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Market Analysis 4 June 2020

Jun 4th, 2020

Executive summary

Animal spirits continue to drive share prices based on hideous fundamentals, and any further increases will remain short-lived. The world is scrambling to answer how the market can stay afloat even while the global economy is in shambles.

The bear market continues to unfold with the next major decline to start very soon. The long term view from the 2008 Global Financial Crisis remains the same in terms of where we are in the collapse, and where we are going. Declines since the final top of the market have now completed the first primary waves down and up, with the next primary wave down about to start. Third waves are the longest and strongest and this wave will likely drop the Dow down from 26000 to the region of 7000. That drop will be a 5 wave impulsive decline with the first wave taking price down to the region of 15 500 which will engulf and eliminate all the extreme investor euphoria of the moment.

The US$ has been weakening with equities making gains in completing the corrective wave up. Resumption of equity declines will see the dollar into a strong rally as demand ratchets up. Similarly, other currencies will be affected inversely, opposite to the dollar. 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, but the acid test will be once equities decline.

Precious metals are moving sideways whilst miners are leading the metals in starting to decline. Miners are indicating 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, but with weakness in the tail which is more obvious in the short term charts. 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 12 month chart reveals dollar weakness after the triangle break which is now near to completion. A strong dollar rally is likely to start from this region and extend to new highs above the March peak. Much depends on the exact timing of the resumption of equity declines because this will increase dollar demand in the next period. Corresponding weakness in other currencies will be evident, such as the Euro and the Rand.

The 3 month chart illustrates the triangle breakdown in more detail, and the dollar decline which has probably run its course. A strong rally will start from this region which will reciprocally respond to equity declines as the Dow Jones starts the next major leg down in the bear market.

EuroDollar

The Eurodollar breakout nears completion and should start declining from this region in response to imminent dollar strength.

US Treasuries

The benchmark 10 year US Treasury yield continues to consolidate as it builds a fragile support base with mild strength in the tail. Any further bullish signals will be put to the acid test once equities resume serious declines, which will certainly be met with increased US Fed bond purchasing to supposedly arrest declines and stabilise markets. Such Fed ‘meddling’ has the effect of reducing rates and Treasury yields.

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 0.16%, 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 recently. 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 after breakdowns to well below the 200-Day MA (blue), and a similar drop now could witness a gold price decline of $200-$300.

Gold weakens in the sideways top channel in the wake of the bearish sell divergence which still lacks energy either way. The chart appearance is of a potential price break down, but there is still no confirmation of a break either way.

In moving sideways in the top channel Gold has weakened to support at the 50-Day MA (red). There is a confluence of rising trendlines and the 50-Day MA in the circle, and this needs to be penetrated before any further weakness.

Brent Crude Oil

Oil has a breakout above the consolidation zone, in line with equity gains in the late stage of primary wave 2 up and prior to any hint of resuming declines. Fundamentals in the oil market remain abysmal with economic activity at 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 towards the 200-Day MA (green). The chart still indicates lower gold prices to come.

South African Rand

The Rand breakout is close to completion with gains equivalent to the height of the triangle. Rand strength is temporary with the dollar set for a strong rally soon.

HUI / Gold Ratio

The HUI /Gold ratio bear flag breakdown gathers momentum as price declines below a key trendline towards the support zone. Miners are leading the gold price down and the chart has a threatening ‘Jaws of Death’ appearance which could be dangerous with potentially severe declines in the next period.

HUI Gold Bugs Index

The HUI itself has a similar chart to the HUI / Gold 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

The Dust breakout is in the very early stage and is starting to gain momentum, in the wake of long term buy divergence and noticeable volume increases. Being a US miners bear index and valuable indicator as well, this means lower metals and miners prices ahead as it responds in the opposite direction to the miners themselves.

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, on average, for the last 22 trading days. This is potentially countertrend and will not last much longer. 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 fails to break to a new high as rally energy dissipates in a developing bear flag. In not achieving a new high silver continues the non-confirmation with gold which is a traditional trend change signal, indicating lower prices ahead. As with gold though, there are still no confirmations that the top is in.

Silver turns down from a triple top after rallying from the triangle breakout. There has been insufficient energy to break to a new high. There is still no confirmation of a top although it appears that lower silver prices lie ahead, with a key support level at $14.50.

Silver repeats the small topping process of last week, which could still go higher. It needs to decline below $14.50 to confirm reversal of the up trend and eliminate further bullish potential.

Silver miners breakdown from the bear flag last week was threatened with invalidation this week. But the price increase failed to penetrate and turned down again this week to validate the break. Therefore the ‘Jaws of Death’ still threatens and 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 lower at 94.93 although the pennant break appears exhausted. Gold leads silver lower this week again but signs of a bottom and turnaround in the ratio are evident in the circle. Lower precious metal prices ahead would result in the ratio increasing back up above 100 and that would confirm resumption of lower metal prices, or 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 with the index price now reaching strong resistance at the 200-Day moving average (green).

Animal spirits continue to drive share prices based on hideous fundamentals, and any further increases will remain short-lived. The world is scrambling to answer how the market can stay afloat even while the global economy is in shambles.

The long term view of the Dow Jones Ind Ave remains the same. A very basic Elliott Wave count from the 2008 Global Financial Crisis illustrates where we are in the collapse, and where we are going. 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 26000 to the region of 7000. That drop will be a 5 wave impulsive decline with the first wave taking price down to the region of 15 500.

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