Have Gold Stocks Lost All Their Vigor?

The Gold Miners

While investors believed that superficial strength indicated clear skies ahead, I warned on Jun. 14 that storm clouds were likely to rain on gold, silver and mining stocks’ parade.

I wrote:

Not only has gold’s RSI fallen precipitously, but the yellow metal’s stochastic oscillator is also at levels that preceded significant historical drawdowns. As a result, while a $100+ decline is likely to materialize in the short term , an even larger decline will likely occur over the medium term. And with the 2008 and 2012-2013 analogues becoming even more valid by the day, gold’s ominous path forward will likely catch many market participants by surprise.

And with the technical realities finally drowning the yellow metal, it was a tough pill to swallow for those that didn’t heed the warning.

Please see below:

As part of the problem, the vast majority of individual investors and – sadly – quite many analysts focus on the trees while forgetting about the forest. However, once one zooms out and looks at the situation from a broad perspective, it’s clear that: “What has been will be again, what has been done will be done again; there is nothing new under the sun.” (-Ecclesiastes 1:9)

Therefore, while investors often focus all of their attention on the yellow metal, I warned on Jun. 14 that the HUI Index’s ominous behavior signaled significant downside for gold, silver and mining stocks.

I wrote:

With the HUI Index acting as the PMs’ canary in the coal mine, the bearish implications are as clear as day when eyeing the long-term chart. In the past three weeks, two key events unfolded:

  1. The stochastic oscillator delivered a clear sell signal.
  2. The self-similarity patterns became increasingly valid.

And with last week’s price action adding further confirmation, investors’ optimism is showing severe cracks in its foundation.

On top of that, even though the HUI Index plunged by more than 10% last week , the carnage may not be over. Case in point: the HUI Index is in the midst of forming the right shoulder of its bearish head & shoulders pattern, and if completed, could result in a profound decline over the medium term. For context, with gold approaching its late-April bottom and its rising medium-term support line, the yellow metal could bounce at roughly $1,750. In the process, the gold miners may follow suit. However, the bearish implications remain intact over the medium term, and a significant slide is likely to follow.

Please see below:

To explain, if you held firm in 2008 and 2013 and maintained your short positions, you almost certainly realized substantial profits. And while there are instances when it’s wise to exit one’s short positions and re-enter at more attractive prices, the smooth declines of gold, silver, and mining stocks mean that the risk-reward of doing so is tilted toward the downside.

Or to put it more bluntly, the prospect of missing out on the forthcoming slide makes exiting the short positions a risky investment decision. For context, we believe that holding the short position is the most prudent course of action. However, if gold, silver and mining stocks become extremely oversold, we may consider covering on a short-term basis.

If that wasn’t enough, I warned previously that the recent plunge was weeks in the making:

I wrote the following about the week start started on May 24 :

What happened three weeks ago was that gold rallied by almost $30 ($28.60) and at the same time, the HUI – a flagship proxy for gold stocks… Declined by 1.37. In other words, gold stocks completely ignored gold’s gains. That shows exceptional weakness on the weekly basis and is a very bearish sign for the following weeks.

To that point, the HUI Index is still following two medium-term historical analogies. To explain, back in 2008, right before a huge slide, in late September and early October gold was still moving to new intraday highs, but the HUI Index was ignoring that, and then it declined despite gold’s rally. However, it was also the case that the general stock market declined then. If stocks hadn’t declined back then so profoundly, gold stocks’ underperformance relative to gold would likely be present but more moderate.

Moreover, in 2012, the HUI Index topped on Sep. 21, and that was just the initial high in gold. At that time the S&P 500 was moving back and forth with lower highs – so a bit more bearish than the current back-and-forth movement in this stock index. And what was the eventual climax? Well, gold moved to new highs and formed the final top (Oct. 5). It was when the S&P 500 almost (!) moved to new highs, and despite both, the HUI Index didn’t move to new highs. Thus, the similarity to how the final counter-trend rally ended in 2012 (and to a smaller extent in 2008) ended is uncanny .

On top of that, the stochastic oscillator (which flashed a clear sell signal ) is singing a similar tune. Not only do these signals often precede massive price declines on their own, but the analogies of 2008 and 2012 serve as confirmation that the huge decline has only just begun and that forecasting lower gold prices is currently justified.

Thus, if history rhymes, as it tends to, the HUI Index will likely decline profoundly and find medium-term support in the 100-to-150 range. For context, high-end 2020 support implies a move back to 150, while low-end 2015 support implies a move back to 100. And yes, it could really happen, even though it seems unthinkable.

The HUI Index retraced a bit more than 61.8% of its downswing in 2008 and in between 50% and 61.8% of its downswing in 2012 before eventually rolling over. Now, in both (2008 and 2012) cases, the final top – the right shoulder – formed close to the price where the left shoulder topped. And in early 2020, the left shoulder topped at 303.02.

That’s why I previously wrote that “it wouldn’t be surprising to see a move to about 300 in the HUI Index”. And that’s exactly what we saw (a move above 320 is still close to 300 from the long-term point of view). To clarify, one head-and-shoulders pattern – with a rising neckline – was already completed, and one head-and-shoulders pattern – with a horizontal neckline – is being completed, but we’ll have the confirmation once miners break to new yearly lows.

Furthermore , three of the biggest declines in the mining stocks (I’m using the HUI Index as a proxy here), all started with broad, multi-month head-and-shoulders patterns. And in all three cases, the size of the declines exceeded the size of the head of the pattern.

As a result, we’re confronted with two bearish scenarios:

  1. If things develop as they did in 2000 and 2012-2013, gold stocks are likely to bottom close to their early 2020 high.
  2. If things develop like in 2008 (which might be the case, given the extremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightly below) their 2016 low.

Keep in mind though: scenario #2 most likely requires equities to participate. In 2008 and 2020, the sharp drawdowns in the HUI Index coincided with significant drawdowns of the S&P 500 . However, with the Fed turning hawkish and investors extremely allergic to higher interest rates, the likelihood of a three-peat remains relatively high.

Let’s zoom in.

To explain, the senior miners’ weekly decline occurred relatively uninterrupted, with little buying pressure witnessed on Jun. 18. Moreover, not only did the GDX ETF close below its April lows and its March highs, but it also dipped below the 61.8% Fibonacci retracement level. Thus, while the senior miners’ RSI (Relative Strength Index) signals a buying opportunity (by falling below 30), the technical damage (breakdown below the 61.8% Fibonacci retracement) justifies the bearish outlook even in the short run. Of course, I remain on the lookout for this breakdown’s invalidation as it would be a sign of potential strength.

Finally, let’s consider the size of the possible corrective upswing based on the analogy to 2012. Back then, the GDX ETF’s corrective upswing didn’t recapture 61.8% or even 38.2% of its previous decline, and the bullish correction was rather “muted” relative to gold. Thus, the notable detail here is that the GDX ETF started its November 2012 correction with the RSI close to 30, but also when it moved slightly below its previous (August) lows, and the final short-term bottom took place after the second (!) day when it declined on big volume.

So, if history is going to continue to rhyme (which seems likely), even if gold corrects quite visibly, gold stocks’ corrective upswing might not be that significant. If we see “screaming short-term buy signals” or something like that, we might close or even briefly switch to the long side, but for now, the trend remains down.

In conclusion, gold, silver and mining stocks’ plight was a humbling experience for many investors. And while the recent slide highlights the importance of investing without emotion, we remain confident that the precious metals will soar once again. However, because secular bull markets don’t occur in a straight line, based on the similarity to how similar situations developed in the past, a final profound decline will likely occur before the metals resume their resurgence. As a result, even though gold, silver, and mining stocks are poised to shine in the long run, I still think that short positions in the precious metals sector – especially in the junior miners – currently remain attractive from a risk-reward perspective.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold: The Fed Wreaked Havoc on the Precious Metals

However, we should stay alert to any possible changes, as no market moves in a straight line. Tread carefully.

On a side note, while I didn’t check it myself (well, it’s impossible to read every article out there), based on the correspondence I’m receiving, it appears I’ve been the only one of the more popular authors to be actually bearish on gold before the start of this week. Please keep that in mind, along with me saying that yesterday’s decline is just the beginning, even though a short-term correction might start soon. Having that in mind, let’s discuss what the Fed did (and what it didn’t do) in greater detail.

Look What You Did

With the U.S. Federal Reserve’s (FED) reverse-repo nightmare frightening the liquidity out of the system, I highlighted on Jun. 17 that the FED raised the interest rate on excess reserves (IOER) from 0.10% to 0.15%.

I wrote:

The FED hopes that by offering a higher interest rate that it will deter counterparties from participating in the reverse repo transactions. However, whether it will or whether it won’t is not important. The headline is that the FED is draining liquidity from the system and increasing the IOER is another sign that the U.S. federal funds rate could soon seek higher ground.

Please see below:

To explain, the red line above tracks the U.S. federal funds rate, while the green line above tracks the IOER. If you analyze the behavior, you can see that the two have a rather close connection. And while we don’t expect the FED to raise interest rates anytime soon, officials’ words, actions and the macroeconomic data signal that the taper is likely coming in September.

And in an ironic twist, while the question of whether it will or whether it won’t seemed reasonable at the time, the tsunami of reverse repurchase agreements on Jun. 17 signal that 0.15% just isn’t going to cut it. Case in point: while the FED hoped that the five-basis-point olive branch would calm institutions’ nerves, a record $756 billion in excess liquidly was shipped to the FED on Jun. 17 . For context, it was nearly $235 billion more than the daily amount recorded on Jun. 16.

Please see below:

To explain the significance, I wrote previously:

A reverse repurchase agreement (repo) occurs when an institution offloads cash to the FED in exchange for a Treasury security (on an overnight or short-term basis). And with U.S. financial institutions currently flooded with excess liquidity, they’re shipping cash to the FED at an alarming rate.

The green line above tracks the daily reverse repo transactions executed by the FED, while the red line above tracks the U.S. federal funds rate. Moreover, notice what happened the last time reverse repos moved above 400 billion? If you focus your attention on the red line, you can see that after the $400 billion level was breached in December 2015, the FED’s rate-hike cycle began. Thus, with current inflation dwarfing 2015 levels and U.S. banks practically throwing cash at the FED, is this time really different?

Furthermore, I noted on Jun. 17 that the FED’s latest ‘dot plot’ was a hawkish shift that market participants were not expecting.

I wrote:

The perceived probability of a rate hike by the end of 2022 sunk to a 2021 low on Jun. 12. However, after the FED’s material about-face on Jun. 16, I’m sure these positions have been recalibrated.

Please see below:

And as if the chart above had been inverted, the perceived probability of a rate hike by the end of 2022 has now surged to more than 90%.

The Death Toll of June 17th

In addition, while I’ve been warning for months that the bond market’s fury would eventually upend the PMs, not only has the FED’s inflationary misstep rattled the financial markets, but the U.S. 30-year fixed-rate mortgage (FRM) jumped to 3.25% on Jun. 17.

Please see below:

Source: Mortgage News Daily

Furthermore, please read what Matthew Graham, COO of Mortgage News Daily, had to say:

“Markets were somewhat surprised by the Fed’s rate hike outlook. Granted, the Fed Funds Rate (the thing the Fed would actually be hiking) doesn’t control mortgage rates, but the outlook speaks to how quickly the Fed would need to dial back its bond buying programs (aka “tapering”). Those programs definitely help keep rates low. The sooner the Fed begins tapering, the sooner mortgage rates will see some upward pressure .”

To that point, with tapering prophecies officially morphing from the minority into the consensus, the PMs weren’t the only commodities sent to slaughter on Jun. 17. For example, the S&P Goldman Sachs Commodity Index (S&P GSCI) plunged by 2.37% as the inflationary unwind spread. For context, the S&P GSCI contains 24 commodities from all sectors: six energy products, five industrial metals, eight agricultural products, three livestock products and two precious metals.

Exacerbating the selling pressure, China’s National Food and Strategic Reserves Administration announced on Jun. 17 that it would release its copper, aluminum and zinc supplies “in the near future” in a bid to contain the inflationary surge that’s plaguing the region. As a result, if the psychological forces that led to the surge in cost-push inflation come undone, the USD Index could move from the outhouse to the penthouse.

To explain, I wrote on Apr. 27:

Why is the behavior of the S&P GSCI so important? Well, if you analyze the chart below, you can see that the S&P GSCI’s pain is often the USD Index’s gain.

To explain, the red line above tracks the USD Index, while the green line above tracks the inverted S&P GSCI. For context, inverted means that the S&P GSCI’s scale is flipped upside down and that a rising green line represents a falling S&P GSCI, while a falling green line represents a rising S&P GSCI. More importantly, though, since 2010, it’s been a near splitting image.

Inflation Is Still There

In the meantime, though, inflationary pressures are far from contained. And while the S&P GSCI’s plight would be a boon for the USD Index, the greenback still has plenty of other bullets in its chamber. Case in point: with the FED poised to taper in September and investors underpricing the relative outperformance of the U.S. economy, VANDA Research’s latest FX Outlook signals that over-optimism abroad could lead to a material re-rating over the summer.

Please see below:

To explain, the chart on the right depicts investors’ expectations of economic strength across various regions. If you analyze the second (CAD) and the third (GBP) bars from the right, you can see that positioning is more optimistic than the economic growth that’s likely to materialize. Conversely, if you analyze the first bar (USD) from the left, you can see that positioning is more pessimistic than the economic growth that’s likely to materialize. As a result, with U.S. GDP growth poised to outperform the U.K., Canada, and the Eurozone, an upward re-rating of the USD Index could intensify the PMs selling pressure over the medium term.

On top of that, while the inflation story is far from over (and will pressure the FED to taper in September), the Philadelphia FED released its Manufacturing Business Outlook Survey on Jun. 17. And while manufacturing activity dipped in June, “the diffusion index for future general activity increased 17 points from its May reading, reaching 69.2, its highest level in nearly 30 years .”

In addition, “the employment index increased 11 points, recovering its losses from last month,” and “the future employment index rose 2 points … [as] over 59 percent of the firms expect to increase employment in their manufacturing plants over the next six months, compared with only 5% that anticipates employment declines.” For context, employment is extremely important because a strengthening U.S. labor market will likely put the final nail in QE’s coffin.

But saving the best for last:

“The prices paid diffusion index rose for the second consecutive month, 4 points to 80.7, its highest reading since June 1979 . The percentage of firms reporting increases in input prices (82 percent) was higher than the percentage reporting decreases (1 percent). The current prices received index rose for the fourth consecutive month, moving up 9 points to 49.7, its highest reading since October 1980 .”

Please see below:

Source: Philadelphia FED

Investment Clock Is Ticking

Also, signaling that QE is living on borrowed time, Bank of America’s ‘Investment Clock’ is ticking toward a bear flattener in the second half of 2021. For context, the term implies that short-term interest rates will rise at a faster pace than long-term interest rates and result in a ‘flattening’ of the U.S. yield curve.

Please see below:

To explain, the circular reference above depicts the appropriate positioning during various stages of the economic cycle. If you focus your attention on the red box, you can see that BofA forecasts higher interest rates and lower earnings per share (EPS) for S&P 500 companies during the back half of the year.

As further evidence, not only is the FED’s faucet likely to creak in the coming months, but fiscal stimulus may be nearing the dry season as well.

Please see below:

To explain, the blue bars above track the U.S. budget deficit as a percentage of the GDP. If you analyze the red circle on the right side of the chart, you can see that coronavirus-induced spending was only superseded by World War Two. Moreover, with the law of gravity implying that ‘what goes up must come down,’ the forthcoming infrastructure package could be investors’ final fiscal withdrawal.

The Housing Market

Last but not least, while the S&P 500 has remained relatively upbeat in recent days, weakness in the U.S. housing market could shift the narrative over the medium term.

Please see below:

To explain, the red line above tracks the S&P 500, while the green line above tracks U.S. private building permits (released on Jun. 16). If you analyze the arrows, you can see that the former nearly always rolls over in advance of the latter . For context, the S&P 500 initially peaked before building permits in 2018 and alongside in 2015. However, in 2018, when the S&P 500 recovered and continued its ascent – while building permits did not – the U.S. equity benchmark suffered a roughly 20% drawdown. Thus, if you analyze the right side of the chart, you can see that building permits peaked in January and have declined significantly. And if history is any indication, the S&P 500 will eventually follow suit.

