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Market Analysis 18 June 2020

Jun 18th, 2020

Executive summary

US Fed chairman Jerome Powell testified in yesterday’s Capitol Hill briefing that they would ‘backstop’ everything: Meaning the market is not allowed to collapse. In spite of that, the bear market continues to unfold as the Dow Jones begins primary leg 3 down. The end of primary leg 2 up presented as a rare island reversal as did the top of the market in Feb 2020, both confirming bearish tops. The strong sell divergence signal is in place and active and this will provide added decline energy to gain momentum.

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$ is now switching back into rally mode as dollar demand increases with US equities now beginning the next major decline phase. We define this as the first of 2 inflection points. Increasing dollar demand will eventually collapse along with all currencies after the second inflection point when confidence in fiat currencies collapses into a period of serious inflation and hyperinflation thereafter.

The benchmark 10 year US Treasury yield continues to build a fragile support base which might start to display some mild bullish formations as the building process develops. But US equities are resuming declines in the next major leg down, and this therefore begins to present as the acid test to evaluate treasury performance in the face of serious equity declines with resultant money flows from equities back into treasuries plus US Fed support, which both have the effect of reducing yields.

Precious metals are moving sideways in top channels and have yet to confirm tops, with potential to still move higher before topping out. But gold charts have sell divergences in place and the Gold/Silver ratio appears to have bottomed which supports lower metal prices ahead. US miners look slightly more bearish and could be leading the metals lower.

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 is now switching back into rally mode at the first of 2 inflection points as dollar demand increases with US equities now beginning the next major decline phase. Increasing dollar demand will eventually collapse after the second inflection point, as confidence in fiat currencies collapse into a period of serious inflation and hyperinflation thereafter.

The 12 month chart reveals the end of dollar weakness in a breakout from the bull flag, completing the temporary decline. A strong dollar rally is likely to start from this region as this is the first inflection point at the resumption 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 bull flag breakout in more detail, plus a breakout in the MACD oscillator at the bottom.

EuroDollar

The Eurodollar has a break down from the bear flag after completing its temporary rally, plus a break down in the MACD oscillator at the bottom. A strong decline is likely from this region in response to imminent dollar strength.

US Treasuries

The benchmark 10 year US Treasury yield strengthens slightly as it continues to build a fragile support base. This support base might start to display some mild bullish formations as the building process develops, but US equities are resuming declines in the next major leg down. This therefore begins to present as the acid test to evaluate treasury performance in the face of serious equity declines with resultant money flows from equities back into treasuries plus US Fed support, 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.

Short term US Treasury yields are holding in a narrow range at 0.17%, which indicates limited US Fed interference at the moment, 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 inflection point 2 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, but the gold top is not confirmed yet nor has the weaker trend started.

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. The sideways consolidation does increasingly resemble a top pattern with the key neckline level at $1674.

The sideways move in the top channel appears to be supported by the 50-Day MA (red). First level break lines are supplied by the reducing triangle (black lines) and final break lines by resistance and support. The key neckline support is at $1674, and any break below this level will trigger further declines.

Brent Crude Oil

Oil is starting to consolidate above the breakout, but the equity market is starting to weaken and this will impact negatively on the oil price. Fundamentals in the oil market have improved slightly but remain abysmal with economic activity still at anaemic levels.

The gold / oil ratio has a breakout from the declining channel with the ratio turning up as it approached the 200-Day MA (green). This signals lower oil prices ahead.

South African Rand

The US$Rand has a breakout from the flag which is positive the dollar and negative the Rand. This indicates the Rand strength phase has completed and now faces declines against a forecast stronger dollar. This is amplified by a MACD breakout also and the Rand is likely to test the resistance zone next.

HUI / Gold Ratio

The HUI /Gold ratio is in a broadening top pattern in the wake of the bear flag breakout. This presupposes US miners are leading gold lower, but key breaklines need to be breached before any certainty is possible.

HUI Gold Bugs Index

The HUI itself has a virtually identical chart pattern and we must await any potential certainty. The overall expanding triangle does present as a threatening ‘Jaws of Death’ and further weakness will gather momentum in closing the gap, breaching key support, and finally testing the previous low at 142.


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


Dust US Miners Bear Index

The Dust breakout is in the very early stage of slowly gaining momentum in a bullish consolidation, with a key trigger level at $35. 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 more than 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.

In turning down from a triple top, silver has a breakout from the rising channel pattern as the consolidation turns into a recognisable H&S formation. Lack of follow-through energy continues to prevent a new high and continues to perpetuate the non-confirmation with gold with bearish connotations. The key support level remains at $14.50.

Silver has a break down from the rising channel as it develops a topping pattern into a H&S formation, above the support of the 200-Day MA (green). Despite not breaking up to a new high silver does still have a positive short term chart, and any weakness will need to decline through $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 overall expanding triangle does present as a threatening ‘Jaws of Death’ and further weakness will gather momentum in closing the gap, breaching key support, and finally testing the previous low at 16.

Gold : Silver Ratio

The gold / silver ratio closed higher at 97.64 as it gains momentum after the confirming bottom. Gold is now again starting to lead silver to higher ratio levels which is negative for metal prices.

General Equities

The bear market continues to unfold as the Dow Jones begins primary leg 3 down. The end of primary leg 2 up presented as a rare island reversal as did the top of the market in Feb 2020, both confirming bearish tops. The strong sell divergence signal is in place and active and this will provide added decline energy to gain momentum.

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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