

Executive summary

US equities, represented by the Dow Jones Industrial Average, have rallied back to the top after the declines of last week. Numerous indications have been developing for some time now in support of a top, and all the data and supporting impact factors need to unwind further before resolving into higher levels of certainty. This involves the complete gambit including US Treasuries, the dollar, debt and funding options, interest rates, and much more. So for now, the longest bull market in history since 2009 remains in place. However, this is nevertheless a major topping pattern which is now threatened by eventual and final collapse.

US Treasury yield bounced up off support after recent weakening, but the US Treasury countertrend rally completion remains delayed with no immediate likelihood of yield rising beyond the breakout level. The whole question needs to unfold further before resolving into mainstream bond market direction, with increased money flows from equities to bonds whenever US equities indicate a potential top. Despite pronouncements from the US Fed to hold rates steady throughout 2020, it seems very likely that the rate will be cut by June, because of lower yields by then.

The US yield curve inverted again this week (based on the 10 year / 3 month) indicating that all is not well in the US economy and that recession is a matter of when and not if. This impacts massively on the whole question of debt and funding and the actions of central banks and interest rates. The dollar is in long term decline but has extended periods of strength, such as now. The current rally is forecast to end very soon and resume dollar weakness, which is likely to reduce the US$ Index value down from 98 towards 95, which in turn will strengthen the Euro and British pound, amongst others.

The gold bear market rally could now have peaked as prices start to decline, with an active sell divergence in place to propel prices lower. Silver is leading the way down as gold continues to outperform with an ever higher gold / silver ratio, which is negative for the whole precious metals complex. The next gold bull market will drive price to many times higher but will be preceded by a sharp decline first. This battle will be fought in a world of approaching monetary and political chaos, and it is critical to identify gold’s true bottom in the period that lies ahead.

US Dollar

The US$ is in long term decline but has been in a rally since 2008, although trending sideways since retreating down from resistance in slow progress. By a number of different yardsticks the long term dollar decline is likely to take the index into the low 60’s in the next 5 years, although there will no doubt be substantial partial strengthening in search for ‘safe haven’ once equity and bond markets decline.

The dollar is still correcting up after the break from the rising wedge. This has now developed into a potential ‘goodbye kiss’ which could activate resumption of the downtrend which is still under the influence of negative divergence stretching back to Aug 2018.m

The dollar rally extends gains as the push towards the previous top continues, but the reverse sell divergence should reverse trend soon. The strong rally achieving multiple breakouts en-route is in a potential bear flag which will lead to lower dollar values once the flag is activated.

The short term 3 month daily chart provides a closer view of the strong dollar rally in the potential bear flag. It is now pushing resistance towards it’s previous high, well above all the MAs. The reverse sell divergence indicated in the 12 month chart should encourage lower dollar values soon.

EuroDollar

The Eurodollar, as the near inverse of the dollar index, continues to weaken in a series of multi-breakdowns towards it’s recent low. Having broken down through the rising channel the recent mini-rally created a ‘’goodbye kiss’ before declining towards a potential H&S. This presents as a bearish chart which can only be rescued by a weaker dollar.

US Treasuries

10 Year yield bounces up off support after recent weakening. But the US Treasury countertrend rally completion remains delayed with no immediate likelihood of yield rising beyond the breakout level of 1.94%. This chart structure needs to unfold further before resolving into mainstream bond market direction, with increased money flows from equities to bonds whenever US equities indicate a potential top. Despite pronouncements from the US Fed to hold rates steady throughout 2020, it seems very likely that the rate will be cut by June, because of lower yields by then.

For now, key levels in the chart present as about 1.5% at the lower end and 1.94% at the upper end. Penetration of the upper level will indicate resumption of the bond market collapse, and at the lower end as an extension of the bond bull market.

US Yield Curve

The US yield curve, represented by 10 year / 3 month, was again briefly inverted this week (red circle). The chart has a weakening bias since Nov 2019 which indicates technically that another inversion is likely soon. This indicates that all is not well in the US economy and that recession is a matter of when and not if.