In conclusion, the PMs imploded on Jun. 17, as taper trepidation and the USD Index’s sharp re-rating dropped the guillotine on the metals. And with the FED’s latest ‘dot plot’ akin to bullet holes in the PMs, the walking wounded is still far from a recovery. With inflation surging and the FED likely to become even more hawkish in the coming months, the cycle has materially shifted from the goldilocks environment that the metals once enjoyed. And with the two-day price action likely the opening act of a much larger play, the PMs could be waiting months for another round of applause.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold: Skis Are On, Time to Choose the Slope

In the skiers’ vernacular, a ski trail is a very easy way down, with a light gradient at full length. It looks like the late-2012 decline in gold. However, there is also a black slope – a steep and dangerous road on which inexperienced skiers can hurt themselves badly; it’s very similar to what happened to gold in 2008 and 2020. While we don’t know yet which way we will choose to go down (as we have probably just reached the top), the nearest FOMC event will most likely shove us towards one of them. Let’s put our helmets on.

The world is holding its breath for today’s comments from the Fed, knowing that one of the approaches would be a game-changer.

If the Fed hints that it’s ready to taper its stimulus, the long-term rates will likely rally, whereas stocks, precious metals and commodities will likely slide. But if they don’t do that, it seems that whatever has been going on in the above markets will likely continue based on their technical developments.

In the case of gold, it means either a measured late-2012-style decline or a more powerful slide similar to the moves we saw in 2008 and 2020. Which one will it be? Either way, the next big move is likely to be to the downside (even if dovish comments were to spur some immediate-term gains). Why? Because history tends to rhyme, and right now, gold is simply repeating its price patterns from the past that were preceded by relatively similar events (invalidation of the breakout to new all-time highs – just like in 2008; similarity with regard to price moves, volume, and key indicators – just like in 2011-2012).

Gold declined once again today, but since it remains between the declining medium-term support line and the rising short-term resistance line, the tug-of-war between bulls and bears remains in place.

The above chart is likely either perplexing, confusing or appearing random for those who haven’t stumbled upon the technical analysis toolkit. But to those who have learned about its principles and have used it themselves, the above chart is very exciting. And to those who took the expertise to the next level and see an even bigger picture, the chart is relatively calm, and normal.

Gold: How Exciting Are Recent Moves?

Why would the above chart be so exciting? Because gold just broke below its rising dashed support line and closed the day below it. This is the first time that it managed to do that, despite coming close to it a few times before. The excitement is even bigger because of what happened on an intraday basis – gold moved back to its declining support line based on the 2020 and 2021 highs and then it moved back up. Consequently, based on the same session, both bulls and bears have an indication that “they were right all along”. Was yesterday’s session a major breakdown, or a confirmation of the May breakout?

But how excited can you get if it’s clear that gold is simply repeating its price patterns from the past that were preceded by relatively similar events (invalidation of breakout to new all-time highs – just like in 2008; similarity with regard to price moves, volume, and key indicators – just like in 2011-2012).

Watching a football match is not as exciting when you already know the outcome, is it?

What’s likely to happen now? Gold is likely to move back and forth, but will ultimately break below the declining support line, which will be a major “uh-oh” moment for those who think that gold will move higher from here based on the very positive fundamental situation. Yes, it is very positive, but it doesn’t mean that gold would rally right away. It could decline despite the fundamentals, just like it did in 2008 and in 2013. And it seems that it’s about to slide.

Back in 2008, gold corrected to 61.8% Fibonacci retracement , but it stopped rallying approximately when the USD Index started to rally, and the general stock market accelerated its decline.

Taking into consideration that the general stock market has probably just topped, and the USD Index is about to rally, then gold is likely to slide for the final time in the following weeks/months. Both above-mentioned markets support this bearish scenario and so do the self-similar patterns in terms of gold price itself.

Moreover, while the pace of gold’s decline in 2012 started off slow, the momentum picked up later on as the drawdown became more vicious. As a result, the tepid pace of gold’s current slide remains deceptive and isn’t a cause for concern.

Please see below:

The relatively broad bottom with higher lows is what preceded both final short-term rallies – the current one, and the 2012 one. Their shape as well as the shape of the decline that preceded these broad bottoms is very similar. In both cases, the preceding decline had some back-and-forth trading in its middle, and the final rally picked up pace after breaking above the initial short-term high.

Interestingly, the 2012 rally ended on huge volume, which is exactly what we saw also on May 19 this year. Consequently , forecasting much higher gold prices here doesn’t seem to be justified based on the historical analogies.

The thing I would like to emphasize here is that gold didn’t form the final top at the huge-volume reversal on Sep. 13, 2012. It moved back and forth for a while and moved a bit above that high-volume top, and only then the final top took place (in early October 2012).

The same happened in September and in October 2008. Gold reversed on huge volume in mid-September, and it was approximately the end of the rally. The final top, however, formed after some back-and-forth trading and a move slightly above the previous high.

Consequently, the fact that gold moved a bit above its own high-volume reversal (May 19, 2021) is not an invalidation of the analogy, but rather its continuation.

The lower part of the above chart shows how the USD Index and the general stock market performed when gold ended its late-2012 rally and was starting its epic decline. In short, that was when the USD Index bottomed, and when the general stock market topped.

Also, please note that while it might seem bullish that gold managed to rally above its declining black resistance line recently (the one based on the 2020 top and the 2021 top), please note that the same happened in 2012 – I marked the analogous line with red. The breakout didn’t prevent gold from sliding. When the price reached the line, we saw a short-term bounce, but nothing more than that – the gold price fell through it in the following weeks. Consequently, if history rhymes, the support provided by the current declining medium-term support line is unlikely to trigger anything more than a short-term bounce. And since we’re already after this event, gold’s next attempt to break below it might be successful.

Having said that, let’s take a look at silver.

Silver’s Failed Attempts to Break Out

Silver price confirmed its breakdown below its rising support line, and it has just finished invalidating its fifth attempt to break above the early January highs. This is a clearly bearish combination, even without taking into account the similarity between now, 2020, and 2008.

Let’s keep in mind that silver might hesitate to decline substantially at first, but then play a huge catch-up close to the end of the decline – just as it did in 2020.

Miners: Breaking Below Support Lines Without USDX Help

The breakdown in the GDX ETF is also crystal clear. Moreover, it’s almost confirmed, as the GDX ETF closed below its rising dashed support line for the second day in a row.

We saw a buy signal from the stochastic indicator, but the breakdown in terms of closing prices is more important, as the buy signals from the stochastic (below 20) were not that reliable so far this year. Please note that the mid-January buy signal was followed by much lower prices in the following weeks. The same was the case with the first buy signal that we saw in late February.

And indeed, the supposedly bullish signal has already been reversed by another sell signal. Thus, the trend remains down and the outlook remains bearish.

The breakdown is also clear in the case of the 4-hour chart featuring the proxy for junior miners – the GDXJ ETF.

On the above chart, we see that the huge-volume rally has once again worked as a sell signal – in the past, it often heralded short-term declines like the current one.

What’s particularly interesting, gold and gold miners have broken decisively below their rising support lines without the USD Index’s help. This is a sign of weakness in the PMs market.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

USDX: The Cleanest Shirt Among the Dirty Laundry

The USD Index (USDX)

With the USD Index washing away its sins in recent weeks, the greenback has recorded five daily rallies of more than 0.40% since May 26. And with the up days growing stronger and the down days growing weaker, the change in the trend will be clear to more and more traders, which eventually would likely cause a shift in the sentiment. Case in point: while gold, silver and mining stocks are looking forward to their summer vacations (deep dives seem to be in the vacation plans, especially given today’s pre-market ~$20 decline in gold) , the USD Index has been hard at work rehabbing its reputation. And with the U.S. dollar easily the cleanest shirt among the currency basket of dirty laundry, the smell of fresh linen has begun to pique investors’ interest.

For one, not only are the USD Index’s fundamentals trending up, but the technicals are also moving in the same direction. And after the USD Index closed visibly above its previous weekly close, the greenback’s verified breakout above its declining resistance line remains a source of optimism. Moreover, while the USD Index still remains below its dashed rising resistance line and its 50-day moving average, subtle signs signal that the dollar is slowly cleaning up its act.

Please see below:

Second, while the USD Index’s rally occurred slowly at first in 2016, the momentum gathered steam as sentiment shifted. And while we’re only in the first stage of the two-stage process, it’s important to remember that investors are forward-looking.

Third, the USD Index recently bounced off of a triple (declining) bottom and prior instances were followed by significant rallies (the identical patterns formed in mid-and-late 2020 and are marked by the shaded green boxes above). During that time, the USD Index originally declined steadily before zigzag corrections culminated with new lows. However, with the third time being a charm, the third distinctive bottom was the final one.

For context, the USDX sunk like a stone in July 2020, before moving back and forth while still declining in August. Similarly, in November 2020, the USDX fell from grace once again (there was one exception) before moving back and forth while still declining in December. More importantly, though, ever since the final days of March, we’ve seen the same thing all over again. After the USD Index lost its confidence in April, we saw back-and-forth movement with lower lows and lower highs in May. However, with the third distinctive low likely already achieved, the USD Index’s best days may lie ahead.

Head & Shoulders Patterns Ahead

And what happened to gold, silver and mining stocks in the time of the two previous analogues?

Well, in August, gold topped without waiting for USD’s final bottom – which is natural, given how extremely overbought it was at the time. Likewise, in early January gold topped (which was much more similar to the current situation given the preceding price action) when the USDX formed its third and final distinctive bottom.

In addition, while the development is more of a wildcard at the moment, the USD Index might be in the early innings of forming an inverted head & shoulders pattern. For context, an inverted H&S pattern is a bullish development that if formed, could usher the USD Index to about 97-98. However, completing the right shoulder requires an upward breach of 93 (the blue line on the chart above), so at this point, it’s more of an indication than a confirmation.

However, if we turn the pattern upside down, the Euro Index might be in the midst of forming a bearish H&S pattern . If you analyze the right side of the chart below, you can see that the symmetrical pattern has the current price action mirroring the summer of 2020. And while we’re still in the early innings of forming the right shoulder, three peaks were recorded during the second half of 2020 before the Euro Index eventually rolled over.

Likewise, with a symmetrical setup that seems to already be in motion, the Euro Index may be heading down a similar path of historical ruin. In the second half of 2020, the decline was not that big, but it’s no wonder that this was the case as that was only the left shoulder of the pattern. Completion of the right shoulder, however, would imply another move lower, at least equal to the size of the head – to about the June 2020 lows or lower.

Please see below:

Moreover, with the USD Index’s triple bottom mirrored by a likely triple top in the Euro Index , last week’s decline actually ushered the Euro Index materially below the dashed resistance line of its monthly channel. And with the price action mirroring what we witnessed in mid-to-late 2020 – right before the Euro Index plunged – investors’ confidence could soon turn into fear.

Furthermore, the completion of the masterpiece could have a profound impact on gold, silver and mining stocks. To explain, gold continues to underperform the euro. If you analyze the bottom half of the chart above, you can see that material upswings in the Euro Index have resulted in diminishing marginal returns for the yellow metal. Thus, the relative weakness is an ominous sign, and if the Euro Index reverses, it could weigh heavily on the precious metals over the medium term. That’s another point for the bearish price prediction for gold.

The 2016 Analogue

Also, foretelling another revival, the USD Index has hopped into the time machine and set the dial to 2016. With the flashback scrubbing the stains off of the USD Index’s 2016 downswing, Mr. Clean could be arriving at just the right time.

As you can see on the above chart, what we saw this year is quite similar to what happened in 2016. If the analogy continues, the back-and-forth trading is likely to be followed by an upward acceleration. The trigger for it could be the rally back above the 50-day moving average and the rising dashed line. The confirmed breakout above both in 2016 resulted in sharper rallies in the USDX and much lower gold prices (gold declined about $200 between early October 2016 and its December 2016 lows).

Finally, the USD Index’s long-term breakout also remains intact . And when we steady the binoculars and observe the currency landscape, the greenback’s recent weakness is largely inconsequential.

Also, please note that the correlation between the USD Index and gold is now strongly negative (-0.93 over the last 10 days). The same thing happened in early January 2021 and in late July – August 2020; these were major tops in gold.

The bottom line?

Once the momentum unfolds , ~94.5 is likely the USD Index’s first stop. In the months to follow, the USDX will likely exceed 100 at some point over the medium or long term. Keep in mind though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is outperforming the Eurozone and the EUR/USD accounts for nearly 58% of the movement of the USD Index – the relative performance is what really matters .

In conclusion, investors are well aware of the USD Index’s dirty laundry, and the euro’s squeaky-clean image is starting to show stains. Moreover, with the U.S. Federal Reserve (FED) poised to come clean and scale back its asset purchases in September, the USD Index should shine over the medium term. More importantly, though, with gold, silver and mining stocks exhibiting strong negative relationships with the U.S. dollar, the greenback’s eventual shower could send all of the precious metals’ gains down the drain.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

The FED Holds the Market. How Long Will It Last?

It’s a Bird, It’s a Plane, It’s the FED

With Jerome Powell, Chairman of the U.S. Federal Reserve (FED), donning his cape like Superman and his monetary crew akin to The Avengers, investors’ faith in the FED was on full display on Jun. 10. Case in point: with the headline Consumer Price Index (CPI) surging by 4.93% year-over-year (YoY) – the highest YoY percentage increase since 2008 – the bond, stock and currency markets barely flinched.

The commodity PPI surged by 17.25% YoY in April. And if you exclude the 17.36% YoY jump in July 2008, it was the largest YoY percentage increase since December 1974. For context, the commodity PPI often leads the headline CPI and that’s why tracking the former’s movement is so important. Moreover, reconnecting with the green line implies a ~5.50% YoY percentage increase in the headline CPI.

Please see below:

And with the indicator proving quite prescient once again, the gap on the right side of the chart was nearly filled on Jun. 10.

Furthermore, while investors continue to see the world through the FED’s X Ray Vision, “base effects” are now the primary defense among the superhero’s supporters. However, as I’ve mentioned on several occasions, it’s important to remember that the core CPI increased by 0.74% month-over-month (MoM). And if you exclude April’s rise of 0.92% (which was only one month ago), it was the highest MoM percentage increase since 1982.

Please see below:

The FED Has Become Independent Thought’s Kryptonite

On top of that, with the YoY percentage change in the headline CPI running extremely hot, the real federal funds rate is now at its second-lowest level ever . For context, the federal funds rate is the overnight lending rate set by the FOMC, while the real federal funds rate is adjusted for inflation by subtracting the YoY percentage change in the headline CPI.

Please see below:

So how can we explain investors’ lack of prudence?

Well, as Bloomberg eloquently put it on Jun. 10…

Source: Bloomberg

Thus, with the FED mesmerizing investors and keeping them under its spell, market participants have determined that it’s easier to follow the FED rather than fight it. However, when screaming fundamentals are dismissed as irrelevant, it often ends badly for those who fail to heed the warnings. To that point, while the Producer Price Index (PPI) – which will be released on Jun. 15 – will provide important clues on the inflationary trajectory, Nordea’s trend model signals that YoY CPI prints still have plenty of room to run.

Please see below:

To explain, the light blue line above tracks the YoY percentage change in the headline CPI, while the dark blue line above tracks the projected YoY percentage change in Nordea’s trend model. If you analyze the right side of the chart, you can see that April and May’s prints were accurately forecasted. More importantly, though, with the dark blue line signaling that the headline CPI should rise by more than 7% YoY in the coming months, investors’ faith in the FED will be put to the test over the medium term.

Likewise, even though the FED has become independent thought’s kryptonite, if investors dismiss the scorching inflationary summer, they’ll likely incur deeper burns in the fall.

To explain, I wrote on Jun. 10:

With the Jun. 15/16 policy meeting not leaving enough time for FED officials to “communicate very early, very often what we’re going to do” (spoken by Philadelphia FED President Patrick Harker) and the Jul. 27/28 policy meeting excluding a summary of the FED’s economic projections, either the Jackson Hole Economic Symposium (late August) or the Sep. 21/22 policy meeting is when the fireworks will likely begin.

With the U.S. Bureau of Labor Statistics (BLS) revealing on Jun. 8 that U.S. job openings surged to an all-time high of 9.286 million – and came in well above the consensus estimate of 8.300 million – the only thing depressing the U.S. labor market are ill-advised enhanced unemployment benefits.

Please see below:

To explain, the red line above tracks U.S. nonfarm payrolls, while the green line above tracks U.S. job openings. If you analyze the relationship, you can see that the latter is often a strong predictor of the former. However, with enhanced unemployment benefits still in effect until mid-to-late June or early July (across ~25 states) – and nationwide until Sep. 6 (expected) – the shift likely won’t occur overnight. But once the benefits expire, U.S. nonfarm payrolls will likely spike in August (reflecting July’s data) and September (reflecting August’s data) and lift the U.S. 10-Year Treasury yield and the USD Index in the process.

The bottom line? With a potential spike in the Shelter CPI likely to coincide with a major resurgence in the U.S. labor force, September has all of the necessary ingredients to force the FED’s hand .

