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Midweek Market 16 April 2020

Apr 16th, 2020

Executive summary

The bear market continues to unfold.

The Dow Jones Industrial Average has completed the first major leg down in the bear market and the countertrend advance in the correction up is now complete or very nearly so. The next major leg down has either already started or is very nearly to do so, accompanied by severely declining volumes which reflect the exhaustion in the advance. The next major leg down will likely drop another third to the region of 15000 points, last seen 7 years ago in 2013. This bear market is severe and long-lasting, and global human activity will be massively impacted as negative economic intensity gathers momentum.

Despite real currency erosion, the US dollar gains value during equity collapse as demand increases with global dollar loan requirements increasing in currencies eroding faster than the dollar, as well as the search for an apparent ‘safe haven’ during chaos. Also, the fate of the dollar and US Treasuries are closely linked. The US Fed is the only real buyer of government bonds at these excessive and artificial levels as they inflate currency value and depress interest rates by injecting ludicrous levels of liquidity into the system to keep ’the patient’ alive. This artificial stimulation increases the severity of collapse and promotes the demise in both the dollar and US Treasuries.

This all guarantees vast gains in Gold which is the ‘bedrock’ of the next international monetary system design once the current system starts to fail. But first, severity in the equity bear market will engulf everything in its path including gold which will be driven down to new lows first, before the start of the next true gold bull market.

US Dollar

The US$ is in long term decline but has been in a rally since 2008 with a recent strong rally since 2018 to a new high which could soon exceed the previous high at the start of 2017. This will corrupt this dynamic with dollar strength into continued equity collapse, as we enter a new dynamic until a more meaningful loss of confidence in the present international monetary system changes it back to long term dollar weakness.

This applies also to US Treasuries and therefore the US bond market, as interest rates and the dollar are closely linked. The excessive over valuation of the US bond market will lead eventually to the collapse of both the bond market and the dollar.

The dollar is trending up as demand increases with equities close to the end of the current upward correction; also indicated on the 12 month chart.

The 12 month chart shows the dollar in a strengthening mode as dollar demand increases with equities in the very late stage of a rally, if not already completed. This presents as a pivotal moment, as also indicated by other currencies opposite to the dollar such as the Euro.

The US$ has corrected down from the high at $104 over a period of 18 trading days which coincides exactly with the Dow Jones correction up over the same trading period. This means it is likely to strengthen once the Dow Jones starts to weaken, which is forecast to occur very soon. The dollar has stabilised and moved up slightly, co-incidentally, from the support of the 50-Day MA (red).

EuroDollar

The Eurodollar, as the virtual opposite of the US dollar index, is in a clear weakening mode, as it continues to trend lower. This to a degree gives credence to dollar strength ahead.

US Treasuries

The benchmark 10 year US Treasury yield turns down again as it breaches the mini rising trendline, in a potential bottom which could be weakening again. This indicates the US Bond market is rising slightly as equities appear to be resuming declines in an unfolding bear market. However, we are approaching the pivotal point at which US interest rates start rising despite the efforts of the US Fed pumping ludicrous amounts of currency into the market in their QE program. The acid test is when US equities resume the collapse which is forecast any time soon, and whether that causes Treasuries to increase again as money flows from equities into bonds.

Short term US Treasury yields are increasing with the 3 month note way off zero, although the recent mild trend up has turned down through the 10-Day MA (blue). The US Fed continues to pump vast quantities of currency into the system which has the effect of reducing rates, all printed from nothing. This 3 month rate is the one that guides the US Fed into rate decisions, which means they probably cannot justify another rate cut at the moment whether equities start to drop again or not.

Gold

Long term gold still has an active sell divergence in place which should lead to declines from here. The next gold bull market will drive price many times higher, but only after further declines to new lows first. These lows will finally signal an end to the gold bear market in a world of approaching monetary and political chaos.

The 5 year weekly chart highlights the sell divergence in more detail, as well as the massive drop in volume as the gold price peaked. This all indicates lower prices ahead. These are the signals, but as usual the action may only follow after days or even weeks.

