Our operating plan is for the summer cool down (mini or maxi) to be driven by the anti-market (USD) and its fellow rider, the Gold/Silver ratio (“metallic credit spread” indicating loss of liquidity & risk ‘off’ when rising). To this point, a rally in USD has been subject to the neckline of an inverted H&S pattern, which is a bullish pattern if the neckline is taken out. As if in anticipation of that, the Gold/Silver ratio recently got on its horse too.
USD (DXY) took out the neckline yesterday, faded a little bit and this morning is furthering that breakout. Hence, caution for asset markets continues to be warranted. Now USD needs to take out the March high to complete the bottoming process and set its sights on target #1 in the mid-94s.
The weekly chart shows the ‘W’ bottom, target #1 at the 38% Fib retrace level and target #2 at 98 and the 62% Fib. I might also add that weekly RSI & MACD look pretty darn solid.
Joining the festivities is the Gold/Silver ratio, which has popped hard this week and taken out its 200 day moving average.
If these two continue to rally together the implication is for a continued loss of market liquidity and lurch to risk off, with a less favored alternate view of a more extended Goldilocks phase, where the stuff that does not depend on dollar depreciation – i.e. Tech, Growth, Defensives, etc. – may get the rotation bid.
In short, both USD and Gold/Silver ratio are ANTI-inflation, and what is the word we’ve heard increasingly loudly (including Fed & Yellen jawbones lately) in 2021? Yup, inflation. The summer cool down continues and it remains to be seen how bad it may or may not get as inflationists get cleaned up. This morning broad markets are trying to rally. But as long as the charts above continue to bull I’d remain suspect of the inflation/reflation stuff at least.