The ECB Is Not Reducing Anything

On top of that, I warned that prophecies of the European Central Bank (ECB) reducing its bond-buying program in June were much more semblance than substance.

I wrote on Apr. 27 :

Recent whispers of the ECB tapering its bond-buying program are extremely premature. With the European economy still drastically underperforming the U.S., it’s actually more likely that the ECB increases the pace of its bond-buying program.

And after the ECB released its monetary policy decision on Jun. 10, what was clear before now is the reality.

Please see below:

Source: ECB

In addition, ECB President Christine Lagarde said the following during her press conference:

  1. “The U.S. economic situation and the Euro Area economic situation are very different stories. The two economies are at different points in the recovery cycle.
  2. “Any discussion about exit from the PEPP would be premature, too early, and it will come in due course, but certainly, for the moment it is too early and premature – simple as that.”
  3. “Any kind of transition, exit, whatever you call it, has not been discussed”

And although the ECB increased its Eurozone GDP growth, as well as inflation expectations, and Lagarde even said that “there was [a] debate on the pace of the purchase, on some of the analytical aspects of the use of our instruments,” she reiterated:

Source: Reuters

The bottom line?

While the EUR/USD remains materially overvalued, the ECB’s policy is not the only fundamental data point that supports this thesis. Case in point: it was a trifecta for Germany (Europe’s largest economy) on Jun. 9, with imports, exports, and consequently the German trade balance, all missing economists’ consensus estimate. To explain, exports rose by 0.30% MoM versus 0.5% expected, imports fell by 1.7% MoM versus a decline of 1.1% expected and the trade balance came in at €15.9 billion versus €16.3 billion expected.

Please see below:

The S&P 500 Is Losing Momentum

Finally, while it may not be visible on the surface, the S&P 500’s momentum continues to decelerate. Even though the U.S. equity benchmark followed the ‘ don’t fight the FED’ mantra to another all-time high on Jun. 10, optimism is waning. Case in point: while the YoY percentage change in the FED’s balance sheet (released on Jun. 10) was roughly flat this week, the YoY percentage change in the S&P 500 continues to move lower. And with a summertime soirée likely the last “hurrah!” for the S&P 500 and the FED’s balance sheet – with all signs pointing to the latter tightening in September – a move lower for both variables will likely occur over the medium term.

Please see below:

The red line above tracks the YoY percentage change in the S&P 500, while the green line above tracks the YoY percentage change in the FED’s balance sheet. If you analyze the relationship, you can see that investors’ optimism often rises and falls with the pace of the FED’s asset purchases. To that point, the FED’s YoY rate of expansion of its balance sheet peaked (for good) during the third week of February and has been in free fall ever since. Similarly, the S&P 500’s YoY rate of expansion peaked during the third week of March and has declined substantially.

The bottom line? With the weekly metric hitting a 2021 low on Jun. 3 and a reduction of the FED’s bond-buying program poised to push the YoY percentage change into negative territory in the coming months (again, likely in September), the S&P 500 is slowly running out of gas.

In conclusion, the FED has mesmerized the investing public once again, and saving the day doesn’t even require the central bank to do anything anymore. However, with reality undefeated and a major regime shift likely to occur in September, there are only a few hours left until the clock strikes midnight. Moreover, with bond market imbalances at or near their all-time highs, the PMs will likely detest the forthcoming climax. Think about it: if the PMs can only muster tepid rallies when the fundamentals are historically (though synthetically) tilted in their favor, the price action could get ugly once the sanity finally prevails.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold: Do Not Underestimate My… Copper?

Do you know what the key commodity in today’s world is? Crude oil. It’s the most commonly used good on the planet. In terms of versatility and number of applications, silver is not far behind, but there is also one more market that definitely comes to one’s mind when one hears “world commodity” – copper. And for a good reason – while it doesn’t have as unique properties as silver or gold, copper is much cheaper and thus more widely available.

Consequently, what’s happening in copper prices might have quite profound effects on the rest of the world, including the precious metals market. And the thing is: something very important happened to the price of copper recently.

The Importance of the Brown Metal

Namely, copper has just invalidated its breakout to new highs, which means that – just like in the case of gold in August 2020 – it wasn’t strong enough to soar higher. Well, it’s not to say that copper is weak, as it has more than doubled its price since the 2020 lows. However, it does mean that it’s likely time for a bigger corrective downswing, especially given that we haven’t seen one in many months. For instance, when gold invalidated its breakout above the 2011 high despite very bullish fundamentals, it meant that forecasting gold at lower levels was very much justified.

Likewise, when copper failed to hold its breakout above the 2008 high back in 2011, it was followed by a multi-year decline. Will the same happen this time? I wouldn’t bet on that given the amount of money being pumped into the system, but even if this is not the case, copper is likely to suffer a significant drawdown on a temporary basis. No market can move up or down in a straight line, and neither copper nor gold nor silver are exceptions to this rule.

Ok, but why is it important for the precious metals investors?

Because of two things:

  1. Both markets tend to move in a big way at similar times. The more local moves can vary, but the really big price moves are usually aligned. For example, the 2008 – 2011 rally and the fact that they both bottomed in late-2015 / early-2016.
  2. The copper price is quite closely related to the general stock market and the former’s inability to hold above its previous highs seems to be an indication of a change in the trend in the general stock market as well.

As I wrote before, the general stock market’s decline is not required for the precious metals sector to decline, but it would likely exacerbate the decline, just like it did in 2008 – especially in the case of silver and mining stocks.

And speaking of stocks, let’s check what the S&P 500 is doing.

The markets are self-similar (which is another way of saying that they have a fractal nature), which generally means that while the history tends to rhyme, it also tends to rhyme in similar shapes of alike or various sizes.

For example, the rally from 2018–2020 seems very similar to the rally from 2020 to the present. Both rallies started after a sharp decline, and the first notable correction took the form of back-and-forth trading around the previous high. I marked those situations with big rectangles.

Then the rally continued with relatively small week-to-week volatility. I created rising support lines based on the final low of the broad short-term consolidation and the first notable short-term bottom.

This line was broken, and some back-and-forth trading followed, but it was only about half of the previous correction in terms of price and time.

Then, we saw a sharp rally that then leveled off. And that was the top . The thing that confirmed the top was the visible breakdown below the rising support line right after stocks invalidated a tiny breakout to new highs. That’s what happened in February 2020, and that’s what seems to be taking place right now.

Back in 2020, the rally ended when the weekly RSI moved above 70 once again and when the S&P moved slightly to its new highs. While the history doesn’t have to repeat itself to the letter, if we see another small move higher – to new highs – that also takes the RSI above 70, please keep in mind that it’s not really a bullish development, but actually history forming its final rhyme. And the implications appear bearish for the precious metals sector, as it’s likely to be hit by the first wave of stock market declines – just like it was the case in 2008, 2020, and… 1929.

Moreover, mining stocks’ performance relative to hold has been heralding the declines across the precious metals market for some time now.

While gold is not doing much today, it’s important to note that yesterday it moved quite close to its previous highs (and visibly above $1,900) before declining. And how did gold miners react?

In short, they didn’t. And the GDX ETF has just closed at a new monthly low.

Even without considering the invalidation of the breakout to new highs, the sell signal from the RSI and stochastic indicators, and even without noticing that the GDX corrected to its 61.8% Fibonacci retracement without invalidating it, one can clearly see that gold stocks refused to follow gold higher during the most recent rebound. This is bearish – and quite profoundly so.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor.

By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold Miners: Which Door Will Investors Choose?

The Monty Hall problem is a form of a probability puzzle, and what it shows is immensely unintuitive. Suppose you are on a game show, and you need to choose one of three doors. Behind one of them is a car and behind the others, goats. You pick a door, and then the host (who knows what’s behind them) opens one of the remaining doors, behind which there is a goat. The host now asks: “Do you want to change your door choice for the remaining doors?” So, what do you do?

It turns out that if you change the door, the probability of winning the car increases… two times! You have a 2/3 chance, instead of a 1/3. Tremendously unintuitive, indeed, but what if the same is happening on the market now? With a bullish prospect representing the door of the first choice, and the technicals and fundamentals the host’s help, wouldn’t it be safer to switch the door to win eventually?

The Gold Miners

With investors stuck in their own version of the Monty Hall problem , guessing ‘what’s behind door No.1’ has market participants scrambling to find the bullish gateway. However, with doors two and three signaling a much more ominous outcome for gold, silver and mining stocks, the key to unlocking their future performance may already be hiding in plain sight.

Case in point: with the analogue from 2012 signaling a forthcoming rush for the exits, there are no fire escapes available for investors that overstay their welcome. And because those who cannot remember the past are condemned to repeat it (George Santayana), doubters are likely to lose more than just their pride.

While the most recent price action is best visible in the short-term charts, it is actually the HUI Index’s very long-term chart that provides the most important details (today’s full analysis includes 44 charts, but the graph below is one of the key ones). The crucial thing happened two weeks ago, and what we saw last week was simply a major confirmation.

What happened two weeks ago was that gold rallied by almost $30 ($28.60) and at the same time, the HUI – a flagship proxy for gold stocks… Declined by 1.37. In other words, gold stocks completely ignored gold’s gains.

That shows exceptional weakness on the weekly basis and is a very bearish sign for the following weeks. And it has important historical analogies.

Back in 2008, right before a huge slide, in late September and early October gold was still moving to new intraday highs, but the HUI Index was ignoring that, and then it declined despite gold’s rally. However, it was also the case that the general stock market declined then. If stocks hadn’t declined back then so profoundly, gold stocks’ underperformance of gold would likely be present but more moderate. In fact, that’s exactly what happened in 2012.

The HUI Index topped on September 21, 2012, and that was just the initial high in gold. At that time the S&P 500 was moving back and forth with lower highs – so a bit more bearish than the current back-and-forth movement in this stock index. What happened in the end? Gold moved to new highs and formed the final top (October 5, 2012). It was when the S&P 500 almost (!) moved to new highs, and despite both, the HUI Index didn’t move to new highs.

The similarity to how the final counter-trend rally ended in 2012 (and to a smaller extent in 2008) ended is uncanny. The implications are very bearish for the following weeks, especially given that the gold price is following the analogy to 2008 and 2012 as well.

All the above is what we had already known last week. In that case, let’s move to last week’s confirmation. The thing is that the stochastic oscillator just flashed a clear sell signal . This is important on its own as these signals often preceded massive price declines. However, extremely bearish implications come from combining both: the sell signal and the analogy of 2008 and 2012. Therefore, we should consider the sell signal in the HUI-based stochastic oscillator as yet another sign serving as confirmation that the huge decline has just begun.

Thus, if history rhymes, as it tends to, the HUI Index will likely decline profoundly. How low could the gold stocks fall? If the similarity to the previous years continues, the HUI could find medium-term support in the 100-to-150 range. For context, high-end 2020 support implies a move back to 150, while low-end 2015 support implies a move back to 100. And yes, it could really happen, even though it seems unthinkable.

But which part of the mining stock sector is likely to decline the most? In my view, the junior mining stocks.

The Junior Miners

GDXJ is underperforming GDX just as I’ve been expecting it to. Once one realizes that GDXJ is more correlated with the general stock market than GDX is, GDXJ should be showing strength here, and it isn’t. If stocks don’t decline, GDXJ is likely to underperform by just a bit, but when (not if) stocks slide, GDXJ is likely to plunge visibly more than GDX.

Expanding on that point, the GDXJ/GDX ratio has been declining since the beginning of the year, which is remarkable because the general stock market hasn’t plunged yet. And once the general stock market suffers a material decline, the GDXJ ETF’s underperformance will likely be heard loud and clear.

Please see below:

Why haven’t the juniors been soaring relative to senior mining stocks? What makes them so special (and weak) right now? In my opinion, it’s the fact that we now – unlike at any other time in the past – have an asset class that seems similarly appealing to the investment public. Not to everyone, but to some. And this “some” is enough for juniors to underperform.

Instead of speculating on an individual junior miner making a killing after striking gold or silver in some extremely rich deposit, it’s now easier than ever to get the same kind of thrill by buying… an altcoin (like Dogecoin or something else). In fact, people themselves can engage in “mining” these coins. And just like bitcoin seems similar to gold to many (especially the younger generation) investors, altcoins might serve as the “junior mining stocks” of the electronic future. At least they might be perceived as such by some.

Consequently, a part of the demand for juniors was not based on the “sympathy” toward the precious metals market, but rather on the emotional thrill (striking gold) combined with the anti-establishment tendencies ( gold and silver are the anti- metals, but cryptocurrencies are anti-establishment in their own way). And since everyone and their brother seem to be talking about how much this or that altcoin has gained recently, it’s easy to see why some people jumped on that bandwagon instead of investing in junior miners.

This tendency is not likely to go away in the near term, so it seems that we have yet another reason to think that the GDXJ ETF is going to move much lower in the following months – declining more than the GDX ETF. The above + gold’s decline + stocks’ decline is truly an extremely bearish combination, in my view.

In conclusion, once gold, silver and mining stocks’ doors finally slam shut, over-optimistic investors will likely go down with the ship. And with the most volatile segments of the precious metals market eliciting the most bearish signals, those left holding the bag will likely wonder how it all went wrong. Moreover, with gold’s relative outperformance signaling waning investors’ optimism, the miners – and more specifically, the GDXJ ETF – will likely suffer the brunt of the forthcoming selling pressure. The bottom line? With the walls closing in on gold, silver and mining stocks, the game show will likely end with investors left empty-handed.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported.

The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Gold: First Steps Down in the Short Term

Yesterday’s (Jun. 2) and today’s sessions were quite rich in signals for gold, silver, and mining stocks, but only if one knows where to watch.

Gold: Short-Term Moves

Gold closed ~$5 higher yesterday, and this move took place on relatively low volume. In fact, gold hasn’t rallied on volume this low since Apr. 26. This is a bearish sign for the short term, and indeed after the Apr. 26 session, gold moved lower in the following days.

And, right on cue, gold was about $15 down in today’s pre-market trading . While this decline might seem surprising to some, it’s actually a perfectly natural thing for gold to do right now.

The low-volume daily rally was only a confirmation, as we knew that Tuesday’s daily reversal was critical all along – based on the triangle-vertex-based reversal we recently saw. Combination of this with highly overbought RSI, a sell signal from the stochastic indicator, and, most importantly, the analogies to how the situation in gold developed in 2008 and 2012, provides us with an extremely bearish outlook for gold.

Many other factors are pointing to these similarities, and two of them are the size of the correction relative to the preceding decline and to the previous rally. In 2012 and 2008, gold corrected to approximately the 61.8% Fibonacci retracement level. Gold was very close to this level this year, and since the history tends to rhyme more than it tends to repeat itself to the letter, it seems that the top might already be in.

In both years, 2008 and 2012, there were three tops. Furthermore, the rallies that took gold to the second and third top were similar. In 2008, the rally preceding the third top was bigger than the rally preceding the second top. In 2012, they were more or less equal. I marked those rallies with blue lines in the above chart – the current situation is very much in between the above-mentioned situations. Also, the current rally is bigger than the one that ended in early January 2021 but not significantly so.

Since I realize that it’s most difficult to stay on track right at the top, let me remind you about two key facts:

  1. We have open-ended QEs – money is being pumped into the system at an unprecedented pace, even when stocks are well beyond their all-time highs. The world has been in a pandemic for over a year, and the economies were hit hard. And yet, gold – the king of safe hedges – did not manage to soar above its 2011 highs and then stay above them. Given how extremely positive the fundamental situation is, gold’s reaction is even more extremely bearish. This market is simply not ready to soar without declining significantly first. The bull market and bear markets move in stages, and the final slide was postponed multiple times, but it’s clear that gold is not ready to soar to new highs without completing this final stage – the downswing.
  2. Remember what happened when gold previously attempted to break above major long-term highs? It was in 2008 and gold was breaking above its 1980 high. Gold wasn’t ready to truly continue its bull market without plunging first. This downswing was truly epic, especially in the case of silver and mining stocks; and now even gold’s price patterns are like what we saw in 2008.

Lessons Learned From History

My previous comments on the analogies to 2008 and 2012 remain up-to-date:

Back in 2008, gold corrected to 61.8% Fibonacci retracement , but it stopped rallying approximately when the USD Index started to rally, and the general stock market accelerated its decline.

Taking into consideration that the general stock market has probably just topped, and the USD Index is about to rally, then gold is likely to slide for the final time in the following weeks/months. Both above-mentioned markets support this bearish scenario and so do the self-similar patterns in terms of gold price itself.

