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Market Analysis 28 Jan 2021

Jan 28th, 2021

Executive summary

The Dow Jones reacts down this week to incline support but still within the boundary of the threatening rising wedge, and could hold above these levels. It needs to penetrate down below the rising wedge to signal what could then be significantly bearish. However, US equities continue to enjoy general investor sentiment at historic extremes which is compatible with a rally (or bubble) which should now be at absolute completion. It could be that the start of a major reversal to collapse the structure is very close at hand.


The bottoming process in the US dollar continues to look bullish, although there is still no breakout – which could be close. A reducing wedge breakout will propel the dollar into a strong advance, and this is supported by COTS data and reciprocal evidence in Euro behaviour. Gold is poised to resume declines and US miners continue to look bearish.

Dow

The Dow Jones reacts down to the influence of the sell divergence to incline support at the 50-Day MA (red). Price is still within the boundary of the rising wedge and well above the 200-Day MA (green), and could hold above these levels. It needs to penetrate down below the rising wedge to signal what could then be significantly bearish. However, yesterday’s activity on the NYSE resulted in a solidly negative advance / decline ratio of nearly 5 with general investor sentiment at historic extremes which is compatible with a rally (or bubble) which should now be at absolute completion. It could be that the start of a major reversal to collapse the structure is very close at hand.

US Dollar

The bottoming process in the US dollar index continues to look bullish, powered by 2 consecutive buy divergences. There is still no breakout although that could be close, depending largely on whether US equity weakness continues. A breakout up through the reducing wedge will propel the dollar into a strong advance. This is supported by COTS data (next chart) and reciprocal evidence in the Euro chart.

US$ Cots data indicates a ’constriction’ phase (black circles) that is starting to dilate which supports continued dollar strengthening, as it did from Mar 2018 (blue circle).

The 5 year dollar chart illustrates the similarity between the current bullish reducing wedge and that of about 3 years ago. The breakout now has still not occurred, but once completed it will lead into the next strength phase, which supports the notion of much weaker gold ahead.

EuroDollar

The Eurodollar chart reflects the virtual opposite of the dollar index chart, also supported technically by 2 consecutive sell divergences. This should reduce Euro value and a downside break from the top pattern, which reciprocally supports a stronger US dollar. The EU economy is under-performing the US economy and this should unwind into the forecast weaker Euro and stronger dollar.
Euro Cots data (not shown) also supports a weaker Euro with a virtually identical chart to the US dollar, except opposite.

US Treasuries

The US Treasury 10 year yield turns down more meaningfully with this week’s weakening US equities, as bond prices rise. But at this stage yield still continues to grind up slowly within the confines of the rising channel. This is supported by the ‘gold cross’ with the 50-Day MA (red) crossing up through the 200-Day MA (green) which finally signals a move towards higher interest rates. But for certainty, we need increased yields during the ‘acid test’ when equities are actually declining. Also, the weekly 5 year chart (next) indicates that yield could be declining soon.

The weekly 5 year chart presents as a potential bottom with yield doubling over the last 6 months. However, this has occurred simultaneously with the creation of a reverse sell divergence which indicates lower yields next, long term (being weekly data).

Gold

Gold is poised to decline further with support from Cots data (next chart). The gold price has 2 minor breakdowns as it ‘meanders’ further down the reducing channel, which could of course turn out to be a large bull flag!!! But precipitous equities and bottoming dollar (plus gold cots data) all indicate further gold declines.

Gold Cots data indicates massive dilation (red circle) which is bearish with gold declines to continue. This can be seen (verified) by the opposite massive constriction which occurred in Sep 2018 at the start of a strong strengthening phase in gold.

South African Rand

The Rand starts to weaken again under the influence of the dollar buy divergence, as the US$ZAR continues to drift lower within the confines of the reducing channel which should see greater Rand weakness once the top trendline is breached in what could end up as a large dollar bull flag.

Hui : Gold Ratio

The HUI / Gold ratio bearish dome pattern produces multi-breakdowns as miners lead gold lower. This all presents as a bearish chart with further declines to test support likely.

GDX US Gold ETF

GDX has a similar chart although somewhat less bearish, but remains poised for more breakdowns. If the gold Cots data plays out true then US miners should soon test support also.


This situation applies also to all US miners, and HUI, GDXJ, and XAU are all positioned in likewise charts subject to further breakdowns.


Dust US Miners Bear Index

The Dust chart base breakout is proving to be a long time coming, and continues into 7 months. It has still not broken up, although there are now signs of a breakout soon.

Silver

Like gold, silver is poised to decline further with support from Cots data (next chart). The silver price also has 2 minor breakdowns, but much still depends on US equity direction and dollar value which does indicate lower silver.

Silver Cots data indicates massive dilation (red circle) which is bearish with silver declines to continue. This can be seen (verified) by the opposite massive constriction which occurred in Sep 2018 at the start of a strong strengthening phase in silver.

Gold : Silver Ratio

The gold / silver ratio advances slightly above the double bottom level, indicating the start of potential metal price declines. But we need more price movement to judge accurately, as the ratio is at present only drifting sideways.

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