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Market Analysis 3 Jun 2021

Jun 3rd, 2021

Executive summary

US equities continue at elevated levels while threatening sell divergence and rising wedge patterns remain. But there is still the nagging potential for yet another new high before any serious declines occur, and both of these are likely given all the other factors impacting markets.
At the moment it may be that the liquidity fright in the US banking system in Dec 2015 may be happening again, and we need to consider that before evaluating US interest rates, the dollar, and gold. US Treasury 10 year yield is moving sideways could move either way in the short term which will add some volatility to markets, but the deteriorating US reverse repo situation will support a strengthening bias.


The dollar downtrend continues although it is likely to rally strongly later, but probably only after declining to a potential new low first. The deteriorating US reverse repo situation will support the dollar rally after that. The gold breakout is holding although not supported strongly by the various US miner charts. It continues to be threatened by Treasury yield strength and the silver non-confirmation.

Dow

The Dow Jones continues at elevated levels while the threatening sell divergence and rising wedge patterns remain. But there is still the nagging potential for yet another new high before any serious declines occur, and both of these are likely given all the other factors impacting markets.

The Dow short term 3 months chart however continues to look more bearish with the breakdown from the short term rising wedge still holding good, in the wake of the sell divergence and appearance of a set of bearish ending candles. This has the potential to drop the index to the top of the support zone before any further increases to a possible new high.

US Reverse Repo situation
As a precursor to evaluating the dollar and gold it is perhaps a good idea to revisit the US reverse repo situation which shook markets in Dec 2015. At that time the US Federal Reserve started tapering asset purchases because of the liquidity fright it created in the banking system, and it appears this is happening again.

In Dec 2015 the level of overnight reverse repurchase agreements in securities sold reached $475bn (green) and it has now exceeded that level at $485bn. Tapering after Dec 2015 caused the effective Federal funds rate to increase from just above zero to nearly 2.5% (red). Tapering and rate increases are dollar friendly and hostile towards gold. Tapering did eventually reverse and the funds rate did eventually decline back to nearly zero, but in the short term this situation is likely to boost the dollar and reduce the gold price.

US Dollar

The US$ index downtrend continues while US equities continue at elevated levels, but the expanding triangle and reducing wedge are bullish patterns. This suggests the dollar is likely to rally strongly later, but probably only after declining to a potential new low first. A set of bearish candles have emerged as ending candles to encourage this, and the deteriorating US reverse repo situation will support the dollar rally after that.

EuroDollar

The EuroDollar chart reflects the exact opposite of the dollar chart with a continued uptrend and a set of bullish ending candles to support further gains. By contrast the Euro is likely to achieve a new high before the inevitable weakening phase starts which will be supported by the expanding triangle and rising wedge patterns.

US Treasuries

US Treasury 10 year yield continues sideways as US equities remain elevated. The chart looks indecisive and could move either way in the short term which will add some volatility to markets, but the deteriorating US reverse repo situation will support a strengthening bias (as does the Gold Cross (green square)). Progress in the ACID test still needs to be monitored.

If Treasury yields continue to weaken slightly this will extend the gold rally, due to the inverse correlation between the two. But of course the reverse is also true.

Gold

The gold breakout is holding although not supported strongly by the various US miner charts. It continues to be threatened by Treasury yield strength and the silver non-confirmation. Any breakdown from the rising wedge will move towards activation of the potential bear flag. Weakening in US Treasury yields will extend the gold rally, which is possible, and the deteriorating US reverse repo situation will depress the gold price. An increase in US equities will catapult the Bitcoin price which will assist gold weakness.


Money is being pumped into world monetary systems at unprecedented pace, even with equities well beyond all-time highs. The world has been in a catastrophic pandemic for more than a year and economic systems have been hit hard. And yet gold, the monarch of safe havens, has not managed to go above 2011 highs, let alone soar above. The gold market is simply not ready yet without declining significantly first.
South African Rand

The Rand continues to strengthen despite the continued dollar buy divergence. In fact the continued dollar weakness has destroyed the RSI divergence (MACD divergence is still evident), and there is further Rand strength ahead because of further dollar weakness.

Hui : Gold Ratio

The HUI / Gold ratio breakouts are weakening with the wedge breakout invalidated. The chart is not decisive like the gold chart itself.

GDX US Gold ETF

The GDX breakouts are stronger but also weakening and not as decisive as gold itself. The chart needs to break up otherwise it will start testing support levels and eventually activate the potential bear flag.

GDX Junior : GDX Ratio

The GDXJ:GDX ratio has a breakout, indicating junior miners are strengthening faster than GDX miners. This is the one indication (amongst all others) suggesting strength ahead.

XAU US Gold and Silver Miners Index

The combined gold and silver miners chart breakout is holding, just. But like the others it needs to break up otherwise it will start testing support levels and eventually activate the potential bear flag.

NUGT US Miners Bull Index

NUGT reflects the current gold miners’ strength but all the same impact factors apply. It has developed a pennant which indicates continued strength.

Silver

The silver chart is still exhibits 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 breakout is holding (declines ahead) but is largely still relatively neutral. We need to see move chart development to make constructive projections.

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