What would change my mind with regard to gold itself? Perhaps if it broke above its January 2021 highs and confirmed this breakout. This would be an important technical indication on its own, but it would also be something very different from what happened in 2008 and 2012. If that happened along with strength in mining stocks, it would be very bullish. Still, if the above happened, and miners didn’t react at all or they declined, it would not be bullish despite the gains in the gold price itself.

The March 2021 low formed well below the previous low, but as far as other things are concerned, the current situation is similar to what happened in 2012.

The relatively broad bottom with higher lows is what preceded both final short-term rallies – the current one, and the 2012 one. Their shape as well as the shape of the decline that preceded these broad bottoms is very similar. In both cases, the preceding decline had some back-and-forth trading in its middle, and the final rally picked up pace after breaking above the initial short-term high.

Interestingly, the 2012 rally ended on huge volume, which is exactly what we saw also on May 19 this year. Consequently , forecasting much higher silver or gold prices here doesn’t seem to be justified based on the historical analogies.

The thing I would like to emphasize here is that gold didn’t form the final top at the huge-volume reversal on Sep. 13, 2012. It moved back and forth for a while and moved a bit above that high-volume top, and only then the final top took place (in early October 2012).

The same happened in September and in October 2008. Gold reversed on huge volume in mid-September, and it was approximately the end of the rally. The final top, however, formed after some back-and-forth trading and a move slightly above the previous high.

Consequently, the fact that gold moved a bit above its own high-volume reversal (May 19, 2021) is not an invalidation of the analogy, but rather its continuation.

There’s one more thing I would like to add, and it’s that back in 2012, gold corrected to approximately the 61.8% Fibonacci retracement level – furthermore, the same happened in 2008 as you can see in the below chart. Consequently, the fact that gold moved above its 50% Fibonacci retracement doesn’t break the analogy either. And even if gold moves to $1,940 or so, it will not break it. It’s not likely that it is going to move that high, as in both cases –in 2008 and 2012 – gold moved only somewhat above its high-volume reversal before forming the final top. So, as this year’s huge-volume reversal took place close to the 50% retracement and not the 61.8% retracement, it seems that we’ll likely see a temporary move above it, which will create the final top. And that’s exactly what we see happening so far this week.

The lower part of the above chart shows how the USD Index and the general stock market performed when gold ended its late-2012 rally and was starting its epic decline. In short, that was when the USD Index bottomed, and when the general stock market topped.

Also, please note that while it might seem bullish that gold managed to rally above its declining black resistance line recently (the one based on the 2020 top and the 2021 top), please note that the same happened in 2012 – I marked the analogous line with red. The breakout didn’t prevent gold from sliding. When the price reached the line, we saw a short-term bounce, but nothing more than that – the gold price fell through it in the following weeks.

Meanwhile, the USD Index has just confirmed its short-term breakout, suggesting that the analogy to 2016 and the similarity to how it bottomed (triple bottom with lower lows) in mid-2020 remains intact – and so does the bullish outlook for the universally-hated-and-massively-shorted U.S. currency.

The USD Index reversed yesterday in a supposedly bearish manner, but today’s pre-market price action shows that it was just a fake reversal. It seems that a major bottom in the USDX is already in, as the breakout above the declining short-term resistance line (that started with the April top) was verified. And with the outlook for the USD Index being bullish, the implications for the precious metals market are bearish.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

USDX: Trick or Treat, Looks Like an Early Halloween

The USD Index (USDX)

With the ghosts of 2015 attempting to scare the U.S. Federal Reserve (FED) into tapering its asset purchases, the latest reverse repo nightmare could be gold, silver and mining stocks version of the boogeyman. Case in point: with the liquidity fright helping the USD Index sleep better at night, the greenback should benefit from the FED’s latest house of horrors: And with the central bank’s daily reverse repos hitting an all-time high of $485 billion on May 27 (with another $479 billion sold on May 28), Halloween may come early this year.

Please see below:

To explain, the green line above tracks the daily reverse repo transactions executed by the FED, while the red line above tracks the federal funds rate. If you focus your attention on the red line, you can see that after the $400 billion level was breached in December 2015, the FED’s rate-hike cycle began. Thus, with current inflation dwarfing 2015 levels and U.S. banks practically throwing cash at the FED, is this time really different?

Likewise, with reduced liquidity poised to bolster the USD Index, not only are the fundamentals trending up but also the technicals. The USD Index jumped above its declining resistance line based on May’s highs, as well as the declining resistance line that started with the late-March high. This is important not only (and not primarily) because of the double-breakout. It’s important and particularly bullish, as it emphasizes that the third – and quite likely the final – short-term bottom in a row is already in.

In addition, the USD Index might be in the early innings of forming an inverted head & shoulders pattern. For context, an inverted H&S pattern is a bullish development that if formed, could usher the USD Index well above 94.5 (to about 97-98). However, completing the right shoulder requires an upward breach of 93 (the blue line), so at this point, it’s more of an indication than a confirmation.

Please see below:

For more context, I wrote previously:

This week’s move lower is a continuation, and most likely the final part, of a specific multi-bottom pattern that the USD Index exhibited recently.

I marked those situations with green. The thing is that the U.S. currency first declined practically without any corrections , but at some point it started to move back and forth while making new lows. The third distinctive bottom was the final one. Interestingly, the continuous decline took place for about a month, and the back-and-forth declines took another month (approximately). In July 2020, the USDX fell like a rock, and in August it moved back and forth while still declining. In November 2020, the USDX fell like a rock (there was one exception), and in December it moved back and forth while still declining.

Ever since the final days of March, we’ve seen the same thing all over again. The USD Index fell like a rock in April, and in May we’ve seen back-and-forth movement with lower lows and lower highs.

What we see right now is the third of the distinctive lows that previously marked the end of the declines.

And what did gold do when the USD Index rallied then?

In August, gold topped without waiting for USD’s final bottom – which is natural, given how extremely overbought it was in the short term.

In early January, gold topped (which was much more similar to the current situation given the preceding price action) when the USDX formed its third, final distinctive bottom.

I received a few questions recently asking what would need to happen for me to change my mind on the precious metals sector’s outlook. There are multiple reasons, and it’s impossible to list all of them. However, one of the reasons that would make me strongly consider that the outlook has indeed changed (at least for the short term) would be a confirmed breakdown in the USD Index below the 2021 lows to which gold would actually react.

As further evidence, the Euro Index might be in the midst of forming a bearish H&S pattern. If you analyze the right side of the chart below, you can see that the symmetrical pattern has the current rally mirroring the summer of 2020. And while we’re still in the early innings of forming the right shoulder, three peaks were recorded during the second half of 2020 before the Euro Index eventually rolled over.

Likewise, with a symmetrical setup that seems to already be in motion, the Euro Index may be heading down a similar path of historical ruin. In the second half of 2020, the decline was not that big, but it’s no wonder that this was the case as that was only the left shoulder of the pattern. Completion of the right shoulder, however, would imply another move lower, at least equal to the size of the head – to about the June 2020 lows or lower.

Gold and the Euro

Furthermore, last week’s decline actually ushered the Euro Index back below the dashed resistance line of its monthly channel. And with its recent triple top mirroring the price action we witnessed in mid-to-late 2020 – before the Euro Index plunged – it won’t take long for confidence to turn into fear.

Please see below:

More importantly, though, the completion of the masterpiece could have a profound impact on gold, silver and mining stocks. To explain, gold continues to underperform the euro. If you analyze the bottom half of the chart above, you can see that material upswings in the Euro Index have resulted in diminishing marginal returns for the yellow metal. Thus, the relative weakness is an ominous sign, and if the Euro Index reverses, it could weigh heavily on the precious metals over the medium term.

If that wasn’t enough, with the USD Index hopping in the time machine and setting the dial to 2016, a bullish pattern is slowly emerging. To explain, I wrote on May 11:

While the self-similarity to 2018 in the USD Index is not as clear as it used to be (it did guide the USDX for many weeks, though), there is also another self-similar pattern that seems more applicable now. One of my subscribers noticed that and decided to share it with us (thanks, Maciej!).

Here’s the quote, the chart, and my reply:

“Thank you very much for your comprehensive daily Gold Trading Reports that I am gladly admitting I enjoy a lot. While I was analyzing recent USD performance, (DX) I have spotted one pattern that I would like to validate with you if you see any relevance of it. I have noticed the DX Index performing exactly in the same manner in a time frame between Jan. 1, 2021 and now as the one that started in May 2016 and continued towards Aug. 16.

The interesting part is not only that the patterns are almost identical, but also their temporary peeks and bottoms are spotting in the same points. Additionally, 50 daily MA line is almost copied in. Also, 200 MA location versus 50 MA is almost identical too. If the patterns continue to copy themselves in the way they did during the last 4 months, we can expect USD to go sideways in May (and dropping to the area of 90,500 within the next 3 days) and then start growing in June… which in general would be in line with your analysis too.

Please note the below indices comparison (the lower represents the period between May-Dec 2016 and higher Jan – May 2021). I am very much interested in your opinion.

Thank you in advance.”

https://www.sunshineprofits.com/media/cms_page_media/2021/5/11/4-d19f56aad9eb4e46a9fae81e1de85d06.png

And here’s what I wrote in reply:

“Thanks, I think that’s an excellent observation! I read it only today (Monday), so I see that the bearish note for the immediate term was already realized more or less in tune with the self-similar pattern. The USDX moved a bit lower, but it doesn’t change that much. The key detail here would be that the USDX is unlikely to decline much lower, and instead, it’s likely to start a massive rally in the next several months – that would be in perfect tune with my other charts/points.

I wouldn’t bet on the patterns being identical in the very near term, though, just like the late June 2016 and early March 2021 weren’t that similar.

As soon as the USD Index rallies back above the rising support line, the analogy to 2016 will be quite clear once again –the implications will be even more bullish for the USDX and bearish for the precious metals market for the next several months.”

Please note that back in 2016, there were several re-tests of the rising support line and tiny breakdowns below it before the USD Index rallied. Consequently, the current short-term move lower is not really concerning, and forecasting gold at much higher levels because of it might be misleading. I wouldn’t bet on the silver bullish forecast either. The white metal might outperform at the very end of the rally, but it has already done so recently on a very short-term basis, so we don’t have to see this signal. And given the current situation in the general stock market – which might have already topped – silver and mining stocks might not be able to show strength relative to gold at all.

On top of that, the USD Index’s long-term breakout remains intact . And when analyzing from a bird’s-eye view, the greenback’s recent weakness is largely inconsequential.

Please see below:

Moreover, please note that the correlation between the USD Index and gold is now strongly negative (-0.90 over the last 30 days) and it’s been the case for several weeks now. The same thing happened in early January 2021 and in late July – August 2020; these were major tops in gold.

The bottom line?

After regaining its composure , ~94.5 is likely the USD Index’s first stop. In the months to follow, the USDX will likely exceed 100 at some point over the medium or long term.

Keep in mind though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is doing (and likely to do) better than the Eurozone and Japan, and it’s this relative outperformance that matters , not the strength of just one single country or monetary area. After all, the USD Index is a weighted average of currency exchange rates and the latter move on a relative basis.

In conclusion, ghouls, goblins and ghosts are popping up everywhere, and while the USD Index has been under investors’ negative spell, the curse may have just been broken. Moreover, with plenty of skeletons in the financial markets’ closet and liquidity slowly being drained from the system, the narrative of excessive money printing has become an old wives’ tale. More importantly, though, with the greenback finding technical support at roughly the same time, we could be witnessing a paradigm shift in U.S. dollar sentiment. The bottom line? With gold, silver and mining stocks benefiting from the USD Index’s recent struggles, a coven is gathering, and it will likely torch the precious metals over the medium term.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold: The Rainy Season Is Coming

During the dry season, people near the equator feel like the sun is getting closer each day, making the heat unbearable at some point. The weather needs to periodically correct itself, allowing for some torrential downpours – this way life can survive. The same happens on the market; we can’t try to reach the sun by rallying incessantly. Patience is key. One thing is certain – a major storm front is moving closer, taking into account how the PMs behave.

Gold just moved higher once again, but mining stocks refused to follow. This is one of the most reliable indications that a top is being formed.

Before moving to the precious metals sector, let’s take a look at the USD Index.

When I described the above chart yesterday (May 25), I wrote that the USD Index had been trading at about 89.6. Since this is the level at which the USD Index closed the day (approximately), practically everything that I wrote about its chart remains up-to-date:

This week’s move lower is a continuation, and most likely the final part, of a specific multi-bottom pattern that the USD Index exhibited recently.

I marked those situations with green. The thing is that the U.S. currency first declined practically without any corrections , but at some point it started to move back and forth while making new lows. The third distinctive bottom was the final one. Interestingly, the continuous decline took place for about a month, and the back-and-forth declines took another month (approximately). In July 2020, the USDX fell like a rock, and in August it moved back and forth while still declining. In November 2020, the USDX fell like a rock (there was one exception), and in December it moved back and forth while still declining.

Ever since the final days of March, we’ve seen the same thing all over again. The USD Index fell like a rock in April, and in May we’ve seen back-and-forth movement with lower lows and lower highs.

What we see right now is the third of the distinctive lows that previously marked the end of the declines.

And what did gold do when the USD Index rallied then?

In August, gold topped without waiting for USD’s final bottom – which is natural, given how extremely overbought it was in the short term.

In early January, gold topped (which was much more similar to the current situation given the preceding price action) when the USDX formed its third, final distinctive bottom.

The USD Index is after a two-month decline, half of which was the back-and-forth kind of decline. It’s forming the third – and likely the final – bottom, and gold just refused to react positively to this situation in today’s pre-market trading.

This might be “it” – the markets might be forming their final reversals here, starting to follow the most bearish (in the case of gold) part of the analogy to the price action in 2008 and 2012.

The Repeating Pattern

Gold has now moved higher, and it even moved slightly above $1,900 in today’s pre-market trading, which seems positive. But it doesn’t change anything with regard to gold’s analogies to how it performed in 2008 and 2012 right before the slide.

Gold seems to be insisting on repeating – to some extent – its 2012 performance, and – to some extent – its 2008 performance. Either way, it seems that gold is about to slide.

The initial reversal in gold took place after gold moved very close to its mid-January highs and the 50% Fibonacci retracement based on the August 2020 – March 2021 decline. Yesterday’s close was the first close above this important resistance, so the breakout was not confirmed.

The sizes of the current rally (taking the second March bottom as the starting point) and the rally that ended at the beginning of this year are practically identical at the moment. The current move is only a little bigger.

Just as the rallies from early 2012 and late 2012 (marked with blue) were almost identical, the same could happen now.

The March 2021 low formed well below the previous low, but as far as other things are concerned, the current situation is similar to what happened in 2012.

The relatively broad bottom with higher lows is what preceded both final short-term rallies – the current one, and the 2012 one. Their shape as well as the shape of the decline that preceded these broad bottoms is very similar. In both cases, the preceding decline had some back-and-forth trading in its middle, and the final rally picked up pace after breaking above the initial short-term high.

Interestingly, the 2012 rally ended on huge volume, which is exactly what we saw also on May 19 this year. Consequently, forecasting much higher gold prices here doesn’t seem to be justified based on the historical analogies.

The thing I would like to emphasize here is that gold didn’t form the final top at the huge-volume reversal on Sep. 13, 2012. It moved back and forth for a while and moved a bit above that high-volume top, and only then the final top took place (in early October 2012).

The same happened in September and in October 2008. Gold reversed on huge volume in mid-September, and it was approximately the end of the rally. The final top, however, formed after some back-and-forth trading and a move slightly above the previous high.

Consequently, the fact that gold moved a bit above its own high-volume reversal (May 19, 2021) is not an invalidation of the analogy, but rather its continuation.

There’s one more thing I would like to add, and it’s that back in 2012, gold corrected to approximately the 61.8% Fibonacci retracement level – furthermore, the same happened in 2008 as you can see in the below chart. Consequently, the fact that gold moved above its 50% Fibonacci retracement doesn’t break the analogy either. And even if gold moves to $1,940 or so, it will not break it. It’s not likely that it is going to move that high, as in both cases –in 2008 and 2012 – gold moved only somewhat above its high-volume reversal before forming the final top. So, as this year’s huge-volume reversal took place close to the 50% retracement and not the 61.8% retracement, it seems that we’ll likely see a temporary move above it, which will create the final top. And that’s exactly what we see happening so far this week.

The lower part of the above chart shows how the USD Index and the general stock market performed when gold ended its late-2012 rally and was starting its epic decline. In short, that was when the USD Index bottomed, and when the general stock market topped.

Back in 2008, gold corrected to 61.8% Fibonacci retracement , but it stopped rallying approximately when the USD Index started to rally, and the general stock market accelerated its decline. This time the rally was not as volatile, so the lower – 50% Fibonacci retracement level will hold the rally in check.

