The Telltale Signs – Miners, Dollar and Stocks
The Telltale Signs – Miners, Dollar and Stocks by PRZEMYSŁAW RADOMSKI, CFA for Sunshine Profits
Everyone and their brother seem to think that gold mining stocks can only go up. In reality, the opposite is most likely for the next few days – weeks.
This is probably the final warning that you read about the decline before it happens. The very bearish indications for the mining stocks became near crystal-clear based on yesterday’s price action. And what action was that?
It was a breakdown! Breakdown below the rising, medium-term support line which was also the lower border of the rising wedge pattern.
Gold miners broke below the rising support line on relatively strong volume.
Despite gold’s daily upswing.
And shortly after, the Gold Miners Bullish Percent Index flashed the most extremely overbought reading – 100.
Gold miners also declined right after rallying once again – just like they have done in 2016, during the only other time when Gold Miners Bullish Percent Index got as overbought.
The RSI just moved back below 70, flashing a sell signal, and the Stochastic indicator flashed a sell signal of its own.
It’s really hard to imagine a more bearish combination for the mining stocks.
If there only was any indication that gold is about to decline as well… Of course, there is one. Actually, more than one, but let’s focus on the obvious. Namely, gold just moved to its 2011 highs. It didn’t move above the $1,900 level, but it closed above $1,883.25 yesterday. And why would this level be important?
Because in the entire recorded history, there were only two other cases when gold closed above $1,883.25 and in both cases, gold then moved initially higher only to decline significantly in the following hours and days.
Gold futures closed at $1,890 yesterday, and moved a bit higher in today’s pre-market trading before giving up their gains. At the same time, gold broke below the very short-term rising support line.
Miners just can’t wait to slide, and it seems that gold is about to provide them with a major trigger.
But wait, there’s more.
It is very often the case that gold takes signals from the USD Index. That was definitely the case in the first half of March, when USD’s major bottom corresponded to gold’s major top. And right now…
Right now, the USD Index appears to be repeating its early-March performance. It broke below the 95 level, just like it did back then. It’s been trading below this level for longer, but it’s not that surprising given the overall lower volatility this time.
Accounting for the lower volatility this time, it still seems that the time is up for the USD Index’s decline, and today’s small breakout above the very short-term declining resistance line (dashed line on the above chart) appears to confirm it.
So, we not only have a very powerful combination of bearish factors in case of the mining stocks, bearish confirmation from gold, but also an indication that gold is about to get a major bearish trigger that already caused its price to slide in March.
The only piece of the perfectly bearish puzzle for the short term (and short term only!) that seems to be missing, is the bearish outlook for the general stock market. But is it really missing?
The S&P 500 futures have just invalidated the previous breakout above the June high, and at the same time they broke below the rising support line – just like the GDX ETF did yesterday. This is a bearish combination in the short run.
This is especially the case given that this rising, medium-term support line already worked two times in recent weeks. The previous support lines that were broken (also visible on the above chart) and none of these breakdowns triggered a major decline. However, they were previously not proven as support lines that already worked. This time, we saw a breakdown below the line that already held twice. This means that the current breakdown is important.
Overview of the Upcoming Decline
As far as the current overview of the upcoming decline is concerned, I think that after bottoming temporarily at about $1,700, gold, silver and miners will bounce back – perhaps $30-$50 or so in gold, and then we will probably see another move lower, with silver declining more than miners. That would be in tune with how the markets initially reacted to the Covid-19 threat.
However, we are not married to this outlook. Gold moved to almost $1,900 and starting from this level instead of $1,700 or so and moving to $1,400 would imply a decline almost twice as big now. Consequently, there is a chance that the decline to $1,700 is all there we’ll see, before the PMs move higher.
How will we tell, which scenario is more likely? Based on the way different parts of the precious metals sector react to the decline and to the initial rebound. If silver catches up with the decline when gold moves to $1,700, but miners lead on the way back up (strongly so), it will be more likely that the bullish scenario prevails. If we see the opposite – miners are weak during the rebound and silver doesn’t catch up with the decline once gold approaches $1,700, the bearish case will prevail. Anything in between will require additional confirmations and we will keep our subscribers updated in any case.
The impact of all the new rounds of money printing in the U.S. and Europe on the precious metals prices is very positive in the long run, but it doesn’t make the short-term decline unlikely. In the very near term, markets can and do get ahead of themselves and then need to decline – sometimes very profoundly – before continuing their upward march.
Summing up, the extremely overbought reading from the Gold Miners Bullish Percent Index and the individual price moves (including silver’s powerful upswing) make the current case very similar to the 2016 topping pattern, and other important indications (especially gold’s and USD’s long-term cycles) point to likely – sizable – decline in the following several weeks. Miners’ relatively weak performance relative to gold and (especially) silver suggest that miners are about to move visibly lower.
Naturally, everyone’s trading is their responsibility, but in our opinion, if there ever was a time to either enter a short position in the miners or to increase its size if it wasn’t already sizable, it’s now. We made money on the March decline and on the March rebound, and it seems that another massive slide is about to start. When everyone is on one side of the boat, it’s a good idea to be on the other side, and the Gold Miners Bullish Percent Index literally indicates that this is the case with mining stocks.
After the sell-off (that takes gold below $1,400), we expect the precious metals to rally significantly. The final decline might take as little as 1-6 weeks, so it’s important to stay alert to any changes.
Most importantly – stay healthy and safe. We made a lot of money on the March decline and the subsequent rebound (its initial part) price moves (and we’ll likely make much more in the following weeks and months), but you have to be healthy to really enjoy the results.
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