A Rising Wedge in Miners Means One Thing
The GDXJ ETF moved higher recently as the investment public likely pushed stock prices higher.
The GDXJ moved higher in the rising wedge pattern, which is a bearish pattern. The size of rallies and declines has been decreasing, and the odds are that we’ll see a breakdown any day (or hour) now.
The lines creating the pattern cross in slightly more than a week from today, so perhaps that’s when the next immediate-term bottom is likely to form.
Anyway, why would this be the investment the public is buying that has pushed prices higher recently? High volume in gold is only one indication. Another comes from the recent performance of the GME (Gamestop) stock price. I wrote about it last week:
Having said all the above, it’s time to move on to the one “extra” chart that I mentioned in the opening paragraph.
It’s GME – the GameStop stock symbol.
Why GME? Because it’s one of the recently (or not so recently) popular “meme stock” that got the spotlight in 2021. The fundamentals of the company are not favorable in my view, and it’s been slowly declining from its 2021 “pumped” peak.
The thing is that since it doesn’t have a favorable fundamental situation but was popular with the investment public, it’s now a useful barometer of sentiment.
It’s likely getting cheaper for a reason, and yet, every now and then, we see sharp rallies and peaks in its price. Why would that be the case? It is most likely the phenomenon that I described previously – the worst performers get a boost at the end of the rally as the investment public enters the market.
Why is this relevant to us?
Well, please take a look at the moments that I marked with red arrows:
- November 2021
- Late March 2022
- Late May 2022
- Early August 2022
- Early February 2023
- and now.
What happened in the GDXJ at those times?
- November 2021 – major top
- Late March 2022 – very close to the final top; before a huge slide
- Late May 2022 – major top
- Early August 2022 – major top
- Early February 2023 – major top
- and now.
The first two of those cases (I put them in bold) were accompanied by a big volume. The declines in the GDXJ in the following weeks were particularly big in those cases.
So, the situation in the GME makes it very likely that it was the general investment public’s buying that recently pushed GDXJ higher. This means that this rally should not be taken at face value.
Instead – and the analysis of GME shows that – this should be treated as a very bearish indication of medium-term importance.
Since this comes on top of the link to 2008, the extremely bearish situation in world stocks, bearish confirmations in the S&P 500, and the bullish (medium-term importance, not just short-term) set-up in the USD Index, the outlook for the precious metals sector – in particular for the junior mining stocks – is currently very, very bearish. The profit potential for our short positions remains enormous.
Please note that the tops in GME and GDXJ didn’t necessarily form on exactly the same days – but they were still very close to each other. The implications here are very bearish for both GME and GDXJ.
Meanwhile, the relative performance of junior miners compared to senior miners continues to deteriorate in a medium-term trend.
During this quick upswing, juniors rallied relative to seniors, but this is just a very short-term move that’s within a short- and medium-term downtrend.
This implies bigger declines in the GDXJ in the future.
Also, let’s not forget about the forest while looking at individual trees. By that, I mean looking at how gold stocks perform relative to gold. That’s one of the major indications that the current situation is just like what we saw in 2012 top.
The situation in the gold stock to gold ratio is similar to what we saw in late 2012 and early 2013. The HUI-to-gold ratio invalidated its first attempt to break lower (marked with red, dashed lines), but after a corrective upswing, it then broke lower more decisively. That’s what I marked using black, dashed lines.
Recently, we saw a quick upswing in the ratio, but that’s not a game-changer – even the biggest declines had corrections in the past. In fact, the correction appears to be over, as the ratio declined sharply. This is yet another indication that the huge, medium-term downswing is already underway.
If history is to rhyme, we’re about to see a profound decline. In fact, we’re likely already past its beginning.
Also, please note that the pattern that we currently see, which started in early 2016, is somewhat similar to what happened between 2003 and 2008.
Back in 2008, the breakdown from the consolidation resulted in sharply lower ratio values and much lower prices for gold stocks.
So, if the situation is analogous to 2012-2013, we’re likely to see a big decline in the following weeks/months, and if it’s analogous to 2008, we’re likely to see an enormous decline in the following weeks/months.
Interestingly, the situation in the gold stocks to other stocks ratio (HUI Index vs. S&P 500 Index) provides the same implications but from a different angle.
The corrective upswings that we’ve been seeing since 2015 are getting smaller and smaller. The current one is visibly smaller than what we saw last year.
Just like it was the case with the gold stocks to gold ratio, the gold stocks to other stocks ratio has declined sharply recently, and it serves as a bearish confirmation.
Consequently, it seems that the ratio is ripe for a breakdown below the 0.05 level. The next support is provided by the all-time low of 0.026. And yes, with the ratio at 0.065 right now, this implies a decline by about of 60%. If the HUI Index were to decline by 60% right now, it would have to move to about 100. If the stock market declined as well, it would imply the HUI was even lower.
Declining stock prices would only add fuel to the bearish fire (after all, gold stocks are… just stocks), and that’s exactly what’s likely to happen.
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Przemyslaw K. Radomski, CFA