Taking into consideration that the general stock market has probably just topped, and the USD Index is about to rally, then gold is likely to slide for the final time in the following weeks/months. Both above-mentioned markets support this bearish scenario and so do the self-similar patterns in terms of gold price itself.

While gold moved to new highs, the GDX ETF didn’t (and neither did silver ).

It moved mere nine cents higher and this move took place on relatively low volume – making that a bearish indication, not a bullish one.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold: The Past Years Are Often the Best Guides

Short-term implications

With gold’s back-and-forth price action mirroring its behavior from 2012, the yellow metal is likely destined for devaluation.

Back then, gold zigzagged with anxiety before suffering a material drawdown. In fact, in early October 2012, it moved slightly above the initial highs right before sliding.

Moreover, while the yellow metal has bounced above its declining resistance line (the black line below), the price action mirrors gold’s behavior from early January. If you analyze the blue line below, you can see that investors’ optimism regarding gold’s short-term breakout quickly faded and the yellow metal sunk like a stone. In addition, with gold’s RSI (Relative Strength Index) moving slightly above 70 before the January swoon occurred, an identical development is already playing out in real time.

Gold seems to be insisting on repeating – to some extent – its 2012 performance, and – to some extent – its 2008 performance. Either way, it seems that gold is about to slide.

The reversal in gold took place after gold moved very close to its mid-January highs and the 50% Fibonacci retracement based on the August 2020 – March 2021 decline.

The sizes of the current rally (taking the second March bottom as the starting point) and the rally that ended at the beginning of this year are practically identical at the moment.

Just as the rallies from early 2012 and late 2012 (marked with blue) were almost identical, the same could happen now.

The March 2021 low formed well below the previous low, but as far as other things are concerned, the current situation is similar to what happened in 2012.

The relatively broad bottom with higher lows is what preceded both final short-term rallies – the current one, and the 2012 one. Their shape as well as the shape of the decline that preceded these broad bottoms is very similar. In both cases, the preceding decline had some back-and-forth trading in its middle, and the final rally picked up pace after breaking above the initial short-term high.

Interestingly, the 2012 rally ended on huge volume, which is exactly what we saw also on May 19 this year. Consequently, forecasting much higher gold prices here doesn’t seem to be justified based on the historical analogies.

The lower part of the above chart shows how the USD Index and the general stock market performed when gold ended its late-2012 rally and was starting its epic decline. In short, that was when the USD Index bottomed, and when the general stock market topped.

Back in 2008, gold corrected to 61.8% Fibonacci retracement, but it stopped rallying approximately when the USD Index started to rally, and the general stock market accelerated its decline. This time the rally was not as volatile, so the lower – 50% Fibonacci retracement level will hold the rally in check.

Taking into consideration that the general stock market has probably just topped and the USD Index is about to rally, then gold is likely to slide for the final time in the following weeks/months. Both above-mentioned markets support this bearish scenario and so do the self-similar patterns in terms of gold price itself.

MACD and the Long Term

Approaching the subject from a different side, remember the huge gap between the U.S. 10-Year Treasury yield and the U.S. 10-Year breakeven inflation rate? The situation in the very long-term MACD indicator is yet another confirmation that what we saw recently is similar to what we saw before the huge 2012 – 2013 slide. We get the same confirmation from the gold to bonds ratio, and I’ll move to that a bit later.

With February’s monthly close the last piece of the puzzle, the MACD indicator’s sell-signal is now perfectly clear. If you analyze the chart below (at the bottom right), you can see that the MACD line has crossed the signal line from above – a development that preceded significant drawdowns in 2008 and 2011.

Based on gold’s previous performance after the major sell signals from the MACD indicator, one could now expect gold to bottom in the ~$1,200 to ~1,350 range. Given the price moves that we witnessed in 1988, 2008 and 2011, historical precedent implies gold forming a bottom in this range. However, due to the competing impact of several different variables, it’s possible that the yellow metal could receive the key support at a higher level.

Only a shade below the 2011 high, today’s MACD reading is still the second-highest reading in the last 40 years. More importantly though, if you analyze the chart below (the red arrows at the bottom), the last four times the black line cut through the red line from above, a significant drawdown occurred.

Also ominous is that the magnitude of the drawdowns in price tend to coincide with the magnitude of the preceding upswings in MACD. And with today’s reading only surpassed by 2011, a climactic move to the $1,250/$1,450 range isn’t out of the question for gold. The above is based on how low gold had previously declined after a similarly important sell signal from the MACD

Now, the month is not over yet, so one might say that it’s too early to consider the sell signal that’s based on monthly closing prices , but it seems that given the level that the MACD had previously reached and the shape of the top in the black line, it makes the situation so similar to 2011/2012 that the sell signal itself is just a cherry on the bearish analytical cake.

Considering the reliability of the MACD indicator a sell signal for major declines, the reading also implies that gold’s downtrend could last longer and be more severe than originally thought. As a result, $1,500 remains the most likely outcome, with $1,350 still in the cards.

As further evidence, if you focus your attention on the monthly price action in 2008, you can see that gold is behaving exactly as it did before it suffered a significant decline.

Please see below:

To explain, after making a new all-time high in 2008 (that was a breakout above the 1980 tops), gold declined back to its rising support line before recording a short-term corrective upswing. This upswing ended approximately at gold’s previous monthly closing price. I marked it with a horizontal, blue, dashed line.

Similarly, if you analyze the right side of the chart, you can see that an identical pattern has emerged. With gold’s corrective upswing following a reconnection with its rising support line, history implies that a sharp decline should occur in the coming months and that the reversal is at hand or already behind us. After all, the thing that triggered the decline almost a year ago was the fact that gold made a new all-time high . Moreover, the recent high was very close to the previous high in terms of the monthly closing prices (Dec. 2020 – $1,895.10 vs. the recent intraday high of $1,891.30).

What about the HUI Index?

Not only are ominous signs emerging from gold’s medium-and-long-term charts, but beneath the surface, the gold miners are also folding their hands. If you analyze the chart below, you can see that the HUI Index back-and-forth price action mirrors its behavior from 2008 and 2012 and its bearish head & shoulders pattern is also gaining similarity. In addition, the BUGS (after all, HUI is called the Gold Bugs Index) stochastic oscillator has moved all-in like the 2012 analogue (depicted at the bottom part of the chart below), and thus, it seems to be only a matter of time before the HUI Index completely blows its bankroll.

Please see below:

To explain, the HUI Index retraced a bit more than 61.8% of its downswing in 2008 and in between 50% and 61.8% of its downswing in 2012 before eventually rolling over. And with investors rejecting the HUI’s recent attempt to break above the 61.8% level, the house of cards is slowly coming down.

The bottom line?

If the HUI Index hasn’t already peaked, history implies that a top is increasingly imminent. As a result, in my opinion, now is the time to enter short positions and not exit them.

Now, in both (2008 and 2012) cases, the final top – the right shoulder – formed close to the price where the left shoulder topped. And in early 2020, the left shoulder topped at 303.02.

That’s why I previously wrote that “it wouldn’t be surprising to see a move to about 300 in the HUI Index”. And that’s exactly what we saw (a move above 320 is still close to 300 from the long-term point of view). To clarify, one head-and-shoulders pattern – with a rising neckline – was already completed, and one head-and-shoulders pattern – with a horizontal neckline – is being completed, but we’ll have the confirmation once miners break to new yearly lows.

In addition, the recent rally is not a game-changer, but rather a part of a long-term pattern that’s not visible when one focuses on the short term only.

The thing is that the vast majority of individual investors and – sadly – quite many analysts focus on the trees while forgetting about the forest. During the walk, this might result in getting lost, and the implications are no different in the investment landscape.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold, Silver, Miners: The Zenith and Its Shadows

Usually, when we think about the zenith, we have in mind a natural phenomenon caused by the tropical sun being exactly over our heads. But the zenith can also mean that something reached its peak – and just as the sun starts casting increasingly longer shadows after retreating from the highest point in the sky, the same happens when an asset on the market starts backing out after topping.

Its shadow – i.e., its ramifications – is cast in one particular direction, and it usually goes this way until the sun sets. Therefore, just as the shadows are getting longer, and longer, and longer, the drop after the top could go lower, and lower, and lower…

During yesterday’s (May 20) session, we saw more or less the repeat of the previous day’s indications – gold stocks reversed once again, and gold is trading where it was trading two days ago. Silver is already trading lower. Consequently, much of my previous comments remain up-to-date.

On Wednesday, gold miners reversed in a classically bearish way, and yesterday’s low-volume session (also a reversal) looks like Wednesday’s reversal’s shadow.

The GDX ETF first tried to rally to new highs, then it failed to hold them. Wednesday’s reversal took place on big volume (important bearish confirmation), and the “shadow reversal” took place on relatively low volume. The low volume doesn’t confirm the reversal, but it more or less invalidates the seemingly bullish fact that miners closed yesterday’s session higher.

Moreover, please note that the volume was similarly low to what we saw on January 7, 2021, when the 4-day top was ending. Yesterday was the fourth day of what appears to be a broad top.

Let’s also keep in mind that the RSI indicator just moved back below 70 after being above it. This happens rarely, and when it happened previously (in the past 1.5 years), it meant that a huge price decline was about to follow.

Silver reversed in a different manner.

The white metal didn’t move to new highs yesterday. Conversely, it moved lower, and then it only recovered intraday decline without moving visibly higher ( silver futures ended the day only $0.04 higher). The true reversal happened on Tuesday – and what we saw yesterday and on Wednesday was just its consequence. It’s quite often the case that the tops and bottoms in the precious metals market take place more or less (!) simultaneously, but not necessarily exactly on the same day. Consequently, what we saw this week is quite normal.

Gold didn’t manage to move to new intraday highs yesterday – however, it didn’t decline visibly either.

It moved a bit lower in today’s pre-market trading, and overall, it’s just $8 higher than it was at the end of Tuesday’s session. This might seem positive given that gold managed to move slightly above its declining medium-term resistance lines. However, given what’s happening in the mining stocks and all the signals from them, I doubt this breakout will really hold.

Here’s another reason: the Fed is attempting to control the long-term rates, and we just saw a short-term exodus from the cryptocurrency market. Theoretically, capital should be flowing into gold as a safe-haven / inflation-hedge asset, and it should be soaring . But it’s not. It did move higher recently, but compared to what “should have” happened given the importance of the above-mentioned developments, the reaction is barely noticeable.

Instead, gold seems to be insisting on repeating – to some extent – its 2012 performance, and – to some extent – its 2008 performance. Either way, it seems that gold is about to slide.

The reversal in gold took place after gold moved very close to its mid-January highs and the 50% Fibonacci retracement based on the August 2020 – March 2021 decline.

The sizes of the current rally (taking the second March bottom as the starting point) and the rally that ended at the beginning of this year are practically identical at the moment.

Just as the rallies from early 2012 and late 2012 (marked with blue) were almost identical, the same could happen now.

The March 2021 low formed well below the previous low, but as far as other things are concerned, the current situation is similar to what happened in 2012.

The relatively broad bottom with higher lows is what preceded both final short-term rallies – the current one, and the 2012 one. Their shape as well as the shape of the decline that preceded these broad bottoms is very similar. In both cases, the preceding decline had some back-and-forth trading in its middle, and the final rally picked up pace after breaking above the initial short-term high.

Interestingly, the 2012 rally ended in huge volume, which is exactly what we saw also on May 19 this year.

What is even more interesting is that back in 2013 gold started its gargantuan (…) slide from about $1,800 and it is not far (from the long-term point of view) from this level also today.

Moreover, let’s keep in mind that the RSI indicator just topped slightly above 70, which is what tends to happen when gold tops. The upside seems very limited. In fact, it seems that the top in gold might already be in.

The lower part of the above chart shows how the USD Index and the general stock market performed when gold ended its late-2012 rally and was starting its epic decline. In short, that was when the USD Index bottomed, and when the general stock market topped.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold: Reversal Is the Name of the Game

“Reversal” is the name of the game, at least when it comes to the precious metals market.

The USD Index declined profoundly once again yesterday (May 18), and gold, silver, and mining stocks ignored this move. They didn’t want to follow in its footsteps anymore.

As you can see, the USD Index reached its horizontal support provided by the previous important low. Low that was formed after a fake breakdown below the neck level of a supposedly bearish head-and-shoulders pattern. The USDX is not only at similar price levels; it’s also right after a supposedly bearish breakdown below. The reversal could be just around the corner, or we might have already seen it, given today’s (small, but still) pre-market move higher.

As I mentioned above, yesterday’s sizable decline in the USDX should have triggered substantial rallies in the PMs. What happened instead?

Reversals .

What Happened to Gold?

Gold reversed right at its triangle-vertex-based… well, reversal, and the combination of resistance lines.

The reversal in gold took place after gold moved very close to its mid-January highs and the 50% Fibonacci retracement based on the August 2020 – March 2021 decline.

The sizes of the current rally (taking the second March bottom as the starting point) and the rally that ended at the beginning of this year are practically identical at the moment.

Just as the rallies from early 2012 and late 2012 (marked with blue) were almost identical, the same could happen now.

The March 2021 low formed well below the previous low, but as far as other things are concerned, the current situation is similar to what happened in 2012.

The relatively broad bottom with higher lows is what preceded both final short-term rallies – the current one, and the 2012 one. Their shape as well as the shape of the decline that preceded these broad bottoms is very similar. In both cases, the preceding decline had some back-and-forth trading in its middle, and the final rally picked up pace after breaking above the initial short-term high.

Interestingly, the 2012 rally had ended in huge volume, which is exactly what we saw on Friday. To be 100% precise, the 2012 rally didn’t end then, but it was when over 95% of the rally was over. Gold moved very insignificantly higher since that time. Most importantly, though, it was the “dollars to the upside, hundreds of dollars to the downside” situation. And it seems that we are in this kind of situation right now once again.

Interestingly, back in 2013 gold started its gargantuan (…) slide from about $1,800 and it is not far from this level also today.

Moreover, let’s keep in mind that the RSI indicator just topped slightly above 70, which is what tends to happen when gold tops. The upside seems very limited. In fact, it seems that the top in gold is already in.

The lower part of the above chart shows how the USD Index and the general stock market performed when gold ended its late-2012 rally and was starting its epic decline. In short, that was when the USD Index bottomed, and when the general stock market topped. I don’t want to get into too many USD-related short-term details, as I did that yesterday, but let’s take a closer look at the short-term developments on the stock market .

Stock Market

In short, the situation doesn’t look pretty. To explain, I wrote the following on May 11:

The markets are self-similar (which is another way of saying that they have a fractal nature), which generally means that while the history tends to rhyme, it also tends to rhyme in similar shapes of alike or various sizes.

For example, the rally from 2018–2020 seems very similar to the rally from 2020 to the present. Both rallies started after a sharp decline, and the first notable correction took the form of back-and-forth trading around the previous high. I marked those situations with big rectangles.

Then the rally continued with relatively small week-to-week volatility. I created rising support lines based on the final low of the broad short-term consolidation and the first notable short-term bottom.

This line was broken, and some back-and-forth trading followed, but it was only about half of the previous correction in terms of price and time.

Then, we saw a sharp rally that then leveled off. And that was the top . The thing that confirmed the top was the visible breakdown below the rising support line right after stocks invalidated a tiny breakout to new highs. That’s what happened in February 2020, and that’s what happened this month.

“Time is more important than price; when the time comes, the price will reverse”. Both rallies took an almost identical amount of time: 60 weeks vs. 59 weeks.

Stocks moved a bit higher recently, but yesterday’s and today’s pre-market decline seem to be telling investors that the initial slide was not just another correction in the bull market. This is the first time when the S&P 500 was unable to get back above its rising support line after temporarily breaking below it. Instead, we saw an attempt to rally, and now we see another slide lower.

This is bearish for gold’s forecast , but also very bearish for silver and mining stocks, which are more correlated with the stock market than gold is.

Speaking of silver, let’s take a look at its price chart.

The white metal has clearly reversed yesterday (May 18), and at the moment of writing these words, it’s trading back below its May 10 high and the $28 level. Just like it is the case with gold, it seems to me that the outlook for silver is bearish.

Mining stocks seem to have reversed in a rather odd manner, but in one that’s ultimately in tune with how tops are formed based on technical analysis principles.

The same (or very similar) opening and closing price levels accompanied by an intraday reversal after an intraday decline – when seen after a short-term rally – are called a “hanging man” candlestick. In short, it’s one of the reversal candlestick patterns. It should have been confirmed by a huge volume – it wasn’t, so it’s not that important, though.

The most important details are still based on the preceding day’s huge volume, the RSI, and the way the GDX ETF topped in the past.

