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Market Analysis 25 June 2020

Jun 25th, 2020

Executive summary

The bear market continues to unfold as the Dow Jones began primary leg 3 down on 8 Jun 2020 from the end of primary leg 2 up. This was characterised by a rare island reversal to confirm the top, as it also was at the final top of the market in Feb 2020. 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 again starting to strengthen into the rally which started in early 2018. After recent weakness it 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 followed by hyperinflation thereafter.

The benchmark 10 year US Treasury yield continues to develop 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 which begins to present as the acid test to evaluate treasury performance. Because in the face of serious equity declines with resultant money flows from equities back into treasuries plus US Fed support, this will all 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.

Gold has a marginal breakout to just short of $1800 which could prove to be the end of the bear market rally. The recent price surge has been driven by declining volumes, typical of rally termination behaviour. Silver has failed to follow suit. The next real precious metals 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 bear market as we reach inflection point 2 at the start of currency collapse between the end of deflation and the start of serious inflation, sometime during the first half of 2021.

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 dynamic will continue for now 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 artificially prompted 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 followed by 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 continues to develop 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 which begins to present as the acid test to evaluate treasury performance. Because in the face of serious equity declines with resultant money flows from equities back into treasuries plus US Fed support, this will all 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, although declining slightly form 0.17% to 0.15% this week. This indicates limited US Fed interference at the moment, despite the start of equity weakness which nobody believes yet. This is a good indicator of US Fed action once equity declines accelerate.

Gold

Gold is reaching the 2012 high as the long term 10 year chart presents as a massive ‘cup & handle’ formation which has severe bearish implications. Price may still edge up further to reach $1800 which could prove to be the end of the bear market rally. The recent price surge has been driven by declining volumes, typical of rally termination behaviour.


The next real 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 at the start of currency collapse between the end of deflation and the start of serious inflation, sometime during the first half of 2021.

The 5 year weekly chart highlights the marginal new high in a sideways consolidation, 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 consolidation, including a small breakout to a new high, which presents as a new sell divergence (particularly noticeable in the MACD at the bottom). The sideways consolidation does increasingly resemble a top pattern with the key neckline support level at $1674.

The sideways consolidation in a top channel has a breakout to a new high just short of $1800. This may prove to be the top of the rally but there is still no confirmation of a top. Any successful breakdown will need to penetrate the pattern neckline support level at $1674.

Brent Crude Oil

Oil is starting to consolidate above the breakout, but the chart has a negative bias and US equities are starting to weaken. Fundamentals in the oil market have improved slightly but remain abysmal with economic activity still at anaemic levels, and equity market declines will impact negatively on the oil price as it did before.

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 weakening top pattern in the wake of the bear flag breakout, as US miners lead 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 after the gold rally terminates.


Dust US Miners Bear Index

The Dust breakout gains are losing momentum in the bottom consolidation, due to the late surge in the gold price. The long term buy divergence is still active and the chart will gather positive momentum again if the gold price falters. Being a US miners bear index it responds in the opposite direction to metals and miners price movement.

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 next real 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 inflection point 2 at the start of currency collapse between the end of deflation and the start of serious inflation, sometime during the first half of 2021.

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 breakdown from the rising channel pattern as the consolidation turns into a broadening top pattern. Lack of follow-through energy continues to prevent a new high and continues to perpetuate the non-confirmation with gold with bearish implications. The key support level remains at $14.50, to confirm the top is in and eliminate any further bullish potential.

Silver is in a broadening top pattern with the neckline in the vicinity of the 200-Day MA (green), which has been virtually horizontal for 3 months now. Despite not breaking up to a new high the silver chart does have a positive bias with the potential of a breakout at any time. Any bullish potential will be eliminated with penetration down through the key support level at $14.50.

The silver miners chart is similar to the gold miner 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 100.46 as it gains momentum after the confirming bottom. Gold is now again leading 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 on 8 Jun 2020 from the end of primary leg 2 up. This was characterised by a rare island reversal to confirm the top, as it also was at the final top of the market in Feb 2020. 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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