Signals for the Coming Crash in Stocks and Rally in Gold

Sunday, September 23, 2018
By Paul Martin

By: David Brady, CFA
GoldSeek.com
Friday, 21 September 2018

The U.S. imposed new tariffs on China this week that were close to the worst possible scenario, despite mainstream media comments to the contrary. The fact that China responded with nothing more than 5-10% tariffs on $60bln of U.S. imports soothed the markets, and stocks rallied. The mistake being made, however, is that China is unlikely done retaliating just yet, and there is likely more to come. What is clear is that neither side is willing to back down in this trade war, so it is probably going to get worse. This is why I still see a risk of higher USD/CNY (despite recent comments from the Chinese Premier to the contrary) and lower Gold prices ahead. The bigger question is: when does it all end? When does Gold finally bottom and rally?

In last week’s article, “When The U.S. Stock Market Crashes, Buy Gold”, I explained why I believe that a U.S. stock market crash is coming. I also shared why this would be followed by a Fed reversal in policy to stimulus on steroids and that this would mean a peak and fall in the dollar, including USD/CNY. This would signal the beginning of the end to the trade war, because a weaker dollar would succeed where tariffs have failed in reducing the U.S. trade deficit with China. A more immediate effect of a return to quantitative easing combined with a decline in USD/CNY would be a soaring Gold price. Silver, Platinum, and especially the Miners would follow suit and then pass Gold on the way up.

Having already explained why I expect a stock market crash in the U.S., this week I want to share with you the market signals I am monitoring that indicate such a crash is about to occur. This crash will launch a series of events that cause Gold to rally beyond its 2016 high and then some, in my opinion.

S&P 500 NEGATIVE DIVERGENCE

A negative divergence occurs when price hits a higher high but it is not confirmed by a higher high in the RSI, MACD Histogram or MACD Line. Such divergence on a monthly basis occurred at the peaks in the S&P in March 2000, October 2007, and we are seeing it again now, given that the S&P is hitting new all-time highs. This does not mean that the S&P has peaked yet, but does suggest that it is close. This tells me we’re in the “sell zone”. However, we obviously cannot rely on one signal alone.

NEGATIVELY DIVERGENT SENTIMENT

You can also get a negative divergence based on a higher high in price but a lower high in sentiment. My preferred measure of sentiment is the daily sentiment index, or DSI.

In May 2007, the spot DSI peaked at 93 and the 21-day moving average DSI at 89. Price rose to a higher high in October 2007, but the spot DSI peaked at a lower high of 88 and the 21-day moving average at 83. This is what I mean by a negatively divergent higher high in price, which typically signals that price is about to fall.

The S&P peaked in October 2007 at 1576 and then proceeded to crash to 666 in March 2009. We could see the same negative divergence play out soon.

The Rest…HERE

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