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Market Analysis 23 Jul 2020

Jul 23rd, 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. Sell signals are in place but movement is sluggish however, and the Dow Jones continues to advance sideways with primary wave 3 down still in the process of starting with no decline momentum yet. Also, this has the knock-on effect of retarding movement in values of other elements of the market, such as the dollar, gold, US Treasuries, interest rates, commodities, and much else.

The long term view of the Dow Jones 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$ continues the short term advance started in Jan 2018 although with current weakness due to the extended duration in US equities actually starting primary wave 3 down. 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.

Climactic moves are occurring in the US$, Euro, gold, and silver, each of which is fast approaching significant reversals.

Gold has penetrated the 2012 high in breaching the double top to a new 9 year high. The question is whether it now continues to new all-time highs or whether this is an exhaustion spike that capitulates to the strong sell divergence. The 5 year rally is certainly due a major correction and this question will only be answered in due course by the strength of the two major confronting forces impacting the gold market. Will US (and therefore global) equities collapse and suck the gold market down as well or will the warped global monetary system (and impending currency collapse) blast the gold market much higher. This applies equally to silver.

Price has now probably topped, 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 mid-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 once US equities resume declines into primary wave 3 down, 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 delay in US equities actually building decline momentum at the start of primary wave 3 down. This has been identified as inflection point 2, which has already been reached, but is transforming in ‘slow-motion’ into equity decline and US Dollar strength. Increased dollar demand from this point will eventually collapse after inflection point 3, as confidence in fiat currencies collapse into a period of serious inflation followed by hyperinflation thereafter.

The 12 month chart illustrates the dollar breakdown through support at $95.70 towards the earlier Mar 2020 low. This creates a double bottom as price drops down into the bottom region of a reducing wedge (with bullish implications). A key resistance breakout level remains at $97.80.

The 3 month chart illustrates the dollar breakdown to a new low at $94.92 in the reducing wedge, and the breakout level at $97.80.

EuroDollar

The Eurodollar chart is similar to the dollar index chart, except in the opposite direction, and sluggish US equity declines have the reciprocating effect of boosting Euro values as they advance in the rising wedge at the end of a 4 month rally. A strong decline is eventually likely from this region in response to corresponding eventual dollar strength, and a key support level is at 1.1165.

The long term EuroDollar 10 year chart illustrates long term Euro weakness, with the current rally reaching a region of strong resistance (black circle).

US Treasuries

The benchmark 10 year US Treasury yield continues to weaken in a fragile support base. It continues to nudge down into earlier support prompted by the energy in the sell divergence. US Treasuries are therefore in a sideways consolidation, still at peak capital values indicated by the low yield at 0.60% (virtually zero). Treasuries will be subject to the acid test once US equities actually resume serious declines in the next major leg down, because of resultant money flows from equities back into treasuries plus US Fed interventions, which 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 penetrated the 2012 high in breaching the double top to a new 9 year high. The question is whether it now continues to new all-time highs or whether this is an exhaustion spike that capitulates to the strong sell divergence. The 5 year rally is certainly due a major correction and this question will only be answered in due course by the strength of the two major confronting forces impacting the gold market. Will US (and therefore global) equities collapse and suck the gold market down as well or will the warped global monetary system (and impending currency collapse) blast the gold market much higher.

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 mid-2021.

Gold has a breakout to a new high, whilst entrenching the incumbent sell divergence. The behaviour of the gold price is also linked to general equity behaviour, in that it will probably stay buoyant until equities actually resume serious declines in primary wave 3 down. This 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 have to include penetration of the key support level at $1674.

Gold has a breakout to a new high with still no indication yet of a potential top. The metal is likely to remain buoyant until US equities and the dollar trigger significant reversal behaviour. A gold reversal will only start after penetration of key support levels at $1790 (initial) and $1674 (final).

Gold has a breakout to a new high and only after breeching support levels will anything change.

Brent Crude Oil

Oil advances marginally in spite of the sell divergence and nothing is likely to change this other than serious resumption of equity declines which will push oil much lower. The oil price has been in a bear market since 2008 and prospects ahead remain more bearish than bullish. The triangle patterns should break lower from here.

South African Rand

The US$ / Rand price rests on the neckline of an inverse potential cup and handle which once activated is weak the dollar and strong the Rand. Key levels are $16.33 (strong Rand) and $17.53 (weak Rand). The Rand has been strengthening less than the dollar has been weakening, and all depends on US equity and US dollar behaviour.

HUI / Gold Ratio

The HUI /Gold ratio has a breakout to a new high, indicating greater US miner strength against a stronger gold price. This is in spite of the sell divergence in the apex of bearish reducing wedge and expanding triangle patterns. These patterns indicate reversals soon.

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, this is in spite of the sell divergence in the apex of bearish reducing wedge and expanding triangle patterns that should induce reversals soon.


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 chart remains extremely subdued in light of the metals and miners breakouts to new highs. But, it presents as a wonderful investment opportunity with virtually no risk with price virtually at zero. 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

The silver rally has been strong and quick with price doubling in 3 months. It has powered through earlier resistance and key levels and could still go higher, but is close to a major reversal. Despite the exceptional performance, it is nowhere near eclipsing the highs of 2012 as gold has done. This non-conformance against gold therefore continues and is a major harbinger of a trend change. It goes a long way in answering, negatively, the question posed in the gold section as to whether price continues to new all-time highs or whether this is an exhaustion spike that capitulates to the downside. The silver rally is also due a major correction and is also subject to the same two major confronting forces impacting the gold market. Will US (and therefore global) equities collapse and suck silver down as well or will the warped global monetary system (and impending currency collapse) blast silver much higher.

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, probably around mid-2021.

Silver has finally found the energy to breakout to a new high. As with gold, silver is also linked to general equity behaviour, in that it will probably stay buoyant until equities actually resume serious declines in primary wave 3 down. This will lead to deflation which will envelop silver into declines, even more so because silver also has an industrial demand market. Silver is probably now due a correction after such a rapid advance, and will be held accountable to the rigours of a bear flag formation. But there are still no indications of a top.

A strong breakout to a new high but close to a reversal.

A strong breakout to a new high but close to a reversal. 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 it is also close to a major reversal with price at the apex of the bearish rising wedge and expanding triangle.

Gold : Silver Ratio

The gold / silver ratio plummets to a close at 80.59, a new 11 month low as metals spike up. Further declines indicate yet higher metal prices, 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, and the Dow Jones continues to advance sideways with primary wave 3 down still in the process of starting with no decline momentum yet
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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