Gold

The sell divergence in the gold long term chart is impacting in lower gold prices going forward. Virtually all gold commentaries worldwide indicate higher gold prices ahead, whilst Elliott Wave analysis indicates the opposite, with the current rally being a bear market rally only with prices still likely to weaken considerably. The next gold bull market will drive price many times higher but will be preceded by a sharp decline first. This battle will be fought in a world of approaching monetary and political chaos.y

The 5 year weekly chart highlights the sell divergence and that price decline momentum is starting. Price is still well ahead of all the moving averages and the 1st support zone which starts at $1450.m

Price decline momentum is starting after the sell divergence triggered the top. The next key support level is at $1538.m

The 3-month chart illustrates lower prices gathering momentum after the gold price backed down from a late charge.

Importantly, gold Cots data, which is usually correct, continues to remain increasingly gold bearish, with Large Commercials short and Speculators long.

South African Rand

Divergence in the US$/ZAR currency pair weakened the Rand by about 8% before resistance started the correction which is still in progress. The chart structure indicates sideways movement next, but forecast dollar weakness will be the stronger deciding factor.

HUI / Gold Ratio

The ratio is beginning to break lower after the initial sell divergence. The break through the rising channel and bear flag includes a ‘goodbye kiss’ which could send the ratio lower to test support at a key level including a mini-triple bottom. This all presupposes US gold shares are declining faster than the gold price (also forecast to decline).

GDX US miners ETF

The less bearish GDX has a break down through the rising channel and bear flag, with a potential ‘goodbye kiss’ to come. It would appear investors in US gold miners are now increasingly less confident of higher gold prices.

This pattern is also similarly reflected by the GDX Juniors, XAU, and inverse Dust (charts not shown).

Silver

The silver general trend continues down after the recent peak as it declines more than gold, reflected in the higher gold / silver ratio. Silver is probably now unlikely to still make a late charge to higher prices. Irrespective, the next silver bull market will drive price to many times higher but will be preceded by a sharp decline first. Like gold, this battle will be fought in a world of approaching monetary and political chaos.y

Silver’s non-confirmation with gold is the main driver in generating lower prices, as the decline gathers momentum. The chart structure now suggests yet lower prices to soon test yet lower support levels. m

The 12 month chart illustrates the decline gathering momentum as silver drops faster than gold. The next support is close at $17.28.m

The ominous Shooting Star candle at the peak did in fact have a strong influence on silver’s decline as lower prices continue to gather momentum. Silver is being supported by the 50-Day MA (red) which it needs to penetrate if the next support level at $17.28 is to be tested.

As with gold, silver Cots data has a similar structure which continues to remain increasingly silver bearish.s

The decline in silver miners gathers momentum as it breaks through the rising wedge and bear flag (black circle), after triggering the sell divergence at the peak. The next support level is close at $29.75.

Gold : Silver Ratio

The gold / silver ratio closed lower at 88.79 and in so doing closed the gap created last week. While a lower ratio is positive for precious metals (and vice versa) the general trend continues to be up as gold continues to outperform silver. This trend looks likely to continue.

General Equities

The Dow Jones rallied back up towards the previous top, despite the sell divergence and decline of last week. This therefore continues the peaking mode of the last period. Numerous indications have been developing for some time now in support of a top and pending collapse, and all the data and supporting impact factors need to unwind still further before resolving into higher levels of certainty supporting a final top. This involves the complete gambit including US Treasuries, the dollar, debt and funding options, interest rates, and much more.

So for now, the longest bull market in history since 2009 remains in place. However, this is nevertheless a major topping pattern which is now threatened by eventual and final collapse.

One Elliott Wave view of the Dow indicates completion of the various wave counts ending in a top 5 of numerous degrees which presumes the final top. Once this top is confirmed, which is only a matter of time now, it will herald the start of a serious decline that could extend into most of the next decade.

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