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Market Analysis 1 Feb 2022

Feb 1st, 2022 No comments

Executive summary

US equities continue to validate the earlier breakdowns and continue to threaten major declines, in the wake of the triggered technical sell signals. But partial recovery is in process as dichotomy in the markets continue to lurk. For instance, oil powers ahead to new highs, and penetration of 200-day equity moving averages are invalidated. This suggests that equities could start testing resistance levels again as investor euphoria remains ever strong.

US Treasury 10 year yield holds the major breakout level and continues to be the precursor towards higher yields and the trend towards higher interest rates. Treasury yields represent a strong rising trend setup which are likely to ignite further yield increases as the period of higher interest rates gathers momentum, and this will have an inevitable effect on the full gambit of all markets including oil and gold.

The US Federal Reserve confirmed last week that there will be a rate hike in Mar 2022. This resulted initially in the dollar increasing to a new high and gold declining. Thereafter the dollar turned down abruptly which could signal the start of a weakening phase, and this is supported by the development of sell divergence which converted from the earlier reverse buy divergence. This is also consistent with opposite signals from the Euro. It could also mean gold will weaken first followed by strength during the dollar weakening phase.

S+P 500

The S+P 500 breakdown holds and continues to threaten a major decline, in the wake of the triggered sell divergence. But partial recovery is in process as dichotomy in the markets continue to lurk. For instance, oil powers ahead to new highs, and the S+P 500 invalidates penetration of the 200-day MA (green). This suggests that equities could start testing resistance levels again as investor euphoria remains ever strong.

To wit, the dollar price of Brent oil roars to a new high in a major dichotomy with financial market declines. The oil price chart setup also looks particularly bullish which suggests even higher new highs, an impossibility in collapsing financial markets.

US Treasuries

US Treasury 10 year yield holds the major breakout level and continues to be the precursor towards higher yields and the trend towards higher interest rates. Treasury values therefore continue to edge lower although US equities are in semi-recovery after initial declines. We seem to still be in the mode of equity and Treasury values inversely correlated before the mould ruptures and both equities and bonds decline together in a real bear market. But higher interest rates are coming which will have an inevitable effect on all markets.

The Treasury yield and gold comparison chart illustrates yield in rising mode and gold in sideways mode, although in decline this past week. This represents a breakdown of the correct historic inverse correlation of these two elements. If gold were to now be at the start of a decline phase, which seems likely, it could herald the start of correcting this breakdown towards the historic relationship of inverse correlation between the two elements.

US Dollar

The dollar achieved a new high before abruptly turning down which could signal the start of a weakening phase. This is supported by the development of sell divergence which converted from the earlier reverse buy divergence. Reverse buy divergence typically should mean one more new high followed by a weakening phase, and it would appear to be happening. This is also consistent with opposite signals from the Euro. It could also mean gold will weaken first followed by strength during the dollar weakening phase.

EuroDollar

The Euro is a virtual opposite of the dollar and achieved a new low before abruptly turning up which could signal the start of a strengthening phase. This also is supported by the development of buy divergence which converted from the earlier reverse sell divergence. Reverse sell divergence typically should mean one more new low followed by a strengthening phase, and it would appear to be happening.

South African Rand

The Rand is set to weaken in a breakout to a new high in the Dollar Rand chart as the reverse buy divergence exerts influence. Unlike the dollar index and the Euro, the Dollar Rand has not converted to sell divergence and therefore seems to be out on a limb.

Gold

Gold declines abruptly from strong resistance, but is still in an area of decision as price approaches the triangle apex. However, it is not supported by US miners which could drag gold lower, and other strong impact factors are also influencing gold lower such as Treasury yield strength, a strengthening dollar, and silver which is leading gold lower.

Hui : Gold Ratio

The HUI – gold ratio is moving sideways to down within the overall negative bias. In the process it has a tentative breakdown of the bear flag which has been invalidated, but the overall drift sideways reflects gold’s area of decision as price approaches the triangle apex.

GDX US Gold ETF

GDX, by contrast, has a breakdown of the bear flag on increased volume, and the partial recovery looks like it could develop into a ‘kiss goodbye’. This intensifies the negative bias and could herald lower miner as well as gold prices ahead.

Silver

Silver has a strong breakdown from the rising wedge as it leads gold lower, which indicates yet lower prices ahead.

Gold : Silver Ratio

The gold:silver ratio has another breakout as it ratchets higher above 80, as silver leads gold lower. This all indicates lower precious metal prices ahead.

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