Breakdown Confirmed – Full Profit Speed Ahead!

What a perfect confirmation of the breakdown! What a verification! Unbelievable!

Yes, I mean the breakdown in the proxy for junior mining stocks – the GDXJ ETF.

In my Thursday’s analysis, I wrote the following:

However, if we were to see a rally from here, how high could the GDXJ go? And this, my friends, is a better question to be asking right now than one about whether the immediate-term outlook is bullish.

Indeed, based on the RSI and big-volume reversal, the immediate-term outlook is bullish, but the key point here is that based on the breakdown to new lows, it’s quite likely that the GDXJ won’t rally far – if it rallies at all that is.

The GDXJ now has resistance at the previous 2023 low, and the August low, and at the slightly rising red resistance line. This means that the immediate-term upside target is very close – below $33.5.

This, in turn, means that I don’t think that adjusting the current short position is justified from the risk to reward point of view. Of course, day-traders might want to take advantage of the possible rebound, but in general, it seems that this move might be too tiny to really take it into account.

Here’s what happened:

Breakdown Confirmed – Full Profit Speed Ahead! - Image 1

The GDXJ topped on Friday at $33.20, and then it declined by almost a full dollar, closing the week at $32.23.

In this way, junior miners verified their move to new 2023 lows through:

  • weekly close below the previous 2023 lows
  • three consecutive daily closes below the previous 2023 lows
  • the comeback to the previously broken support line, which was followed by a decline, which verified the line as resistance.

This means that whatever rally was likely to happen based on Wednesday’s and Thursday’s reversals might have already happened.

The slide to new lows can now continue.

Also, please note that I wrote that I didn’t think that it was a good idea to adjust the short position, even despite the possibility of seeing an intraday rally here.

Breakdown Confirmed – Full Profit Speed Ahead! - Image 2

Indeed, as you can see on the above chart, the move higher was very sharp, but what’s most important is that the follow-up decline was also very sharp. It would have been very difficult to get back into the short position at higher prices (just like we managed to do recently – once when flipping the short position to a long one, and once by greatly limiting the size of the short position and then greatly increasing it at higher prices).

Gold and silver declined as well, and the entire trio (together with miners) ended the week close to its weekly lows.

Breakdown Confirmed – Full Profit Speed Ahead! - Image 3

The USD Index and the S&P 500 Index both corrected, which means that the precious metals sector pretty much ignored those corrections.

Translation: precious metals and miners really want to decline here.

The small move lower in the USD Index and the move higher in stocks “should have” generated a rebound in the PMs, but it didn’t. That’s yet another sign of the weakness of the latter and an indication that the declines are not yet over.

Breakdown Confirmed – Full Profit Speed Ahead! - Image 4

Speaking of the USD Index, thanks to its recent move lower, the RSI indicator based on it just moved back below 70 after being extremely overbought.

The USDX has been rallying relentlessly since it’s fake breakdown below the previous 2023 lows. I wrote that the invalidation of this breakdown was likely to have major bullish implications and that the rally following it wouldn’t be small. And indeed – it’s not. However, all rallies need breathers every now and then. We just saw a tiny one, and we might (we don’t have to), see some sideways movement here or another small move lower.

What does it imply for the precious metals market? Actually, not much. Since PMs and miners just proved that they are able not to rally despite a move lower in the USDX, another move lower, might not cause much action either. And sideways trading in the USDX might actually result in lower prices of PMs and miners.

All this means that the profits on our short position are likely to increase further. The profit-take levels for this downswing remain up-to-date.

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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief