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Market Analysis 28 May 2020

May 28th, 2020

Executive summary

The bear market continues to unfold with the Dow Jones primary leg 1 down complete and the primary leg 2 up nearly complete, with primary leg 3 down about to start. This will engulf the extreme investor euphoria that is typical of a bear market primary leg 2.

There are tremendous pressures evident in the financial system. The US Fed’s balance sheet recently expanded by an unprecedented $3 trillion, and during the same period the US stock market has added $3 trillion in primary wave 2 up since its low point in March. Animal spirits are driving share prices based on hideous fundamentals.
 
The world is scrambling to answer how the market can stay afloat even while the global economy is in shambles. The central issue is the sharp and persistent divergence between the real economy and the stock market. A bidding war on Wall Street is happening once again, while on Main Street the unemployment rate is 14.7% and that number will be much worse when the next data set is released, considering almost 40 million people have applied for unemployment since the start of this crisis.

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.

Precious metals have turned from mild buy signals last week to mild sell signals this week, with US miners leading the metals down with breaks through bear flags in charts that have dangerous ‘Jaws of Death’ formations in place.

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 with a breakdown through the triangle. The dollar is likely to continue weakening marginally before the start of a strong rally, which depends largely on the exact timing of the resumption of US equity declines. The dollar usually strengthens in line with equity collapse, and this is also supported by EuroDollar performance in opposite direction to dollar performance.

The short term 3 month chart illustrates the triangle breakdown in more detail. This is likely to still weaken slightly before a strong rally into equity declines, as the Dow Jones starts the next major leg down in the bear market.

EuroDollar

The Eurodollar, as the virtual opposite of the US dollar index, is in clear weakening mode but with mini-rallies in the tail including a mini-breakout which should strengthen further before declines resume. 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 US equities continue to unfold into the 2nd primary wave up. The acid test is US Treasury behaviour once equities resume declines, which will certainly be met with increased US Fed bond purchasing to supposedly arrest declines and stabilise 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 and the US Fed ramps up QE. 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 start collapsing.

Short term US Treasury yields are holding in a narrow range at 0.15%, prior to the start of any equity declines. 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, aided now by the absence of some short term buy signals that were there a week ago. The next gold bull market will drive price many times higher, but only after further declines to new lows during a period of deflation. These lows will finally signal an end to the gold bear market as we reach the inflection point between the end of deflation and the start of inflation.

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 twin breakouts to two rising wedges, as gold drifts sideways in the wake of the bearish sell divergence. The chart has the appearance of a potential price break down with both oscillators drifting down.

Gold is moving sideways in the narrow top channel, bracketing the 10-Day MA (blue). Breaks up or down could occur, but it seems likely that any trigger will have to come from the miners and not the metals themselves.

Brent Crude Oil

Oil has moved up to the top of the consolidation zone, in line with equities still unfolding in the late stage of primary wave 2 up and prior to any hint of resuming declines. 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

Twin breakouts from the triangle and rising wedge indicate continued Rand strength. Prospects of dollar weakness are limited and Rand strength can therefore only be temporary.

HUI / Gold Ratio

There is a bear flag breakdown indicating further declines in the ratio. Miners are leading the gold price down and the chart has a threatening ‘Jaws of Death’ appearance which could be dangerous with a potentially severe decline in the next period.

HUI Gold Bugs Index

The HUI itself has a similar chart to the HUIGold ratio with a bear flag breakdown indicating further declines in the miners. Miners are leading the gold price down and the chart also has a threatening ‘Jaws of Death’ appearance which could be dangerous. If (or when) the gap is closed the key level of 185 will be tested, and breaching that level will test the March low at 142.

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

There is a breakout in the Dust chart that has been 11 months long in the making. The reducing wedge and the long term buy divergence has broken up (double circle), promising higher Dust prices. A breakout in Dust means lower metals and miners ahead, 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.

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 outperforming gold for the last 17 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 silver bear market as we reach the inflection point between the end of deflation and the start of inflation.

The strong silver rally from the sideways consolidation of the last number of weeks has stopped short of the previous high as the rally energy dissipates in a developing bear flag. In not achieving a new high silver continues the 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.

The silver triangle breakout and continued rally has topped into a consolidation below resistance as rally energy dissipates. Lower silver prices lie ahead and a key support level remains at $14.50.

The triangle breakout has exhausted into a consolidation with the extended peak roughly equal to the height of the base. 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.

The silver miners chart is similar the HUI index with a bear flag breakdown indicating further declines in the miners. Miners are leading the silver price down (as with gold) and the chart also has a threatening ‘Jaws of Death’ appearance which could be dangerous. If (or when) the gap is closed the key level of 23 will be tested, and breaching that level will test the March low at 16.

Gold : Silver Ratio

The gold / silver ratio closed slightly up with a bullish closing candle being the first sign of reversal in 10 weeks. It is early days, but it could be that the earlier pennant break to the downside has exhausted and the ratio is showing signs of a bottom and potential turnaround. The next week or two is crucial, and if this is indeed a bottom then metals are likely to have topped, and vice versa.

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 and all the gaps below 27000 have now been closed.

There are tremendous pressures evident in the financial system. The US Fed’s balance sheet recently expanded by an unprecedented $3 trillion, and during the same period the US stock market has added $3 trillion in primary wave 2 up since its low point in March. Animal spirits are driving share prices based on hideous fundamentals.
 
The world is scrambling to answer how the market can stay afloat even while the global economy is in shambles. The central issue is the sharp and persistent divergence between the real economy and the stock market. A bidding war on Wall Street is happening once again, while on Main Street the unemployment rate is 14.7% and that number will be much worse when the next data set is released, considering almost 40 million people have applied for unemployment since the start of this crisis.

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 (circle) 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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