Midweek Market 27 Dec 2018
Executive summary
US markets had a belated Xmas rally of gigantic proportions in a miracle dead cat bounce that lifted equities 5% yesterday. This was attributable to various issues including some noise emitted from the White House suggesting the US Fed Chairman will not be fired, and single day records were broken. But, the die is cast and equity wave structures continue to unfold into a bear market of equally gigantic proportions that will eventually dwarf much that has gone before.
Using the Dow Jones Industrial Average as a proxy for US equities (and indeed world equities) it can be seen that a variety of different impact factors are propelling the index to yet much lower levels. These include Elliott Wave theory, activation of a strong H&S pattern, and a strong negative divergence, all as can be seen in the charts that follow. Also, the countertrend rally in the US bond market is now probably completed with the long term bond bear market likely to resume very soon.
The US$ index has begun a multi-month decline phase since recent peaks, albeit still sluggishly, just as the similar (but in reverse) gold multi-month rally continues to gain momentum. The gold rally is gathering pace which has been energized by disproportionate increases in the silver price which has erased the long-standing non-confirmation against gold which now aligns both metals.
US$
The US$ index has begun declining after recent peaks, but is still doing so sluggishly. In moving largely sideways it is in fact even starting to construct a bear flag, as a prelude to breaking lower. The chart structure, together with corroborating data such as still extremely positive investor sentiment and bearish Cots data, indicates a multi-month dollar decline in the period ahead. The oscillators though are turning up in denial.

One of the powerful motivators for dollar weakness is the extreme investor optimism and the bearish Cots data which reflects in the continued wide dilation in the graphic (red circles). Also, finally, the dollar decline is becoming slightly more evident.
One of the powerful motivators for dollar weakness is the extreme investor optimism and the bearish Cots data which reflects in the continued wide dilation in the graphic (red circles). Also, finally, the dollar decline is becoming slightly more evident.

The 12 month daily chart illustrates the principal propellant for dollar weakness is the negative divergence between price and MACD. This is likely to drop dollar value well below 200-Dema (probably towards $93.80), despite the oscillators in denial.

The longer term 3 year weekly chart illustrates dollar value slowly beginning to roll over with the support of the oscillators turning down.

Japanese Yen
The Yen strength cycle is gaining momentum, having penetrated both the diagonal supports (red) decisively. This, by definition, is due to a weaker US$ and by implication a stronger gold price. The Yen has moved to it’s strongest in nearly 4 months, in powering through 200-Dema, and is now going to test support (red) between 108-110 Yen to the dollar.

US Treasuries
US bonds continue to collapse into a long term bear market but yields have continued to correct down in the short term counter-trend correction. In accordance with Elliott Wave, it can be seen the yield decline is now probably complete, having completed a 5 wave (i) to (v) down to 2 c (circle). This establishes 1-2 which will now propel te stronger wave 3 up as yields increase in a declining bond market.
From this point US bonds will resume their collapse into a long term bear market, and both oscillators are bottoming in support of this.

US Treasuries and Gold
The relationship between gold and the US Treasury 10 year price is reflected in the chart below with rising bias in strong gold / weak bond price, and reducing bias in weak gold / strong bond price. The chart illustrates that the relationship has bottomed (red line), as it moves up to test the H&S neckline. This reflects the stronger gold price and weaker bond price, together with both oscillators rising in support.

Gold
Gold continued to strengthen this week as the rally gains momentum. But it closed yesterday on a Doji candle which reflects indecision and could impair further gains in the ultra short term. The oscillators are overbought which indicates stalling in gold price gains, despite all the contra-indications such as weaker dollar and bullish gold Cots data.

The gold COTs data indicates the start of dilation but it is still early days and the gold price continues to rally.

The gold rally gains momentum in a breakout through the key level of $1269, having penetrated the diagonal resistance line. The oscillators are beginning to top out although momentum will probably carry the day, given all the impact factors.

South African Rand
The reducing wedge pattern has proved quite powerful with the Rand weakening to break out and then consolidate above the pattern. The struggle continues between expected dollar weakness and extending the consolidation above the reducing wedge pattern even further up. The Slow Stochastic is overbought but the MACD appears not so quite yet. Price closed at $14.55, just below the next key ZAR weakness level at $14.70.
So, whilst expected dollar weakness will lead to Rand strength, South African political and economic weakness will tend to retard any Rand strength, leaving the currency above the reducing wedge pattern.

HUI / Gold Ratio
The ratio continues to gain momentum despite breakbacks, which means that US miners are moving up slightly faster than the gold price. The next key breakout level at 0.1291 is very close and both oscillators have turned up in support.

HUI Index
The HUI index itself is far more positive than the HUI / Gold ratio, with the miners not having to compete against the gold price. The positive bias has the next key breakout levels close at hand, and the oscillators are turning up in support.

GDX US miners ETF
The GDX chart is similar to the HUI Index chart except it is even more positive. It seems as if the US miners may well catapult up if these patterns persist.

DUST US Gold Miners Bear Index
The Dust chart has similar commentary, except in the opposite direction being a US miners bear index. The downside bias in the chart is gaining momentum despite the breakbacks, having penetrated the diagonal support (red). The oscillators are bottoming and therefore further increase in the chart is possible.

Silver
Silver has a breakout both through the key level of $14.95 and the diagonal resistance line. Silver has erased the long-standing non-confirmation against gold which now aligns both metals, in a very positive move for the whole precious metals complex. The breakout line at $14.95 has developed into a powerful resistance line, comprising many breakout attempts, and it has now been penetrated decisively and will act as a propellant. The next key breakout levels are close at hand on either side of the resistance zone at $15.25 and $15.71. The oscillators are overbought however and may act as a retardant.

The silver COTs data remains very positive although the convergence pattern is beginning to dilate slightly. Because it is still early days the silver rally is nevertheless gaining momentum.

Gold : Silver Ratio
Silver is in the early stages of beginning to outperform gold, which is positive for the whole precious metals complex, and this is reflected in the chart with a breakout through the rising wedge pattern. The oscillators are turning down in support, and the potential top is increasingly looking like an actual top.

General Equities
The Elliott Wave analysis of the Dow short term chart illustrates the potential for further declines. The ‘dead cat bounce’ in the Dow yesterday could be the rise to 4 to be followed by the decline to 5, to complete the 5 wave down to (3). Or, that wave 3 is still in progress which will generate a much lower (3).
The corrective ABC up will only engage once these declines are complete.

The Dow 12 months chart illustrates the major negative divergence between price and MACD which is the main driver in propelling the Dow down strongly. The partial recovery yesterday is a ‘dead cat bounce’ as part of the overall decline process.

The large H&S pattern developed over the last 9 months has been activated, and this is likely to propel the Dow down by 3000 points, being the height of the head. This will drop the Dow down through the next big region of support around the region of 22000 to the next region below that around 21000. This will test 200-Wema (green).

Recent Comments