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Market Analysis 11 June 2020

Jun 11th, 2020

Executive summary

The bear market continues to unfold with the Dow Jones primary leg 1 down complete and the primary leg 2 up probably also complete with today’s declines. The earlier push to higher prices was driven by extreme euphoria as indicated by various sentiment indicators as well as numerous US media reports of an ‘insane’ scramble by everyone to get invested, or lose out: Typical of the end of a primary wave 2 in a bear market. This can only end badly.

The long term view of the Dow Jones Ind Ave remains the same. Primary wave 3 is likely to decline from 27 000 to 7 000 in a 5 wave impulsive decline with the first wave taking price down to the region of 15 500.

The US$ has been weakening in line with US 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 weakens slightly as it continues to build a fragile support base. This is due to US equity weakness with resultant money flows back into treasuries and presumably some ‘easing’ from the US Fed. The acid test remains treasury performance in the face of serious equity declines plus increased US Fed ‘meddling’ which both have the effect of reducing yields.

Precious metals and miners are moving sideways in top channels which could break either way. Gold charts have sell divergences in place and the Gold/Silver ratio appears to have bottomed which supports lower metal prices ahead. US miners have bear flag breakdowns which have not activated yet. So on balance, indications are more bearish than bullish at this stage.

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 continues to strengthen into the rally which started in early 2018, but with strong weakness in the tail. This will switch back into rally mode at the first of 2 inflection points as dollar demand increases after the start of US equity declines into the next major leg down. Increasing dollar demand will be met by decreasing confidence in fiat currencies after the second inflection point at the end of the coming deflationary period and the onset of serious inflation.

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 at the first inflection after the start of US equity declines into the next major leg down. 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 run its course. A strong rally and bear flag breakout 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. The visual trigger will be a bear flag breakdown.

US Treasuries

The benchmark 10 year US Treasury yield weakens slightly as it continues to build a fragile support base. This is due to US equity weakness with resultant money flows back into treasuries and presumably some ‘easing’ from the US Fed. The acid test remains treasury performance in the face of serious equity declines plus increased US Fed ‘meddling’ which both have the effect of reducing yields.

However, 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 0.17%, which indicates limited US Fed interference despite the current equity weakness. This is a good indicator of US Fed action once equity declines accelerate.

Gold

Long term gold still has an active sell divergence in place which should lead to declines from here, although there is still no confirmation that the top is in. Gold may yet go marginally higher first, but the next gold bull market will only start 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 continues sideways in a top channel, in the wake of sell divergence and a breakout from the rising wedge (black circle). The oscillators are neutral but the closing candle is bearish (red circle).

The sideways move in the top channel appears to be supported by the 50-Day MA (red), and the bearish closing candle (red circle) is prominent.

Brent Crude Oil

Oil is starting to consolidate above the breakout, but equities are weakening and both oscillators are at the top of their range. Fundamentals in the oil market have improved slightly but remain abysmal with economic activity still at anaemic levels.

The gold / oil ratio continues 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 and we could have a bear flag breakout any time soon. Rand strength is temporary with the dollar also set to rally soon.

HUI / Gold Ratio

The HUI /Gold ratio is in a broadening consolidation in the wake of the bear flag breakdown, although the pattern resembles a top formation. There is strength in the tail and price has risen above the key trendline to test resistance.

HUI Gold Bugs Index

The HUI itself has a similar chart to the HUI / Gold ratio and is also in a broadening consolidation in the wake of the bear flag breakdown. The pattern also resembles a top formation. There is strength in the tail which is testing resistance.


This situation also applies to all US miners, and GDX, GDXJ, and XAU are all positioned in likewise charts subject to testing resistance.


Dust US Miners Bear Index

The Dust breakout is in the very early stage although losing some momentum in a sideways consolidation. The long term buy divergence is active and will provide positive energy to increase price in the next period. Being a US miners bear index it promises 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, which is now again starting to outperform silver after 3 months. As with gold, there is still no confirmation that the top is in. Silver may yet go marginally higher first, but the next silver bull market will only start after further declines to new lows during a period of deflation. 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 continues in the rising channel but appears to be developing a topping pattern complete with bearish closing candle (circle). It needs to decline first below $17.20 and finally $14.50 to reverse the up trend to a down trend, and eliminate further bullish potential.

The silver miners chart is similar to the gold miners charts. It is also in a broadening consolidation in the wake of the bear flag breakdown. The pattern also resembles a top formation, and there is strength in the tail which is testing resistance.

Gold : Silver Ratio

The gold / silver ratio closed higher at 96.69 and has a breakout from the reducing wedge in forming a new bottom, after some 3 months since the high in mid-March. Gold is now again leading silver to higher ratio levels which is negative for metal prices.

General Equities

The bear market continues to unfold with the Dow Jones primary leg 1 down complete and the primary leg 2 up probably also complete with today’s declines. The earlier push to higher prices was driven by extreme euphoria as indicated by various sentiment indicators as well as numerous US media reports of an ‘insane’ scramble by everyone to get invested, or lose out: Typical of the end of a primary wave 2 in a bear market. This can only end badly.
The Dow Jones Industrial Average is also sporting a strong sell divergence signal with the index price now declining as these words are written. Confirmation of the end of primary wave 2 up and the start of primary wave 3 down will be achieved with penetration down through level 25 743 (penultimate high in wave 2).
The long term view of the Dow Jones Ind Ave remains the same. Primary wave 3 is likely to decline from 27 000 to 7 000 in a 5 wave impulsive decline with the first wave taking price down to the region of 15 500.

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