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Market Analysis 20 May 2021

May 20th, 2021

Executive summary

US equities are starting to decline from elevated levels in the wake of the bearish patterns in sell divergence and rising wedge. Despite this, investor optimism and euphoria appears to not be affected yet and the current market status will probably still continue for a short yet before finally topping out. An early sign of change is the collapse of the crypto market.

US Treasury 10 year yield is starting to resume an advance as US equities start to decline, as yield continues to work higher slowly. This therefore means the bond market is finally moving in the same direction as the equity market, although still tentatively, and the ACID test is still in progress.

The dollar correction down is still incomplete and is likely to weaken further despite any short term strength. Gold and miners continue to rally with breakouts although there are extenuating circumstances indicating that this may be false. These include Treasury yield behaviour, crypto market collapse, and silver’s continuing non-confirmation.

Dow

The Dow Jones starts to test support as the top pattern develops potential to decline further, in the wake of continuing compound sell divergence. The threatening bearish rising wedge formation still remains intact, but barely so.

The Dow 3 months chart however continues to look more bearish with the breakdown from the short term rising wedge holding good, in the wake of the sell divergence. A further breakdown should drop the index to the bottom of the indicated support zone to the region of 32000. However, activity yesterday ended on a bullish candle which indicates more gains in the short term first. The 50-Day MA (red) is providing support.

US Dollar

The US$ index enjoyed a slight recovery in its downtrend as US equities continue declines. But the dollar is likely to continue down to a new low before the bullish patterns in the expanding triangle and reducing wedge impact the dollar to the next strengthening phase. The chart structure now also includes a sequence of lower lows and lower highs.

EuroDollar

The EuroDollar chart reflects the exact opposite of the dollar chart, with a slight weakening in its uptrend. But the Euro is likely to continue up to a new high before the bearish patterns in the expanding triangle and rising wedge impact the Euro to the next weakening phase. The chart structure now also includes a sequence of higher lows and higher highs.

US Treasuries

US Treasury 10 year yield is starting to resume an advance as US equities start to decline, as the mini-break continues to work higher slowly. This therefore means the bond market is finally moving in the same direction as the equity market, although still tentatively, and the ACID test is still in progress.

If Treasury yields continue to advance it will impact gold negatively, due to the inverse correlation between the two. If this starts to occur energetically then gold declines will be significant, and it would appear as if we are on the cusp of this happening.

Gold

Gold has a breakout on high volume with US miners starting to show some strength also. But the gold market is threatened by other factors which suggest the breakout may be false and short-lived. Treasury yields are starting to advance again, and there is a continuing non-confirmation of silver against gold which has a traditionally retarding impact on precious metals’ strength. A concomitant impact may be the collapse of the crypto market with Bitcoin down 50% in a month. The gold spike may be due to crypto investors (and speculators) switching into gold, which probably will not last.

The collapse of Bitcoin since mid-April has seen gold gain most of it’s spike during the same timeframe, especially the last 10 days.

South African Rand

There is slight Rand weakness in it’s overall strengthening against the dollar as the dollar compound buy divergence continues. This all promises eventual Rand weakness as the reducing patterns breakout, but with short term dollar weakness still to come the Rand is likely to continue to stay strong.

Hui : Gold Ratio

There is a HUI / Gold ratio breakout after the gold breakout which is holding for now, but weakening. The breakout may be false as with the gold breakout, in which case the rising wedge will be threatened and begin to act as a bear flag.

GDX US Gold ETF

GDX also has a breakout after the gold breakout which is holding for now, but weakening. It will invalidate if the gold breakout is false, and technically it needs to break up otherwise it will test support levels, in which case the rising wedge will be threatened and begin to act as a bear flag.

XAU US Gold and Silver Miners Index

The combined gold and silver miners chart breakout creates a new high and is therefore more bullish than the other miners’ charts. But all the impact factors nevertheless apply here too, and if the gold price is false the breakout will invalidate with lower prices to come.

NUGT US Miners Bull Index

NUGT reflects the current gold strength but all the same impact factors apply.

Silver

The silver chart illustrates the continuing non-confirmation with gold, which is bearish precious metals. On balance, lower prices lie ahead with identical impact factors as for gold.

Gold : Silver Ratio

The gold / silver ratio is neutral despite a slightly higher close, but a triangle vertex-based reversal approaches with a break either way to follow. This is quite surprising given the extent of gold and miners breakouts, which reinforce the argument that precious metals are not going any higher.

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