The GDX ETF soared to new highs on volume that was much greater than 40M shares. This happened only three times in the past 12 months. In each of those three cases, it was a major top, or it was very, very close to it.

The RSI just moved above 70, and it happened only twice recently. One time it heralded the 2020 top, and the other time we saw it in late February 2020 – right before a huge slide started.

Consequently, taking all the above into account, it seems to me that the situation in the precious metals market is very bearish right now, as it seems to be either topping or after the top. If I didn’t have a short position in the junior mining stocks right now, I would have opened it today.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Being a Gold Bull Is Now Far Too Easy – Don’t Be Deceived

It’s easy to get carried away by the day-to-day price action, and it’s even easier to feel the emotions that other market participants are feeling while looking at the same short-term price action. Right now, it’s tempting to be bullish on gold. It’s “easy” to be bullish on gold while looking at what happened in the last 1.5 months. But what’s easy is rarely profitable in the long run.

Let’s get beyond the day-to-day price swings. The Fed has been keeping the interest rates at ultra-low levels for many months, and it has just pledged to keep them low for a long time. The world is enduring the pandemic, and the amount of money that entered the system is truly astonishing. The savings available to investors skyrocketed. The USD Index has been beaten down from over 100 to about 90. And yet, gold is not at new highs. In fact, despite the 2020 attempt to rally above its 2011 high, gold’s price collapsed, and it invalidated the breakout above these all-important highs. It’s now trading just a few tens of dollars higher than it had been trading in 2013, right before the biggest slide of the recent years.

Something doesn’t add up with regard to gold’s bullish outlook, does it?

Exactly. Gold is not yet ready to soar, and if it wasn’t for the pandemic-based events and everything connected to them, it most likely wouldn’t have rallied to, let alone above its 2011 highs before declining profoundly. And what happens if a market is practically forced to rally, but it’s not really ready to do so? Well, it rallies… For a while. Or for a bit longer. But eventually, it slides once again. It does what it was supposed to do anyway – the only thing that changes is the time. Everything gets delayed, and the ultimate downside targets could increase, but overall, the big slide is not avoided.

Let’s say that again. Not avoided, but delayed.

And this is where we are right now. In the following part of the analysis, I’m going to show you how the situation in the USD Index is currently impacting the precious metals market, and how it’s likely to impact it in the following weeks and months.

Riding investors’ emotional roller coaster, the love-hate relationship between financial markets and the USD Index is quite absurd. However, with alternating emotions often changing like the seasons, the greenback’s latest stint in investors’ doghouse could be nearing its end. Case in point: with the most speculative names in the stock market enduring a springtime massacre, beneath the surface laughter has already turned into tears. And while gold, silver and mining stocks have been buoyed by the intense emotional high that’s only visible on the surface, it’s only a matter of time before the veneer is lifted.

To that point, while I won’t romanticize the USD Index’s recent underperformance, it’s important to remember that extreme pessimism is often the spark that lights the USD Index’s fire.

Please see below:

To explain, the bars above track various market participants’ four-week allocations to the U.S. dollar, while the horizontal light blue line above tracks the USD Index. If you analyze the right side of the chart, you can see that fund flows have fallen off of a cliff in recent weeks. However, if you analyze the behavior of the USD Index near Jan-20, Jan-21 and Mar-21, you can see that extremely pessimistic fund flows are often followed by short-term rallies in the USD Index. As a result, with the latest readings already breaching -4 (using the scale on the left side of the chart), USD-Index bears have likely already offloaded their positions.

What’s more, not only did the USD Index end last week up by 0.10%, but the greenback invalidated the breakdown below its head & shoulders pattern – which is quite bullish – and also invalidated the breakdown below its rising dashed support line (the black line below). Moreover, while the greenback fell below the latter again on May 14, the short-term weakness is far from a game-changer as the breakdown is not confirmed.

Please see below:

On top of that, with the USD Index hopping in the time machine and setting the dial on 2016, a similar pattern could be emerging. To explain, I wrote on May 11:

While the self-similarity to 2018 in the USD Index is not as clear as it used to be (it did guide the USDX for many weeks, though), there is also another self-similar pattern that seems more applicable now. One of my subscribers noticed that and decided to share it with us (thanks, Maciej!).

Here’s the quote, the chart, and my reply:

Thank you very much for your comprehensive daily Gold Trading Reports that I am gladly admitting I enjoy a lot. While I was analyzing recent USD performance, (DX) I have spotted one pattern that I would like to validate with you if you see any relevance of it. I have noticed the DX Index performing exactly in the same manner in a time frame between Jan. 1, 2021 and now as the one that started in May 2016 and continued towards Aug. 16. The interesting part is not only that the patterns are almost identical, but also their temporary peeks and bottoms are spotting in the same points. Additionally, 50 daily MA line is almost copied in. Also, 200 MA location versus 50 MA is almost identical too. If the patterns continue to copy themselves in the way they did during the last 4 months, we can expect USD to go sideways in May (and dropping to the area of 90,500 within the next 3 days) and then start growing in June… which in general would be in line with your analysis too.

Please note the below indices comparison (the lower represents the period between May-Dec 2016 and higher Jan – May 2021). I am very much interested in your opinion.

Thank you in advance.

https://www.sunshineprofits.com/media/cms_page_media/2021/5/11/4-d19f56aad9eb4e46a9fae81e1de85d06.png

And here’s what I wrote in reply:

Thanks, I think that’s an excellent observation! I read it only today (Monday), so I see that the bearish note for the immediate term was already realized more or less in tune with the self-similar pattern. The USDX moved a bit lower, but it doesn’t change that much. The key detail here would be that the USDX is unlikely to decline much lower, and instead, it’s likely to start a massive rally in the next several months – that would be in perfect tune with my other charts/points.

I wouldn’t bet on the patterns being identical in the very near term, though, just like the late June 2016 and early March 2021 weren’t that similar.

As soon as the USD Index rallies back above the rising support line, the analogy to 2016 will be quite clear once again –the implications will be even more bullish for the USDX and bearish for the precious metals market for the next several months.

Please note that back in 2016, there were several re-tests of the rising support line and tiny breakdowns below it before the USD Index rallied. Consequently, the current short-term move lower is not really concerning, and forecasting gold at much higher levels because of it might be misleading. I wouldn’t bet on the silver bullish forecast either. The white metal might outperform at the very end of the rally, but it has already done so recently on a very short-term basis, so we don’t have to see this signal. And given the current situation in the general stock market – which might have already topped – silver and mining stocks might not be able to show strength relative to gold at all.

If that wasn’t enough, the USD Index’s long-term breakout remains intact . And when analyzing from a bird’s-eye view, the recent weakness is largely inconsequential.

Please see below:

Moreover, please note that the correlation between the USD Index and gold is now strongly negative (-0.92 over the last 10 days) and it’s been the case for several weeks now. The same thing happened in early January 2021 and in late July – August 2020. These were major tops in gold.

The bottom line?

After regaining its composure , ~94.5 is likely the USD Index’s first stop. In the months to follow, the USDX will likely exceed 100 at some point over the medium or long term.

Keep in mind though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is doing (and likely to do) better than the Eurozone and Japan, and it’s this relative outperformance that matters , not the strength of just one single country or monetary area. After all, the USD Index is a weighted average of currency exchange rates and the latter move on a relative basis.

In conclusion, with investors and the USD Index likely headed toward reconciliation, the greenback’s medium-term prospects remain robust. With macroeconomic headwinds aligning with technical catalysts, investors’ risk-on inertia is already showing cracks in its foundation. And with the USD Index considered a safe-haven currency, a reversal in sentiment will likely catapult the USD Index back into the spotlight. Moreover, with gold, silver and mining stocks often moving inversely to the U.S. dollar, the mood music will likely turn somber across the precious metals market. The bottom line? With the metals’ mettle likely to crack under the forthcoming pressure, their outlook remains profoundly bearish over the next few months.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Junior Miners Should be Rallying – What’s Holding Them Back?

Today’s technical part of the analysis is going to be brief, as I have discussed multiple things this week and my comments remain up-to-date. There’s not much to add today, and we’ll go over only one technical chart – the one where we have trading positions – the GDXJ ETF chart. Unlike in the previous days, today I’m going to look at it from the more short-term point of view – through the 4-hour chart.

Before looking at it, please note that yesterday’s (May 13) session was relatively boring in the case of gold futures (they ended the day $1.20 higher), and quite positive for the GLD ETF, at least at first sight, as it closed $0.70 higher. The seemingly odd discrepancy between the two is just a result of different times that are taken into account for calculating both markets’ performance. All in all, yesterday’s session was positive for gold.

The S&P 500 index ended yesterday’s session 1.22% higher. At face value, this seems positive. Technically, it was just a comeback to the previously broken lows (mid-April and early May ones), which was followed by a small move lower before the end of the day, so from this point of view, this session was bearish.

Taking day-to-day price changes, though, yesterday’s session was positive for both: gold and the general stock market. Consequently, the GDXJ ETF should have rallied as its price is generally influenced by both. And what actually happened?

ChartDescription automatically generated

The GDXJ ETF declined by 1.18%.

This is an extremely bearish short-term sign as its obvious that exactly the opposite happened to what was actually supposed to happen. The most likely reason? Junior miners simply can’t wait to decline.

Junior mining stocks (the GDXJ ETF is often used as a proxy for them) declined to their rising short-term support line yesterday and ended the session close to it. There was no breakdown, but given the weak trading performance compared to gold and stocks, it seems that we won’t have to wait for it to materialize.

And speaking of relative performance – it’s not just the day-to-day performance. Yesterday’s intraday low in the GDXJ ETF was just one cent above the intraday March high. For comparison, gold’s intraday low yesterday was over $50 above its intraday March high. And the S&P 500 was 91.12 index points (over 2%) above its intraday March high.

My May 11 comments on the additional reason behind juniors’ weakness remain up-to-date:

But what about juniors? Why haven’t they been soaring relative to senior mining stocks? What makes them so special (and weak) right now? In my opinion, it’s the fact that we now – unlike at any other time in the past – have an asset class that seems similarly appealing to the investment public. Not to everyone, but to some. And this “some” is enough for juniors to underperform.

Instead of speculating on an individual junior miner making a killing after striking gold or silver in some extremely rich deposit, it’s now easier than ever to get the same kind of thrill by buying… an altcoin (like Dogecoin or something else). In fact, people themselves can engage in “mining” these coins. And just like bitcoin seems similar to gold to many (especially the younger generation) investors, altcoins might serve as the “junior mining stocks” of the electronic future. At least they might be perceived as such by some.

Consequently, a part of the demand for juniors was not based on the “sympathy” toward the precious metals market, but rather on the emotional thrill (striking gold) combined with the anti-establishment tendencies ( gold and silver are the anti- metals, but cryptocurrencies are anti-establishment in their own way). And since everyone and their brother seem to be talking about how much this or that altcoin has gained recently, it’s easy to see why some people jumped on that bandwagon instead of investing in junior miners.

This tendency is not likely to go away in the near term, so it seems that we have yet another reason to think that the GDXJ ETF is going to move much lower in the following months – declining more than the GDX ETF. The above + gold’s decline + stocks’ decline is truly an extremely bearish combination, in my view.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold: Lose a Battle to Win the War

Sometimes, a good strategist needs to give up a few battles to eventually win the war. Or, at least, convince their enemy that they’re defeated while preparing a counterattack. Just the same, a chess player may need to sacrifice a piece in order to checkmate a king. Sun Tzu has spoken, and the Art of War translates well here.

In the world of trading, the same rules often apply. A good investor needs to give up a few unfavorable days to eventually score a final victory. Again, controlling one’s emotions and adhering to patience are key. These principles are important when waiting out gold’s temporary upswings in a medium-term downswing, and also when waiting for gold’s eventual ascent. Don’t let short-term intraday moves cloud your vision.

Yesterday (May 11), I wrote that the rally in gold and stocks might have just burnt itself out, and the markets didn’t wait long to agree with me.

Is it 100% certain that the top is in? Absolutely not, as there are no certainties in any market, and sound position management should be utilized at all times. But based on what happened yesterday, and what we saw in today’s pre-market trading, the odds that the corrective top is already in have greatly increased.

Let’s take a look at the charts for details, starting with the stock market .

The Influence of the Stock Market

The markets are self-similar (which is another way of saying that they have a fractal nature), which generally means that while the history tends to rhyme, it also tends to rhyme in similar shapes of alike or various sizes.

For example, the rally from 2018–2020 seems very similar to the rally from 2020 to the present.

Both rallies started after a sharp decline, and the first notable correction took the form of back-and-forth trading around the previous high. I marked those situations with green rectangles.

Then the rally continued with relatively small week-to-week volatility. I created rising support lines based on the final low of the broad short-term consolidation and the first notable short-term bottom.

This line was broken, and some back-and-forth trading followed, but it was only about half of the previous correction in terms of price and time.

Then, we saw a sharp rally that then leveled off. And that was the top . The thing that confirmed the top was the visible breakdown below the rising support line right after stocks invalidated a tiny breakout to new highs. That’s what happened in February 2020, and that’s what happened this month.

Combining this with the recent underperformance of the NASDAQ (the previous leader which just moved to new monthly lows) suggests that this might have indeed been the top.

“But why didn’t the mining stocks or silver end yesterday’s session higher given the above, and the fact that stocks declined yesterday? Any tips on that?”

I see two likely reasons.

One is that the stock market reversed before the end of the day, so many investors and traders might have thought that the correction was already over, and they were eager to jump back into the market. This would explain why mining stocks (and GameStop) ended yesterday’s session higher.

The second reason is that miners don’t necessarily slide right after the top. Sometimes, they tend to move back and forth, testing the previous high (on lower volume).

That’s what happened in early January 2021, and that’s what happened yesterday. Did it change anything with regard to the bearish implications of the current situation? Not at all. Besides, the most bearish thing about gold stocks is visible on the long-term HUI Index chart.

The HUI Index

While corrective short-term upswings within a medium-term downtrend can feel discouraging, it’s important to remember that similar instances occurred in 2008 and 2012. And to some extent also in early 2000.

The head and shoulders patterns from 2007 – 2008 and from 2009 – 2012 had the final tops – the right shoulders – very close to the price where the left shoulders topped. And in early 2020, the left shoulder topped at 303.02.

This week’s intraday high in the HUI Index was 307.56, and yesterday’s closing price (the highest closing price we saw recently) was 302.92. That’s one-tenth of an index point away from the left shoulder’s top; if the HUI slides from here – which seems likely – we’ll have a near-perfectly symmetrical H&S pattern with very bearish implications for the following weeks and months.

I previously wrote that “it wouldn’t be surprising to see a move to about 300 in the HUI Index”. And that’s exactly what we saw. To clarify, one head-and-shoulders pattern – with a rising neckline – was already completed, and one head-and-shoulders pattern – with a horizontal neckline – is being completed, but we’ll have the confirmation once miners break to new yearly lows.

Consequently, the recent rally is not a game-changer, but rather a part of a long-term pattern that’s not visible when one focuses on the short term only.

Let’s get back to the broader tops for a while.

Gold, Its Battles and the War

In August 2020 – at the top – gold’s peak was forming over approximately 4 trading days, and it plunged on the fifth day.

At the beginning of this year – at the yearly top – gold was peaking for 2-4 trading days (depending on how one treats the initial daily decline that was then followed by a small corrective upswing) and it plunged on the fifth day.

Today is the fourth day of what is likely to become a topping pattern (we will know for sure only after gold slides). Consequently, the fact that gold didn’t slide profoundly yesterday (except for the intraday decline) is not odd at all. Conversely, it’s in tune with the previous topping patterns.

Moreover, please note that since gold is repeating (to some extent) its 2011-2013 performance (actually, more of an average of gold’s trading performances from the above period and from 2008), it’s particularly normal for it to form a broader top here.

I previously wrote that the situation is similar to 2008 in a way and to 2012-2013 in a slightly different way. When I’m looking at it now, it’s quite normal that the gold market is mixing both previous performances. But it’s always easy to see things with the benefit of hindsight.

In 2008, before the final slide, we had clearly lower lows as well as lower highs. During the 2012-2013 consolidation we had a more or less horizontal pattern that was then followed by the final slide. Right now, we have something in between – we have lower highs and lower lows, but it’s not as clear as it was in 2008.

Back in 2008, it took gold 29 weeks to move from the initial (March 2008) top to the final (October 2008) top.

Back in 2011-2013, it took gold 55 weeks to move from the initial (September 2011) top to the final (October 2013) top.

The arithmetic average of the above is 42 weeks, and last week was the 39 th week after the August 2020 top. If gold stops here or shortly, it will be almost right in the middle of the similarity between both periods.