The 12 month chart illustrates the rising wedge pattern as price peaked with the likely decline from the apex of the wedge.

Gold advanced to the apex of the rising wedge with a bearish candle at the top (black circle) indicating a potential top.

South African Rand

The dollar starts to strengthen again against the slightly weaker Rand, having come down from peak dollar strength. But the dollar is forecast to strengthen further as US equities resume declines, and this will weaken the Rand further, as it continues to look fragile and volatile.

HUI / Gold Ratio

The ratio has a breakout from its recent consolidation, which indicates higher US gold miners (HUI) than even a higher gold price. But if the gold price declines then the ratio will weaken substantially, and evaluation of the various US miner entities indicate the potential for testing the March lows.

HUI The Arca NYSE Gold Bugs Index

The HUI itself has a similar chart to the HUIGold ratio, but is still poised to drop significantly as the key support level of 185 is penetrated with a lower gold price. Penetration of this support level will test the March low at 142.5.

GDX US Gold ETF

This same dynamic is event in the GDX, and penetrating down through the key support level at 23 will drop price down to test the March low at 16.

GDXJuniors US Gold ETF

This same dynamic is evident in the GDX Juniors, except that the breakout is not to a new high, and therefore this non-confirmation with GDX presents as a typical trend change and likelihood of declines ahead. Penetrating down through the key support level at 27.60 will drop price down to test the March low at 16.18.

XAU Philadelphia Gold Miners Index

This applies to the XAU also, except to a lesser extent. Penetrating down through the key support level at 77.80 will drop price down to test the March low at 62.80.

Silver

Long term silver continues to trend lower, despite the recent rally. The chart has a negative bias and the trend continues down in a continued major non-confirmation with gold, as silver leads the price declines. As with gold, the next silver bull market will drive price many times higher, but only after further declines to yet lower lows first. These lows will finally signal an end to the precious metals bear market in a world of approaching monetary and political chaos.

The most notable behaviour in silver is its major non-confirmation with gold which is historically typical at major trend changes. The recent rally has silver underperforming gold and this should lead to lower prices. A key pivotal level remains the previous major low point at $13.60 which has already been breached once.

The 12 month chart illustrates the 3 key support levels (red lines) which if penetrated will encourage yet lower prices in testing the support zone. Penetrating these key levels should lead to much lower prices to test the March low, as with the miners.

The 3-month chart illustrates silver’s recent rally in a bearish rising channel formation, and also still in non-confirmation with gold. There is resistance at the 50-Day MA (red) with price starting to roll over. The lower key support level is at $13.90 and penetration of this level will drop price down to test the March low, as with the miners.

The silver miners chart mirrors that of US gold miners with a breakout, but not to a new high. The key support level is at the bottom of the gap in the advance which is at $22.90. If this level is penetrated then price will drop significantly to test the March low at $16.

Gold : Silver Ratio

The gold / silver ratio closed higher at 112.23 in a chart that continues to present an upward bias which is negative for metal prices, and vice versa. The chart bias is positive which promises yet higher ratios, and yet lower metal prices. All this indicates a continued era with substantial silver underperformance which remains negative for metal prices.

General Equities

The bear market continues to unfold.

The Dow Jones Industrial Average has completed the first major leg down in the bear market and the countertrend advance in the correction up is now complete or very nearly so. The next major leg down has either already started or is very nearly to do so. Also note the severely declining volumes which reflect the exhaustion in the advance. This bear market will be severe and long-lasting, and global human activity will be massively impacted as negative economic intensity gathers momentum.

This chart reflects the Dow Jones Ind Ave performance from the 2008 Global Financial Crisis, and illustrates very basic Elliott Wave counts indicating where we are in the collapse. Declines since the final top of the market at 5 have completed the 1-2 in a 5 wave leg that is next to drop severely in wave 3 down. 3rd Waves are the longest and strongest and this wave 3 is likely to decline towards a level of 15 000 from 24 000 at 2.

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