Six weeks ago we predicted a deflationary event was in store for US stocks, and that precious metals would see a firm bid as a result:  https://bullionexchanges.com/blog/2018/11/12/deflationary-event-on-the-horizon/

Over the past week, the Federal Reserve hiked interest rates once again. It’s the fourth increase of 2018 and the ninth of the present cycle which began in December 2015. Fed-controlled short-term borrowing rates now stand at a target range of 2.25% – 2.50%.

The result of the rate hike was that the US stock market was down over 7.0% this week for the S&P 500, its worst weekly decline since August 2011. Meanwhile, the narrower but oft-quoted Dow Jones Industrial Average was down 6.75%, its worst decline in over a decade. The last drop of this magnitude for the Dow occurred during the worst of the worldwide financial crisis in October 2008.

Gold was up by 1.4% for the week or $17 to close at $1,258, serving its role as a worldwide safe haven

Trend Analysis

At this point, it should be clear that critical insight can be gained from a strict analysis of market trends. As discussed in the link above, two months ago we could not predict why stocks were going to fall. Answer: the Fed’s continued interest rate hikes have spooked the market… but we could predict that they were going to fall. From a technical standpoint, our tip-off that a decline of this magnitude was approaching came as US stocks failed to maintain the parabolic breakout that they were attempting at that time. This is shown below by the blue trendline failure and red callout:

US stocks Trendline

 

So where are we now for the US market?

 

US stocks are approaching an initial downside target of 2350 – 2375 on the S&P 500 (shown in green)

 

For the week, the index closed at 2416.

  • The 2350 – 2375 target comprises the following two levels:
    • 2350 – the lower rising boundary of the decade-long trend channel (magenta color)
    • 2373 (rounded up) – the 50% Fibonacci retracement (silver line) of the entire 2016 – 2018 advance (blue)
  • We should not underestimate the significance of the lower boundary of this target. This is a trend channel that is approaching its 10-year anniversary this March. Technical-based traders will be showing up on this trend channel for at least the attempt of recovery, if not a continuation of the bull market.
  • Brief violations of a trend channel can occur. We have seen this before, during the false breakdowns in 2011 and again in early 2016 (red). They should be no more than 24 – 72 hour affairs if they do occur, and should not exceed a 3% decline below the 2350 boundary (= 2280). It is especially important to observe that the market does not register two weekly closes below this boundary.
  • A legitimate break of the 2350 level on a dual weekly closing basis would argue that the entire bull market for stocks which began in 2009 has ended. This would be a sea-change for world markets and especially precious metals as a counter-cyclical asset class. This would not be a short-term trading signal, but a long-term macro-economic shift.

Still, the rule is: technical boundaries must be respected until proven otherwise. Out highest-probability assessment is that 2350 +/- 3% will hold on a dual weekly closing basis over the coming months. That’s a significant bounce that will result for stocks. The target for the bounce will be calculated once we observe the price action during the developing low.

 

Inverse Flow to Begin Soon

At this time we simply want to caution precious metals investors to consider the flow of funds that have occurred over the past two months. Declining stocks and rising gold prices. Now, the same analysis that we used to predict stocks would decline suggests that a short-term support level is approaching. Could we see an inverse flow of funds from recent weeks? Would gold decline somewhat if stocks recover? Such is likely. Precious metals investors are simply cautioned to not chase the market higher, but to wait for pullbacks to begin averaging into the market.

*****

Happy holidays to all the readers at Bullion Exchanges. It is a pleasure to be a contributor during these volatile times in the markets.

Next week we will provide year-end precious metals and market review, followed by 2019 trend predictions during the first week of the new year.

 

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