Consequently, the way gold and mining stocks are performing now is perfectly normal for a medium-term decline – it’s not a game-changer. The medium-term forecast for gold remains bearish.

What’s Going on With the Euro?

Let’s get back to the issue of head and shoulders patterns – this time in the context of the currency markets.

What one might not notice at first sight, but what is very important, the USD Index just invalidated a small breakdown below the head-and-shoulders pattern, and it rallied back above its neckline. This is a classic buy sign and a sign that the breakdown below the rising support line will be invalidated shortly.

There’s also a potential head and shoulders pattern present in the euro.

The European currency moved to the line that’s parallel to the rising neck level of the potential head and shoulders pattern. If it now declines and moves to new yearly lows, the situation will be extremely bearish – what is more, not only for the euro but also for the precious metals market, which tends to move in tune with the dollar competitor.

As far as silver is concerned, there’s not much new to report – my forecast for silver hasn’t become more bullish recently. The white metal continues to repeat its 2019-2020 performance, and it’s after a short-term period of outperformance relative to gold, which indicates major tops. Unlike gold or mining stocks, silver recently moved to its early-2021 high.

Interestingly, please note that silver is repeating more or less the same pattern from the past that the general stock market does. And we all know what happened to silver (and mining stocks) when the general stock market plunged in March 2020.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

GDX, HUI: Will Paradise Turn into a Dystopia?

With the GDX ETF punching a hole through its glass ceiling, the senior miners are now witnessing an environment that’s beyond their wildest dreams: sunshine, clear skies and a utopia that’s eluded them since the beginning of the New Year. However, while leaving paradise is often more difficult than arriving, the GDX ETF’s recent vacation is likely coming to an end. And with the senior miners about to resume the daily grind of real life, their optimism will likely fade with the tropical sun.

To explain, while the GDX ETF remains on cloud nine, the HUI Index (a proxy for gold mining stocks ) has already left the resort. With the latter’s long-term outlook still intact and its broad head & shoulders pattern remaining on schedule, I wrote previously that the right shoulder would likely form after the HUI Index reaches 300. And after closing at 301.72 on May 7, the BUGS (after all, HUI is called the Gold Bugs Index) are currently living up to expectations.

Please see below:

Moreover, while corrective short-term upswings within a medium-term downtrend can feel discouraging, it’s important to remember that similar instances occurred in 2008 and 2012. Remember: Tom Petty & The Heartbreakers warned us that the waiting is the hardest part. However, in the end, the wait should be more than worth it.

To explain, note that the 2007 – 2008 and the 2009 – 2012 head and shoulders patterns didn’t have the right shoulders all the way up to the line that was parallel to the line connecting the bottoms. I marked those lines with green in the above-mentioned formations. In the current case, I marked those lines with orange. Now, in both cases, the final top – the right shoulder – formed close to the price where the left shoulder topped. And in early 2020, the left shoulder topped at 303.02.

That’s why I previously wrote that “it wouldn’t be surprising to see a move to about 300 in the HUI Index”. And that’s exactly what we saw. To clarify, one head-and-shoulders pattern – with a rising neckline – was already completed, and one head-and-shoulders pattern – with a horizontal neckline – is being completed, but we’ll have the confirmation once miners break to new yearly lows.

For more context, I wrote previously:

The recent rally is not a game-changer, but rather a part of a long-term pattern that’s not visible when one focuses on the short-term only.

The thing is that the vast majority of individual investors and – sadly – quite many analysts focus on the trees while forgetting about the forest. During the walk, this might result in getting lost, and the implications are no different in the investment landscape.

From the day-to-day perspective, a weekly – let alone monthly – rally seems like a huge deal. However, once one zooms out and looks at the situation from a broad perspective, it’s clear that:

“What has been will be again, what has been done will be done again; there is nothing new under the sun.” (-Ecclesiastes 1:9)

The rally is very likely the right shoulder of a broad head and shoulders formation. “Very likely” and not “certainly”, because the HUI Index needs to break to new yearly lows in order to complete the pattern – for now, it’s just potential. However, given the situation in the USD Index (i.a. the positions of futures traders as seen in the CoT report , and the technical situation in it), it seems very likely that this formation will indeed be completed. Especially when (not if) the general stock market tumbles.

In addition, three of the biggest declines in the mining stocks (I’m using the HUI Index as a proxy here), all started with broad, multi-month head-and-shoulders patterns. And in all three cases, the size of the decline exceeded the size of the head of the pattern.

Can we see gold stocks as low as we saw them last year? Yes.

Can we see gold stocks even lower than at their 2020 lows? Again, yes.

Of course, it’s far from being a sure bet, but the above chart shows that it’s not irrational to expect these kind of price levels before the final bottom is reached. This means that a $24 target on the GDX ETF is likely conservative.

In addition, mining stocks are currently flirting with two bearish scenarios:

  1. If things develop as they did in 2000 and 2012-2013, gold stocks are likely to bottom close to their early 2020 high.
  2. If things develop like in 2008 (which might be the case, given the extremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightly below) their 2016 low.

I know, I know, this seems too unreal to be true… But wasn’t the same said about silver moving below its 2015 bottom in 2020? And yet, it happened.

Keep in mind though: scenario #2 most likely requires equities to participate. In 2008 and 2020, the sharp drawdowns in the HUI Index coincided with significant drawdowns of the S&P 500 . However, with the words ‘all-time high’ becoming commonplace across U.S. equities, the likelihood of a three-peat remains relatively high.

Circling back to the GDX ETF, on May 7, the senior miners inched closer to their May 2020 high. And while the development may seem bullish on the surface, the price action actually creates symmetry between the GDX ETF’s left and right shoulders. With May 2020’s peak occurring at nearly the same level, a move lower from here would only enhance the validity of the GDX ETFs H&S pattern.

On top of that, this is the third time that the GDX ETF has poked its head above the upper trendline of its roughly one-and-a-half-month channel. An ominous sign, the GDX ETF’s swoon in late 2020/early 2021, occurred precisely after the senior miners delivered their third act. Furthermore, a small breakout without confirmation is akin to a promise from a friend that can’t keep his word. Thus, with the GDX ETF still underperforming gold on a relative basis, it’s important to analyze the recent price action within its proper context.

Please see below:

For more context, I wrote on May 5:

The history might not repeat itself, but it does rhyme, and those who insist on ignoring it are doomed to repeat it. And there’s practically only one situation from more than the past four decades that is similar to what we see right now.

It’s the early 2000s when the tech stock bubble burst. It’s practically the only time when the tech stocks were after a similarly huge rally. It’s also the only time when the weekly MACD soared to so high levels (we already saw the critical sell signal from it). It’s also the only comparable case with regard to the breakout above the rising blue trend channel. The previous move above it was immediately followed by a pullback to the 200-week moving average, and then the final – most volatile – part of the rally started. It ended on significant volume when the MACD flashed the sell signal. Again, we’re already after this point.

The recent attempt to break to new highs that failed seems to have been the final cherry on the bearish cake.

Why should I – the precious metals investor care?

Because of what happened in the XAU Index (a proxy for gold stocks and silver stocks ) shortly after the tech stock bubble burst last time.

What happened was that the mining stocks declined for about three months after the NASDAQ topped, and then they formed their final bottom that started the truly epic rally. And just like it was the case over 20 years ago, mining stocks topped several months before the tech stocks.

Mistaking the current situation for the true bottom is something that is likely to make a huge difference in one’s bottom line. After all, the ability to buy something about twice as cheap is practically equal to selling the same thing at twice the price. Or it’s like making money on the same epic upswing twice instead of “just” once.

And why am I writing about “half” and “twice”? Because… I’m being slightly conservative, and I assume that the history is about to rhyme once again as it very often does (despite seemingly different circumstances in the world). The XAU Index declined from its 1999 high of 92.72 to 41.61 – it erased 55.12% of its price.

The most recent medium-term high in the GDX ETF (another proxy for mining stocks) was at about $45. Half of that is $22.5, so a move to this level would be quite in tune with what we saw recently.

And the thing is that based on this week’s slide in the NASDAQ that followed the weekly reversal and the invalidation, it seems that this slide lower has already begun.

“Wait, you said something about three months?”

Yes, that’s approximately how long we had to wait for the final buying opportunity in the mining stocks to present itself based on the stock market top.

The reason is that after the 1929 top, gold miners declined for about three months after the general stock market started to slide. We also saw some confirmations of this theory based on the analogy to 2008. Consequently, we might see the next major bottom – and the epic buying opportunity in the mining stocks – about three months after the general stock market tops. The NASDAQ might have already topped, so we’re waiting for the S&P 500 to confirm the change in the trend.

The bottom line?

New lows are likely to complete the GDX ETF’s bearish H&S pattern and set the stage for an even larger medium-term decline. And if the projection proves prescient, medium-term support (or perhaps even the long-term one) will likely emerge at roughly $21.

But why ~$21?

  1. The target aligns perfectly with the signals from the GDX ETF’s 2020 rising wedge pattern. You can see it in the left part of the above chart. The size of the move that follows a breakout or breakdown from the pattern (breakdown in this case) is likely to be equal (or greater than) the height of the wedge. That’s what the red dashed line marks.
  2. The target is also confirmed when applying the Fibonacci extension technique. To explain, if we take the magnitude of the GDX ETF’s recent peak-to-trough decline and extrapolate it by multiplying it by the Fibonacci sequence, the output results in a target adjacent to $21. I used the Fibonacci retracement tool to show that in the above chart. Interestingly, the same technique was useful in 2020 in order to time the March bottom.
  3. The broad head-and-shoulders pattern with the horizontal neckline at about $31 points to the $21 level as the likely target.

Likewise, when analyzing the situation through the lens of the GDXJ ETF, the junior miners are eliciting the same bearish signals. If you analyze the chart below, you can see that despite the recent strength, the GDXJ ETF is still trading below its medium-term rising support line (the thick black line below). More importantly, though, with the junior miners failing to reclaim this key level, their bearish H&S pattern remains intact.

Even more ominous, the GDXJ ETF remains a significant underperformer of the GDX ETF. Despite sanguine sentiment and a strong stock market creating the perfect backdrop for the junior miners, the GDXJ ETF has failed to live up to the hype.

To explain, I wrote previously:

GDXJ is underperforming GDX just as I’ve been expecting it to. Once one realizes that GDXJ is more correlated with the general stock market than GDX is, GDXJ should be showing strength here, and it isn’t. If stocks don’t decline, GDXJ is likely to underperform by just a bit, but when (not if) stocks slide, GDXJ is likely to plunge visibly more than GDX.

Expanding on that point, the GDXJ/GDX ratio has been declining since the beginning of the year, which is remarkable because the general stock market hasn’t plunged yet. However, once the general stock market suffers a material decline, the GDXJ ETF’s underperformance will likely be heard loud and clear.

Please see below:

So, how low could the GDXJ ETF go?

Well, absent an equity rout, the juniors could form an interim bottom in the $34 to $36 range. Conversely, if stocks show strength, juniors could form the interim bottom higher, close to the $42.5 level. For context, the above-mentioned ranges coincide with the 50% and 61.8% Fibonacci retracement levels and the GDXJ ETF’s previous highs (including the late-March/early-April high in case of the lower target area). Thus, the S&P 500 will likely need to roll over for the weakness to persist beyond these levels.

Moreover, the HUI Index/S&P 500 ratio has recorded a major, confirmed breakdown. And with the ratio nowhere near recapturing its former glory, it’s another sign that a storm is brewing. Moreover, after moving back and forth for the last few months, not only has the HUI Index/S&P 500 ratio broken below its rising support line (the upward sloping black line below), but the ratio has also broken below the neckline of its roughly 12-month H&S pattern (the dotted red line below). As a result, given the distance from the head to the neckline, the HUI Index/S&P 500 ratio is on a collision course back to (at least) 0.050.

Please see below:

When the ratio presented on the above chart above is rising, it means that the HUI Index is outperforming the S&P 500. When the line above is falling, it means that the S&P 500 is outperforming the HUI Index. If you analyze the right side of the chart, you can see that the ratio has broken below its rising support line. For context, the last time a breakdown of this magnitude occurred, the ratio plunged from late-2017 to late-2018. Thus, the development is profoundly bearish.

Playing out as I expected, a sharp move lower was followed by a corrective upswing back to the now confirmed breakdown level (which is now resistance). Mirroring the behavior that we witnessed in early 2018, after breaking below its rising support line, the HUI Index/S&P 500 ratio rallied back to the initial breakdown level (which then became resistance) before suffering a sharp decline. And with two-thirds of the analogue already complete, the current move lower still has plenty of room to run. Likewise, the early-2018 top in the HUI Index/S&P 500 ratio is precisely when the USD Index began its massive upswing. Thus, with history likely to rhyme, the greenback could spoil the miners’ party once again.

In addition, the HUI to S&P 500 ratio broke below the neck level (red, dashed line) of a broad head-and-shoulders pattern, and it verified this breakdown by moving temporarily back to it. The target for the ratio based on this formation is at about 0.05 (slightly above it). Consequently, if the S&P 500 doesn’t decline, the ratio at 0.05 would imply the HUI Index at about 196. However, if the S&P 500 declined to about 3,200 or so (its late-2020 lows) and the ratio moved to about 0.05, it would imply the HUI Index at about 160 – very close to its 2020 lows.

All in all, the implications of mining stocks’ relative performance to gold and the general stock market are currently bearish.

But if we’re headed for a GDX ETF cliff, how far could we fall?

Well, there are three reasons why the GDX ETF might form an interim bottom at roughly ~$27.50 (assuming no big decline in the general stock market ):

  1. The GDX ETF previously bottomed at the 38.2% and 50.0% Fibonacci retracement levels. And with the 61.8% level next in line, the GDX ETF is likely to garner similar support.
  2. The GDX ETFs late-March 2020 high should also elicit buying pressure.
  3. If we copy the magnitude of the late-February/early-March decline and add it to the early-March bottom, it corresponds with the GDX ETF bottoming at roughly $27.50.

Keep in mind though: if the stock market plunges, all bets are off. Why so? Well, because when the S&P 500 plunged in March 2020, the GDX ETF moved from $29.67 to below $17 in less than two weeks. As a result, U.S. equities have the potential to make the miners’ forthcoming swoon all the more painful.

In conclusion, with gold, silver and mining stocks staying at the same springtime resort, their departure from reality implies plenty of jet lag at the end of their trip. And with the clock ticking, passengers boarding and their flight nearing takeoff, a return to real life is just around the corner. Moreover, with the USD Index long overdue for some R & R, a reversal of fortunes could leave the precious metals suffering severe envy. Thus, while gold, silver and mining stocks have enjoyed nothing but sun, sand and surf over the last few weeks, the pile of work that awaits them will likely keep them swamped over the medium term.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

NASDAQ: The Leaders Lead. Or Attempt to, and Fail.

The tech stocks were the strongest part of the stock market in the previous year or so, and for a good reason. Due to the lockdown-induced surge in remote work, the need for all sorts of tech improvements (in both: software and hardware) soared. So, it’s no wonder that the NASDAQ was the strongest part of the market. It was the sole leader.

Now, there’s a rule in every market that leaders… Well, lead. This makes perfect sense, no surprise yet. But, there’s a point after which the leaders stop leading and stocks that are relatively weak or have less favorable fundamentals are catching up, eventually rallying more than the leaders. Why would this be the case? Because those who understand the markets and what’s going on are already invested, and those who are neither as knowledgeable nor experienced – the investment public – enter the market.

The investment public makes purchases often without any regard to fundamentals (or technicals) – they buy because a given asset seems cheap compared to other assets. And what would be cheap in the final part of the upswing – after the market professionals have already established their positions in well-positioned assets? The poorly positioned assets. The stocks/markets that were – for a good reason – neglected previously. So, they start buying those, and the laggards become the new leaders.

The NASDAQ was the leader that started to underperform while other stocks soared. The last few months were as clear as it gets in terms of emphasizing that. While the S&P 500 Index soared to new all-time highs, the only thing that the tech stocks managed to do was to attempt to break to new highs.

Attempt.

And fail.

Last week’s shooting-star-shaped weekly reversal was bearish on its own, but considering that it was also a failure to break to new highs, the bearish fire got gasoline poured over it.

Now, this could have been accidental, and it was prudent to wait for another decline before stating that the top in the stock market is most likely in…

Until we saw yesterday’s slide. The NASDAQ is already over 2% lower this week, and it’s only after two sessions.

Why is this important? Because if we have indeed seen a major top on the stock market , then it tells us a lot about the next moves on the precious metals market. And – in particular – about mining stocks.

The history might not repeat itself, but it does rhyme, and those who insist on ignoring it are doomed to repeat it.

And there’s practically only one situation from more than the past four decades that is similar to what we see right now.

