Home > Uncategorized > Market Analysis 16 Jul 2020

Market Analysis 16 Jul 2020

Jul 16th, 2020

Executive summary

The bear market continues to unfold. Using the Dow Jones Industrial Average as a proxy for US equities, you can see that primary wave 1 down has completed and primary wave 3 down is starting. Primary wave 2 up has been a long and slow process, as are all wave 2s in a bear market. The reason for this is the nature of second wave sentiment with the speculative intensity of investors building a powerful force of euphoria in the belief that the bull market is alive and well and that you need to commit everything for fear of missing out. Consequently, second waves in bear markets are notoriously ‘deep’ and extended, with conditions often seeming as good if not better than they were at the bull market peak itself.

Consider the US CBOE Put / Call ratio which is an indicator of investor sentiment: The lower the ratio the higher the euphoria.

The ratio closed yesterday at 0.38. This is low and was last this low in Jan 2011, 9 years ago. Note also that the euphoric sentiment now is higher than at the bull market peak in Feb 2020 with the ratio at 1.00. Once primary wave 3 down begins the entire sentiment characteristic will swivel and eventually reach extremes in the opposite direction.

Also, the sluggish behaviour of the Dow in reaching the end of primary wave 2 up has the knock-on effect of retarding movement in values of other elements of the market, such as the dollar, gold, US Treasuries, commodities, and much else. The long term view of the Dow, and indeed global equities, remains the same however, and 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 15 000.

The US$ continues the short term advance started in Jan 2018 although with current weakness due to the extended duration of primary wave 2 up in the Dow Jones. The dollar will strengthen as equities start to decline at inflection point 2, although dollar demand will eventually collapse after confidence is lost in fiat currencies at inflection point 3.

Gold has reached the 2012 high which presents as a massive double top with bearish implications, once activated. Price has now probably topped at the end of a 5 year bear market rally, which is likely to move into protracted declines perhaps lasting years. The next real gold bull market will only start after further declines once we reach inflection point 3 at the start of currency collapse between the end of deflation and the start of serious inflation, probably towards mid-2021. There are a number of sell divergences in the charts and the next phase will probably see lower prices, although there is still no confirmed top in place.

Silver outperformed gold in the last 4 months during which the gold / Silver ratio declined by 30% in celebration of a stellar precious metals rally. But silver has not achieved new highs, unlike gold, in a major non-confirmation which in itself indicates a major trend change is about to occur.

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 at present, due to the extended completion in the Dow of primary wave 2 up. The start of primary wave 3 down in the Dow is inflection point 2 at which time the dollar will switch back into rally mode with increased demand as US equities begin the next major decline phase. Increasing dollar demand will eventually collapse after the third inflection point, as confidence in fiat currencies collapse into a period of serious inflation followed by hyperinflation thereafter.

The 12 month chart illustrates the dollar breakout invalidating back towards the previous low, although holding above support. Key levels are at $97.80 resistance and $95.70 support.

The 3 month chart illustrates dollar positioning between key support and resistance levels in more detail.

EuroDollar

The Eurodollar chart is similar to the dollar index chart, except in the opposite direction, and sluggish US equity declines could similarly cause EuroDollar strength before the ultimate weakness prompted by penetration below the neckline at 1.1165.tom. The EuroDollar has a mild breakout whereas the dollar itself has no breakdown. Nevertheless a strong decline is eventually likely from this region in response to corresponding eventual dollar strength.

US Treasuries

The benchmark 10 year US Treasury yield continues to weaken in a fragile support base. It continues to nudge down to test support prompted by the energy in the sell divergence. US Treasuries are therefore in a sideways consolidation which will be subject to the acid test once US equities actually resume declines in the next major leg down. Because in the face of serious equity declines with resultant money flows from equities back into treasuries plus US Fed interventions, 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 at inflection point 3 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, pending US equity behaviour. At this stage it indicates limited US Fed interference, but as equity declines gather momentum so too should 3 month yields decline. It is possible the Fed will nevertheless not manipulate yield below zero.

