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Market Analysis 21 May 2020

May 21st, 2020

Executive summary

The bear market continues to unfold with the Dow Jones primary legs 1 down and 2 up virtually complete, primary leg 3 down is about to start. Fundamentally, world economies have imploded and are contracting at a record rate, debt levels are massive, companies are facing closure, and unemployment statistics are horrific. It is at this time that pundits are heralding the continuation of the bull market while the global monetary system is broken and negative economic intensity gathers momentum. In primary leg 3 down the Dow Jones will likely drop the Dow down from 25000 to the region of 15000.

The US$ has been in sideways mode as the Dow Jones completes primary leg 2 up, which may lead to further weakness until primary leg 3 down actually resumes the decline phase. The Dow Jones decline phase will increase dollar demand into a strong rally as the equity bear market unfolds further. The benchmark 10 year US Treasury yield continues to consolidate as it builds a fragile support base, which is broadening slowly and could soon develop mild bullish signals.

The triangle breakout in gold, which might propel prices to a new high, has a weak follow through which indicates that price may now fail to break higher. Silver has had a strong rally, as has US gold and silver miners, but the charts are now indicating weakness to follow.

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 has already exceeded the previous high at the start of 2017. This will corrupt the dynamic with dollar strength into continued equity collapse, as we enter a new phase 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 strengthening as the rally from 2018 extends. US equities are about to start the next major leg down and this will increase dollar demand into a strong rally as the equity bear market unfolds further. This will lead towards an inflection point of increasing dollar demand to be met by decreasing confidence in fiat currencies and the eventual collapse of the global monetary system.

The shorter term 12 month chart reveals the dollar again weakening as it extends sideways into the reducing triangle pattern. This presents as a pivotal moment as the triangle pattern moves closer to the apex and potential breakout. Much depends on the exact timing of the resumption of US equity declines, and there may well be further dollar weakness if these equity declines are unduly delayed. This is also reflected equally in the opposite direction in EuroDollar performance.

The short term 3 month chart illustrates the sideways movement within the triangle in more detail, with the dollar weakening slightly at the triangle apex. A bullish breakout is forecast if US equity declines resume soon, and vice versa. But as the Dow Jones starts the next major leg down in the bear market, so too will the dollar turn up in a strong medium term rally.

EuroDollar

The Eurodollar, as the virtual opposite of the US dollar index, is in clear weakening mode but with mini-rallies in the tail. as it continues to trend lower. This to a degree gives credence to dollar strength ahead, as the EuroDollar is behaving technically nearly exactly opposite.

US Treasuries

The benchmark 10 year US Treasury yield continues to consolidate as it builds a fragile support base. The support base is broadening slowly and could soon develop mild bullish signals, as it is inconceivable that the US bond bull market can co-exist alongside a collapsing equity market, despite the vast (and ludicrous) US Fed bond purchasing program to supposedly stabilise financial markets.

There is a clear link between US Treasury performance and US equities, in that if equities collapse then US Treasuries increase (lower yield) as investors move currency from equities to bonds in search of safe haven (and vice versa). Also, as equities collapse so too does the US Fed ramp up QE in attempting to stem losses and keep the financial and monetary system from collapsing. The net effect is an attempt to inflate asset values which increases bond values and extends the bond bull market. In spite of this, real interest rate expectations are for increasing rates as deflation sets in, which will reverse US Treasury yields from lower to higher as the US bond market starts to collapse in line with equities, and dollar value eventually resumes a weakening phase as confidence in currencies finally collapse.

Short term US Treasury yields are holding in a narrow range at 0.12%. The 3 month yield is subject to the same influences as the benchmark 10 year, except that it is more directly responsive to US Fed activity because the bond purchasing program (QE) includes mainly short term Treasuries. The acid test will occur once equities actually resume significant declines in the bear market and the US Fed increases bond purchases massively in response. This 3 month rate is the one that guides the US Fed into rate decisions, and the chart indicates no potential for any rate cut at the moment.

Gold

Long term gold still has an active sell divergence in place which should lead to declines from here, although some short term signals suggest gold may yet go higher first before real declines start. The next gold bull market will drive price many times higher, but only after further declines to new lows first during a period of deflation. These lows will finally signal an end to the gold bear market in a world of approaching currency, monetary and economic collapse.

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, which have not started yet. Market response to technical signals vary from immediate to days, weeks, or even months later.

A consolidation is building at the moment which could respond similarly to the responses after the 2016 and 2018 consolidations. These declined quickly to well below the 200-Day MA (blue), and a similar drop now could witness a gold price decline of $200-$300.