It’s the early 2000s when the tech stock bubble burst. It’s practically the only time when the tech stocks were after a similarly huge rally. It’s also the only time when the weekly MACD soared to so high levels (we already saw the critical sell signal from it). It’s also the only comparable case with regard to the breakout above the rising blue trend channel. The previous move above it was immediately followed by a pullback to the 200-week moving average, and then the final – most volatile – part of the rally started. It ended on significant volume when the MACD flashed the sell signal. Again, we’re already after this point.

The recent attempt to break to new highs that failed seems to have been the final cherry on the bearish cake.

Why should I – the precious metals investor, care?

Because of what happened in the XAU Index (a proxy for gold stocks and silver stocks ) shortly after the tech stock bubble burst last time.

What happened was that the mining stocks declined for about three months after the NASDAQ topped, and then they formed their final bottom that started the truly epic rally. And just like it was the case over 20 years ago, mining stocks topped several months before the tech stocks.

Mistaking the current situation for the true bottom is something that is likely to make a huge difference in one’s bottom line. After all, the ability to buy something about twice as cheap is practically equal to selling the same thing at twice the price. Or it’s like making money on the same epic upswing twice instead of “just” once.

And why am I writing about “half” and “twice”? Because… I’m being slightly conservative, and I assume that the history is about to rhyme once again as it very often does (despite seemingly different circumstances in the world). The XAU Index declined from its 1999 high of 92.72 to 41.61 – it erased 55.12% of its price.

The most recent medium-term high in the GDX ETF (another proxy for mining stocks) was at about $45. Half of that is $22.5, so a move to this level would be quite in tune with what we saw recently.

And the thing is that based on this week’s slide in the NASDAQ that followed the weekly reversal and the invalidation, it seems that this slide lower has already begun.

Wait, you said something about three months?

Yes, that’s approximately how long we had to wait for the final buying opportunity in the mining stocks to present itself based on the stock market top.

The reason is that after the 1929 top, gold miners declined for about three months after the general stock market started to slide. We also saw some confirmations of this theory based on the analogy to 2008.

All in all, the precious metals sector would be likely to bottom about three months after the general stock market tops. If the last week’s highs in the S&P 500 and NASDAQ were the final highs, then we might expect the precious metals sector to bottom in the middle of the year – in late July or in August.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

USDX, Gold Miners: The Lion and the Jackals

Just as the African landscape sometimes needs to show the strongest of its inhabitants, so does the less remote but equally ferocious financial environment. This time, the USDX seems to have won the fight – its fangs and claws turned out to be the sharpest, and so are the rallies. There is nothing left for gold and its acquaintances than to run through the forest… run.

Sometimes, even jackals need to find shelter to lick their wounds in patience, waiting for a better time to come back to fight. However, they will come back eventually – they always do.

What About Gold, One of the Jackals?

With a triple-top in gold’s stochastic oscillator akin to three warning signs of a nervous breakdown, the yellow metal is still recovering from last week’s crisis of confidence. And with the price action mirroring what we witnessed in early January – right before gold suffered a significant slide – the yellow metal could soon need therapy.

Please see below:

To explain, while gold’s corrective upswing was slightly bigger than I had anticipated, please note that the length thereof was in tune with the border of the green ellipse I used to mark the likely upside target area. In other words, the recent rally was not a game-changer . The yellow metal’s inability to crack $1,800 highlights the medium-term implications that I’ve been warning about. As a result, it’s become increasingly clear that gold’s recent strength was nothing more than a short-term upswing within a medium-term downtrend.

For more on the significance of gold’s stochastic oscillator, I wrote previously:

The first sell signal occurred slightly below the 80 level, the second was above it, and the same was the case with the third one.

Since back in early 2021, the stochastic indicator moved to new highs – and so far it hasn’t – and since the USD Index might even move slightly lower before finding its short-term bottom, gold could move slightly higher on a temporary basis, before topping. Perhaps (there are no certainties on any market, but this seems quite possible in the near term) it would be the round nature of the $1,800 level and the 300-day moving average that’s very close to it that would trigger a reversal and another massive decline. From the medium-term point of view, another $20 rally doesn’t really matter. It’s the few-hundred-dollar decline that’s likely to follow that really makes the difference.

In addition, it seems that gold is moving in a way that’s somewhat similar to what we saw between mid-April 2020 and mid-June 2020. It’s trading sideways below $1,800 but above ~$1,660. Back in 2020, the range of the back-and-forth movement (size of the short-term rallies and declines) was bigger, but the preceding move was also more volatile, so it’s normal to expect smaller short-term volatility this year (at least during this consolidation).

Why is this particularly interesting? Because both consolidations (the mid-April 2020 – mid-June 2020 one and the March 2021 – today one) could be the shoulders of a broad head-and-shoulders pattern, where the mid-June 2020 – early-March 2021 performance would be the head. The breakdown below the neck level – at about $1,660 – would be extremely bearish in this case because the downside target based on the pattern is created based on the size of the head. The target based on this broad pattern would be at about $1,350 (I marked it with a thin dashed red line on the chart below – you might need to click on it to expand it for this line to become visible). Is this level possible? It is. When gold soared above $2,000, almost nobody thought that it would decline back below its 2011 highs (well, you – my subscribers – did know that). Gold below $1,500 seems unthinkable now, but with rallying long-term rates and soaring USD Index, it could really happen.

The Lion – USD Index (USDX)

After delivering a ferocious 0.75% rally on Apr. 30 – the greenback’s largest single-day gain since Mar. 4 – the USD Index let out a roar that was heard across all corners of the financial markets. And while gold, silver and mining stocks are still cackling in disobedience – as evidenced by the trios’ decelerating correlations over the last 10 days – every once in a while, the lion has to show the jackals who he is.

To explain, as the USD Index’s recent plight elicits whispers of a new order in the currency kingdom, the greenback’s stoic behavior has been misjudged as weakness. And while the vultures circle and prophecies of the USD Index’s demise become louder, the lion is slowly moving to his feet.

Case in point: with the zeitgeist forecasting new lows for the greenback, non-commercial (speculative) futures traders are still holding firm. Despite the greenback’s suffering, the immaterial decline in net-long positioning last week was relatively muted and highlights investors’ quiet respect for the U.S. dollar.

Please see below:

Source: COT

Moreover, with prior periods of extreme pessimism followed by monumental rallies in the USD Index, unless ‘this time is different,’ it’s simply a matter of when, not if, the U.S. dollar feasts on the precious metals’ overconfidence.

To explain, I wrote previously:

When net-speculative short interest as a percentage of total open interest (based on the CoT data) became extremely high in 2014 and 2018, the USD Index recoded two of its sharpest rallies in history. How sharp? Well, let’s take a look at how things developed in the past – after all, history tends to rhyme.

Let’s focus on what happened when the net speculative positions were significantly (!) negative and then they became significantly (!) positive, without paying attention to any tiny moves (like the one that we saw last summer).

In short, rallies that followed periods of extreme pessimism include:

  • The big 2008 rally (over 16 index points)
  • The big 2009 – 2010 rally (over 14 index points)
  • The 2011 – 2012 rally (over 11 index points)
  • The 2013 rally (“only” over 5 index points)
  • The big 2014 – 2015 rally (over 20 index points)
  • The 2018 rally (over 15 index points)

The current rally started at about 89, so if the “normal” (the above shows what is the normal course of action) happens, the USD Index is likely to rally to at least 94, but since the 5-index point rally seems to be the data outlier, it might be better to base the target on the remaining 5 cases. Consequently, one could expect the USD Index to rally by at least 11 – 20 index points, based on the net speculative positions alone. This means the upside target area of about 105 – 114. Consequently, a comeback to the 2020 highs is not only very likely, but also the conservative scenario.

In addition, let’s keep in mind that the very bullish analogy to the 2018 rally remains intact. If you analyze the chart below, you can see that back in 2018, the USD Index rallied sharply and then corrected back to (roughly) the 38.2% Fibonacci retracement level. And while the current decline is of a much larger magnitude than what we saw in mid-April 2018, the USD Index is still following its June 2018 analogue by declining slightly below another critical Fibonacci retracement – the 61.8% one. Moreover, amid the greenback’s surge on Apr. 30 – which I warned was forthcoming – the USD Index invalidated its breakdown below the 61.8% Fibonacci retracement level. The bottom line? The sharp reversal is extremely bullish for the U.S. dollar.

More importantly, though, when the USD Index resumed its uptrend in June 2018 – marked by the vertical dashed line near the middle of the chart – the measured move higher also coincided with an accelerated drawdown of gold , silver and mining stocks.

Please see below:

To explain, I wrote on Apr. 21:

I marked the situation from 2018 that seems similar to what we see right now with a dashed, horizontal line. Back in 2018, the pullback ended when the USD Index moved to its first Fibonacci classic retracement level (the 38.2% one). In case of the current rally, it seems that another classic retracement worked – the 61.8% one.

The very important detail about the June 2018 decline (and bottom) is that while this was the moment after which the USD Index’s started to move higher at a slower pace, it was also the moment after which the precious metals market started to decline faster.

At the beginning of the year, I wrote that the precious metals market was likely to decline and that the preceding rally was likely fake. That’s exactly what happened.

Right now, I’m writing that the recent rally was also fake (a correction within a medium-term decline) and – even more importantly – it seems likely that the next downswing could take place at a higher pace than what we saw so far this year. And – just as was the case in 2018 – this upcoming (fast) decline is likely to lead to the final bottom in the precious metals sector.

As further evidence, I warned on Apr. 30 that the USD Index was ripe for a reversal. And while entering long positions in the USD Index is an appetizing thought, shorting the gold miners offers much more bang for our buck.

I wrote (with regard to possible long positions in the USD Index futures):

I would be looking to re-enter long positions as soon as the USD Index confirms the breakout above the declining resistance line. At the moment of writing these words, the USDX is already trading back above this line, so the only thing that it needs to do now is to stay there. Still, given today’s pre-market movement, it seems that we might even see an invalidation of the move below the 61.8% Fibonacci retracement. A weekly close above both levels would be very bullish for the short term and a sign for me to get back to the long positions .

But – that is all based on the assumption that I would want to have any position in the USDX. And I don’t because I think that having a short position in mining stocks provides a much better risk-to-reward ratio.

That’s exactly what we saw – a weekly close above both levels.

Adding even more ferocity to the USD Index’s roar, the recent downtrend has not invalidated its long-term breakout. And with the long-term implications taking precedence over the medium- and short-term ones, the USDX’s uptrend remains intact.

Please see below:

The bottom line?

Given the magnitude of the 2017-2018 upswing , ~94.5 is likely the USD Index’s first stop. In the months to follow, the USDX will likely exceed 100 at some point over the medium or long term.

Keep in mind though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is doing (and likely to do) better than the Eurozone and Japan, and it’s this relative outperformance that matters , not the strength of just one single country or monetary area. After all, the USD Index is a weighted average of currency exchange rates, and the latter move on a relative basis.

In conclusion, with mischievous market participants nipping and clawing at the USD Index’s mane, it’s only a matter of time before the greenback strikes back with a vengeance. And while the precious metals consider the USD Index’s territory up for grabs, the greenback’s pride is unlikely to stay hidden for much longer. As a result, while gold, silver and mining stocks’ gaze across the grassland, the sun has likely set on their recent rallies. However, once the wet season washes away the litany of financial-market imbalances, the eventual bloom will allow the precious metals to grow stronger in the long run.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold Can’t Wait to Fall – Even Without USDX’s Help

The USDX declines and the precious metals sit by idly, twiddling their thumbs. If they had the strength that’s being talked about, they should be soaring by now, or getting ready to. So, what’s their problem?

In the previous days, I discussed the signals coming from the precious metals market or for the precious metals market, as they kept on emerging, and we just received yet another round of indications. And yes, they also confirm the bearish outlook for the following weeks – or a few months.

Let’s start by looking at the USD Index.

On the above chart you can see that this week, the USD Index broke to new monthly lows. And you can also see that gold didn’t move to a new monthly high. In fact, it was not even close to doing so – it just closed the day below $1,770. This is a clearly bearish sign for gold.

And what about the USD Index?

It’s making a second attempt to break below its 61.8% Fibonacci retracement level. Will it be successful? It might be, but… Another support level is just around the corner. Perhaps the proximity to the rising support line based on the January and February lows was actually enough to trigger the rebound yesterday. In this case, the bottom in the USDX is already in. But, we’ll know with much greater certainty when the USDX finally breaks above the declining resistance line and then confirms this breakout.

On the above 4-hour USD Index chart we see that the previous short-term breakout was invalidated, which triggered a substantial sell-off, but… Whatever was likely to happen based on this invalidation seems to have already happened. And it seems that we’re about to see another attempt to break higher. Will the USD Index be successful this time? That’s quite likely, but that’s not the most important thing from the precious metals investors’ and traders’ point of view.

PMs Play the Fiddle While USDX Burns

The key thing is that during the recent declines in the USDX (and during the move to new highs in case of the general stock market), gold , silver, and mining stocks didn’t soar. They “should have” if the situation was normal or bullish. They declined instead, which means it’s highly likely that even if the USD Index doesn’t break out now (but a bit later), the decline in the PMs will not be avoided but only delayed.

In fact, to be more precise, it’s unlikely to be delayed as well – what might be delayed is the increase in the pace at which gold, silver, and miners are about to slide. After all, gold and gold stocks are already moving lower (while silver is trading sideways).

By the way, silver’s lack of movement recently is perfectly normal in the early stage of a decline – the white metal tends to catch up big-time in the final part of a given move.

On the above gold chart, you can clearly see how gold moved back up to its rising short-term resistance line this week, and – instead of invalidating the breakdown – it bounced from it and declined once again. This is what verifications of breakdowns look like.

Also, let’s keep in mind that the situation now seems to be a mirror image of what we saw in April – June 2020, and at the same time it’s somewhat similar to what we saw at the beginning of the year. You can see the former (the rectangles are identical) on the above chart, and you can see the similarity to the early January action below.

Just as was the case in early January, we first saw a pause – a rebound – and the decline continued only thereafter. It seems that the Jan. 7, 2021 price action is quite similar to what we saw yesterday (Apr. 29). Moreover, please note that both happened just above the declining blue support line. It was the final pause before the move higher was invalidated.

Having said the above, let’s move to gold stocks:

Miners: GDX and GDXJ ETFs

In yesterday’s analysis, I described the GDX’s previous performance in the following way:

Gold stocks’ intraday recovery that we saw yesterday may seem profound, but not if we consider what happened in the USD Index and the general stock market. The former declined substantially while the latter was close to its all-time highs. This is a combination of factors that “should have” made gold miners move to new highs – and a daily gain of less than half percent is a sign of weakness, not strength.

In today’s pre-market trading the S&P 500 futures moved to new highs, and gold miners showed gains in the London trading, but they are nothing to write home about – and more importantly, nothing that would change the bearish forecast for gold I described more broadly previously .

The bearish interpretation of the previous “strength” turned out to have been correct – the GDX ETF declined yesterday.

The decline was even more visible and important in the case of the GDXJ ETF, where we have trading positions.

This ETF for junior gold and silver miners ( gold miners have much bigger weight in it, though) moved and closed back below its March 2021 highs.

Consequently, we have a situation in which:

  1. The USD Index is about to reverse and rally.
  2. Gold signals that it just can’t wait for the USD Index to rally, and it’s already declining (the pace at which it declines is likely to greatly increase once the USD Index takes off).
  3. Gold miners behave relatively normally, which in this case means that they are declining more than gold does (GLD just closed 1.14% below the highest daily close of April, while the GDX just closed 5.59% below the highest daily close of April). Besides, their recent move back to the May 2020 highs and the subsequent decline further increases the odds that the decline is going to shape the right shoulder of a huge head and shoulders formation with extremely bearish implications (once completed).
  4. GDXJ is underperforming GDX just as I’ve been expecting it to. While GDX declined by 5.59% so far (in terms of the closing prices), GDXJ declined by 5.67%. This might seem an unimportant level of underperformance, but the perspective changes once one realizes that GDXJ is more correlated with the general stock market than GDX is. Consequently, GDXJ should be showing strength here, and it isn’t. If stocks don’t decline, GDXJ is likely to underperform by just a bit, but when (not if) stocks slide, GDXJ is likely to plunge visibly more than GDX.

The above combination tells me that we are very well positioned in case of our short position in the GDXJ.

Besides, as an analytical cherry on the bearish GDXJ cake, please note that we just saw a sell signal from the MACD indicator (lower part of the chart) while it was visibly above 0, and after a relatively big short-term rally. We saw this kind of performance only several times in the previous year, and it meant declines in almost all cases. We saw it only once before this year – in early January, and a sizable decline followed.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.