Gold

Gold has reached the 2012 high as the long term 10 year chart presents as twin peaks in a massive double top which has severe bearish implications, once activated. Price has now probably topped at the end of a 5 year bear market rally, which is likely to move into protracted declines perhaps lasting years.

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 3 at the start of currency collapse between the end of deflation and the start of serious inflation, probably around May 2021.

Gold has a breakout to a marginal new high, but in the process has strengthened the incumbent sell divergence. The behaviour of the gold price is also linked to general equity behaviour, in that once equity declines gather momentum it will lead to deflation which will envelop gold into declines. The gold cycle is probably now due to start weakening, due to the virtually uninterrupted advance from Oct 2018 as well as sharp volume declines during 2020. Confirmation of a top will include penetration of the key support level at $1674.

Once a top is confirmed, the 2020 consolidation could respond similarly to the aftermath of the 2016 and 2018 consolidations. These declined quickly after breakdowns to well below the 200-Day EMA (blue), and a similar drop now could witness a gold price decline of $200-$300 into the 1st decline target region between $1450-$1550, sometime during Jul-Sep 2020.

The gold breakout to a new high in the broadening top consolidation, also presents as a secondary sell divergence followed by the gold price weakening slightly. This is probably the top of the cycle which will be confirmed by penetrating the key support line at $1674 which will start the next decline phase.

The 3-month chart illustrates the multi-breakout run to a new high, with still no confirmation of a top in evidence yet. A slightly slower rate of increase is evident during the last week.

Brent Crude Oil

Oil advances above recent consolidation to a new 4 month high, due partly to marginal fundamental improvements and partly due to the sluggish resumption of US equity declines. But it has created a sell divergence in the process which is likely to push the oil price lower, and therefore the triangles are more likely to break down rather than up.

South African Rand

The US$ / Rand flag breakout is positive the dollar and negative the Rand, but momentum is reducing. The trigger remains penetration of the resistance neckline at $17.50 which is delayed slightly. As a consequence the MACD breakout is moving towards a breakback which is close to happening.

HUI / Gold Ratio

The HUI /Gold ratio breakout has propelled price up to a double top high, as miners’ gains accelerate against gold gains. Momentum is up, 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, except more positive. US miners’ gains have accelerated through multi-breakouts to a new high. But any confirmed reversal will start testing key supports, and if gold has topped out then miners will be under increased pressure to maintain price levels. Further weakness will gather momentum in closing the gap, breaching key support, and finally testing the previous low at 142 during Mar 2020.


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

Dust has broken down through the double bottom and intensified the long term buy divergence. Activation of the divergence will also be a breakout of the reducing wedge, and the whole configuration suggests a top in US miners is very close. Being a US miners bear index it responds in geared opposition to metals and miners 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, although it has probably now topped out. 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 inflection point 3 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.

Silver penetrates the quadruple top, marginally, but without achieving a long term high. 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 levels remain at $17.00 and $14.50, to confirm the top is in and eliminate any further bullish potential.

Silver has a breakout to a new short term high, but in the process creates a new sell divergence. This should supply the energy for lower prices from here. A key breakline is at $17.00 in the near exact position of the 200-Day MA (green), and penetration of this level will confirm silver’s top and eliminate any further upside potential.

The silver miners chart is similar to the gold miner charts in breaking up to a new high. But in the process it has created a sell divergence which could assist in reducing price levels. A confirmed reversal will start testing key supports and finally testing the previous low at 16 during Mar 2020.

Gold : Silver Ratio

The gold / silver ratio closed lower at 95.02 in celebrating the late surge in metal prices over the last 10 trading days. But it seems the bottom is in to be followed by higher ratios and lower metal prices. If the ratio now starts to advance, this means silver will decline faster than gold, and vice versa.

General Equities

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. Movement is sluggish however, with little more than a 1000 point spread in sideways drift mode for about a month now.

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.

Categories: Uncategorized Tags:
Comments are closed.