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Market Analysis 30 Sep 2021

Sep 30th, 2021

Executive summary

US equities continue in breakdown mode and look precarious which could be the start of a strong decline, with every indication of further declines to follow. The US Fed is also now starting to move from dovish to hawkish as the likelihood of a taper begins to materialise which will assist equity declines further. But, as has happened before, there is still potential to reverse up and maintain the bullish trend experienced in previous breakdown declines.

US Treasury 10 year yield breaks up above the grip of the 200-day moving average which has held it in sideways mode for the past 3 months. That break has triggered a number of reversals in the market: US dollar spike, gold dip, etc. This yield strength also passes the acid test with Treasury values and US equities both declining simultaneously.

For the strong dollar and weak gold to reverse Treasury yields will have to weaken, and this all seems unlikely given current circumstances.

Dow

The Dow Jones continues in breakdown mode in the wake of sell divergence. This looks precarious and could be the start of a strong decline. The break is through rising channel 1 as the chart prepares to penetrate rising channel 2 with every indication of further declines to follow. The US Fed is also now starting to move from dovish to hawkish as the likelihood of a taper begins to materialise. This will assist equity declines further but, as has happened before, there is still potential to reverse up and maintain the bullish trend experienced in previous breakdown declines.

The Dow 3 month chart illustrates the start of breakdown preparation for the 2nd plunge to accelerate the decline. There appears to be little support to prevent the start of further declines.

US Treasuries

US Treasury 10 year yield breaks up above the grip of the 200-day moving average (green) which has held it in sideways mode for the past 3 months. US equity declines are therefore matched by Treasury declines as they move in the same direction for the first time in a long time. Higher Treasury yields has triggered a stronger dollar and weaker gold.

The comparison between Treasury yield and gold illustrates the resumption of inverse correlation which reinstates the historical norm between these two elements.

US Dollar

The US$ index powers up in line with rising US Treasury yields, ignoring all earlier technical signals. This is also assisted by risk aversion and the US Fed’s ‘taper tantrum’ and probable increase in likely market volatility. The dollar is now overbought and could be reaching the start of a decline phase soon.

EuroDollar

The EuroDollar powers down in response to dollar strength, ignoring all earlier technical signals. As with other forex the inverse correlation with the dollar indicates the Euro could be reaching the start of a strengthening phase soon.

South African Rand

The Rand weakens in line with dollar strength, but should begin to strengthen again as the dollar weakens in line with divergence. The slightly broader view illustrates the Rand mini-break from the broader reducing channel of continued Rand strength that has lasted more than a year now. These are two conflicting signals as the Rand continues its sideways zig-zag towards a point of eventual diversion, indicated also by the sideways 200-day MA (green).

Gold

Gold declines as US Treasury yield and dollar strengthens. This is likely to continue further but is dependent on Treasury yield movement which could reverse soon.

The slightly broader view in the 2 year chart illustrates the pivot triangle and the still potential gold price move either way. A Treasury yield break either way will cause gold to do the opposite.

Brent Crude Oil

This 20 year long term view of the oil price begs the question: Is oil about to breakout, or is it about to react down from resistance at the top of the declining channel? Because, if US equities collapse then oil cannot breakout, and if equities reverse up and breakout to continue the bull market then oil can breakout. Perhaps the oil gauge is something to watch carefully.

Hui : Gold Ratio

The ratio weakens to a new low, and this should promote gold weakness further. This is a bearish chart and US miners should continue to drag gold lower.

GDX US Gold ETF

US miners decline to new low in support of weaker gold, and this is turn should produce yet lower gold. This is a bearish chart, although oversold, and any recovery is likely to be short term only.

Silver

Silver declines to new low as Treasury yield and the dollar strengthens. The bullishness of last week has evaporated and also created a non-confirmation with gold which has not declined to a new low. This itself is bearish as well as the gold / silver ratio (next chart) which is now signalled yet lower metal prices.

Gold : Silver Ratio

The ratio closes higher indicating yet lower metal prices to come.

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