Big Things Often Have Small Beginnings. Look at the GDXJ.
Hesitating, a little uncertain, testing the waters. That’s how junior miners approached yesterday’s session – a session during which they declined.
Just as even big journeys start with a first step, huge declines might start with a small move lower.
Gold moved back and forth and ultimately ended the session a little lower.
In response to the above, mining stocks moved sharply lower, but only in the first part of the day. They, just as gold was unsure what to do, they moved somewhat back up.
Was it an important bullish reversal? No, because that wasn’t the end of a decline. It’s actually a broad topping pattern that seems to have started earlier this month.
Silver declined too, and the interesting thing is that silver continues its decline also in today’s pre-market trading.
Silver plunged below yesterday’s lows after a tiny rebound.
Since yesterday’s price action in silver was similar to the one that we saw in the mining stocks, perhaps junior miners are going to continue their decline as well as early as today.
However, it doesn’t really matter if it happens today or in the following days because when it will finally happens, and miners slide, it’s likely to be like massive amounts of water being unleashed after the dam breaks down.
Junior miners are connected with the stock market in a stronger way than the rest of the precious metals sector, and the latter is very likely to fall in the following weeks.
And I don’t mean just the economic trouble that lies ahead due to rising interest rates and inflation that’s still “out there”. I also mean the technical point of view.
Based on the head-and-shoulders pattern that is most likely being formed, it seems that the S&P 500 is headed to its 2022 lows, even though it doesn’t seem like it based on the last few weeks’ price action.
Fortunately, we have more data and don’t have to make decisions based on just the last few weeks. Given how stocks have performed since October, it’s quite clear that what we saw is one big correction that took the form of one of the most common topping patterns – the head-and-shoulders pattern.
Also, let’s not forget the situation in the currency markets. I’m usually commenting on the USD Index, but today let’s take a look at the situation in the EUR/USD – the biggest part of the USD Index.
Despite several attempts, the euro cannot hold above its previous 2023 high.
It’s bearish on its own as it’s a sign of weakness, but what really stands out is that those comebacks and (failed!) attempts to move to new highs are typical for the European currency.
Tiny fakeouts were what preceded declines – massive ones – many times in the past. Even the situation in the RSI indicator (upper part of the above chart) points to the situation right now being similar to what happened previously.
And as the euro declines, the USD Index rises. And gold declines as well.
As gold declines, mining stocks are very likely to decline more (as they’ve done in the previous months and years).
And, finally, as stocks decline, the fire of the decline in junior mining stocks is likely to be poured with gasoline.
So, yes, the outlook for junior mining stocks definitely remains bearish. Very much so.
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Przemyslaw Radomski, CFA