The 12 month chart illustrates the triangle breakout, in the wake of sell divergence, which could propel gold to a new high. The follow through has been weak though and price may now fail to break higher.

Gold has broken down through the rising wedge in the wake of the sell divergence and up into a triangle breakout. Price is only hovering after the breakout with no additional indication of increasing much from here. Final voiding of the triangle pattern needs gold to decline below $1664.

Brent Crude Oil

Oil has been consolidating in a zone around $30 and has now moved up to close at the top of the zone. This seems to be in line with US equities in the late stage of the countertrend rally, which presupposes oil declines after equities resume declines. The fundamentals in the oil market remain bearish with economic activity at such anaemic levels, and the various implications need to still work through the system before real directional signals can be meaningful.

The gold / oil ratio starts to normalise towards the support zone as it drops down further through the 50-Day MA (red) towards the 200-Day MA (green). The chart still indicates lower gold prices to come.

South African Rand

Breakout from the triangle indicates dollar weakness and Rand strength. This can only be temporary as the dollar is set to rally soon.

HUI / Gold Ratio

The US miners rally since mid-March has exceeded by far the rallies in other components of the precious metals complex. HUI (US miners) is leading gold higher in an expanding triangle pattern which could be dangerous, as it resembles the normally bearish ‘Jaws of Death’ pattern which could plummet strongly in the next period.

HUI Gold Bugs Index

The HUI itself has a similar chart to the HUIGold ratio, and is holding to higher levels in leading the other components in the precious metals complex. The rally has been substantial but in an overall pattern that is extremely bearish. There is a gap lower down below 220 and gaps are usually closed later on.

This situation also applies to all US miners, and GDX, GDXJ, and XAU are all positioned in likewise charts subject to lower penetrations which will trigger further declines to test the March lows.

Dust US Miners Bear Index

The Dust chart is a US miners bear index which responds in the opposite direction to the miners themselves. It is also geared and is a valuable indicator as well as being a valuable investment vehicle as well.

The chart illustrates a strong long term buy divergence plus a reducing wedge both of which look set to break up any time soon. Once this occurs, US miners will decline to lower levels.

Silver

Long term silver continues to trend lower, despite the recent strong rally. The chart has a negative bias and the trend continues down in a continued major non-confirmation with gold, despite silver outperfporming gold for the last 12 consecutive trading days. This is potentially countertrend and will not last long. 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 currency, monetary and economic collapse.

Silver has a strong breakout from the sideways consolidation of the last number of weeks which has propelled price up towards resistance. It has also not achieved a new high in continued non-confirmation with gold. The gold/silver ratio has actually declined to below 100 in the silver rally but is forecast to reverse towards higher levels once the dollar starts to rally.

Silver has a strong 9 week rally which ramped up dramatically after the triangle breakout. Price moved up to $18 toward stronger resistance. Lower silver prices lie ahead and a key support level remains at $14.50.

The triangle breakout has propelled Silver to $18 at the culmination of a strong 9 week rally. There may still be higher prices but failing that a key support level remains at $14.50 below which all bullish potential will be lost.

Silver miners advanced 133% in a powerful 10 week rally which ramped up after the breakout in the final week. As with US gold miners, the chart is in a dangerous expanding triangle pattern with severely bearish implications if the silver price declines.

Gold : Silver Ratio

The gold / silver ratio closed down by 11% for the week, as the pennant break to the downside extended further to close below 100 at 97.17 for the first time since mid-March. The overall chart indication still continues to present an upward bias of increasing ratio trend, but this was ruptured this week by the massive silver rally. Silver underperformance will return and this will be continued until the eventual inflection point at the start of the next real precious metals bull market.

General Equities

The bear market continues to unfold with the Dow Jones primary leg 1 down complete and the primary leg 2 up nearly complete. The primary leg 3 down is about to start, and this will engulf the extreme investor euphoria that is typical of a bear market primary leg 2. The Dow Jones Industrial Average is also sporting a strong sell divergence signal.

Fundamentally, world economies have imploded and are contracting at a record rate, debt levels are massive, companies are facing closure, and unemployment statistics are horrific. It is at this time that pundits are heralding the continuation of the bull market while the global monetary system is broken and 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 now completed primary waves 1 and 2 and primary wave 3 is about to start. 3rd Waves are the longest and strongest and this wave will likely drop the Dow down from 25000 to the region of 15000.

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