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Market Analysis 18 Feb 2021

Feb 18th, 2021

Executive summary

US interest rates are rising and this will cause asset prices to decline and the dollar to advance. Gold is the first asset class to start declining and the dollar has seemingly bottomed. This will spill over to equities if the trend continues, and the Dow Jones is about to oblige as it grinds out another new high in a chart structure that threatens declines about to happen.

The US dollar strengthening phase has started because interest rates are rising, although this may correct if US Treasury yields start to weaken again. Gold has started to weaken and is poised for further declines although silver is the stronger of the two. US miners continue to look bearish.

Dow

US Treasury yields are the principle driver of US interest rates, and they are rising. Rising US interest rates cause asset prices to decline and the dollar to advance. Gold is the first asset class to start declining and the dollar has seemingly bottomed. This will spill over to equities if the trend continues, and the Dow Jones is about to oblige as it grinds out another new high in a chart structure that threatens declines about to happen. The bearish rising wedge continues as the sell divergence extends in a threatening structure that awaits the final sell trigger. This is a culminating bull market which will morph into a bear market as the year 2021 continues to progress, with many different aspects of investor sentiment having evolved through exuberant to euphoric and beyond as the market surge moves through various risk barriers towards madness.

US Dollar

The dollar is powered by rising interest rates and the support of bullish Cots data, whilst technically it is still in the reducing wedge pattern in spite of the 2 consecutive buy divergences. It may still correct down further because of the strong link through US equities and interest rates, to US Treasury yields which may still weaken. If there are further equity gains then the dollar will continue to languish, and vice versa. Dollar strength will become supercharged once US equities actually start real declines caused by higher interest rates.

In long term data in the weekly 5 year chart the dollar breakout has held with some strength after the ‘kiss goodbye’. This truly pregnant moment continues, as we await developments in US Treasury yields which impact interest rates, equity and bond values, as well as the gold price.

US dollar Cots data, which admittedly is not a short term indicator, is still dollar bullish (for close to 3 months now). And whether the dollar weakens next or not it will strengthen eventually, and quite soon too.

EuroDollar

The EuroDollar is in a weakening phase, although still in the rising wedge pattern despite the 2 consecutive sell divergences and the additional support of bearish Cots data (not shown). And, like the dollar except opposite, this correction may still develop more upward momentum, but the Euro is a follower not a leader, and will be driven inversely by the impacts driving the dollar. Euro weakness is also supported by the increasingly negative economic data coming out of the EU (certainly when compared with the US which is bad enough).

US Treasuries

The US Treasury 10 year yield rally indicates rising interest rates, as US equities continue to grind out new highs. But in so doing it has created a sell divergence which promises lower yields next. This is in addition to the sell divergence in the long term data 5 year chart (next chart). So, yield still continues to grind up slowly within the confines of the rising channel, but we still need increased yields during the ‘acid test’ when equities are actually declining, which they are not doing yet.

The weekly chart indicates the 10 year yield actually gapped up but still the sell divergence signal holds, and this indicates lower yields next. This is in the long term data and yield declines may actually be lengthy. This in turn could promise protracted declines in interest rates and the dollar, and protracted and continued increases in US equities.

Gold

Gold is poised to decline further with support from rising interest rates and the dollar, plus continued bullish Cots data. Technically there are multi-breakdowns with every evidence of further testing of the support zone. But there is now a double bottom with the previous low in Nov 2020, and if we have US Treasury yield declines we could have another gold rally.

Gold Cots data indicates continued 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 against a stronger dollar, in the wake of a dollar buy divergence. But price remains well within the reducing channel formation which it needs to breach before any sustained Rand weakness.

Hui : Gold Ratio

The HUI / Gold ratio dome turns bearish again as miners lead gold lower, with the ratio turning down from resistance at the 50-Day MA (red). The chart continues to look bearish with the promise of lower miner and gold prices to come.

GDX US Gold ETF

GDX has a similar chart but is more bearish, with a breakdown through the H&S neckline which should produce further sharp declines. Using the height of the H&S as a backsight the target GDX decline price is in the range of $22 / $23 (30% decline).


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 a breakout soon continues to appear probable.

Silver

Silver is stronger than gold at the moment but is also poised to decline with bearish Cots data, and the cocktail of impacts in US Treasury yield increases, higher interest rates, stronger dollar. But with the spike in recent silver interest and continued overflow, silver could rally first.

Silver Cots data indicates continued 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 declined with silver stronger than gold, and this may persist for a while longer. The ratio continues to drift sideways to down and we need more price movement to make more intelligent judgements.

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