The precious metals sector and the stock market rallied once again yesterday, invalidating critical breakdowns.
How high can they rally now?
Let’s jump right into charts.
The GDXJ ETF – a proxy for junior mining stocks – moved considerably higher this week, and it’s no wonder – the conflict in the Middle East keeps getting worse. The key technical detail arrived yesterday.
Namely, juniors moved and closed above their rising red resistance line and their August lows. Invalidation of the breakdown below the neck level of the head-and-shoulders formation is generally a buy signal.
Consequently, the outlook for the very short term (next 1-2 weeks) just became bullish.
What does it change for the medium-term outlook? Absolutely nothing. Just like mining stocks were likely to slide, they are likely to slide in the following months, regardless of Wednesday’s invalidation.
The only thing that changed is the near-term outlook. Instead of seeing a slide all the way down to $28, a move higher now became the likely outcome. So, how high can the GDXJ go before it returns to its massive, medium-term downtrend?
Based on the above chart, it could rally to about $35.7 because that’s where the two blue resistance lines cross. And since the vertex of the triangle created by those lines is on Oct. 20, it would seem quite natural if the reversal takes place then.
That’s one of the targets. Let’s zoom in and check what other targets we have based on more short-term indications.
Based on GDXJ’s hourly chart, it seems that they are between $34 and $35 (in particular, the middle thereof – the $34.5 level). That’s where we, approximately, have the 61.8% Fibonacci retracement based on the September – October decline and where the declining, short-term resistance line currently is. Additional resistance levels are at about $35.5 (the rising red resistance line) and at $36 – at the late-September highs.
Two targets stand out: the ~$34.5 level and the ~$35.5 - $35.7 area.
Since we also have the triangle-vertex-based reversal point on Oct. 20, the price at which the GDXJ will be trading on this day (or close to it), will likely serve as the final price for this rally.
So, if the GDXJ trades at about $34.5 in a few days, then it might not be the final top (unless we see other major sell signals, like silver’s strong performance of an intraday reversal that takes place on very strong volume). But if it does the same on Oct. 19, it will probably be the top. Of course, we’ll keep you – our subscribers – informed.
Having said that, let’s move to gold.
Gold soared visibly, as it’s the part of the precious metals market that is viewed as a safe haven. Silver and miners are connected to gold, so they move similarly, but it is the yellow metal that’s been associated with the ability to protect one against major turmoil.
How high can gold go here? I’d say that the $1,900 - $1,920 area is quite likely to be where gold tops, but I wouldn’t rule out a scenario in which gold has to move to almost $1,960 before it reverses. It will depend on how the situation develops in the Middle East. Mining stocks are likely to be less vulnerable to it, especially as the rally continues. Please remember that miners tend to underperform gold when the rally is close to its end (while silver tends to outperform at those times).
The upside target for silver is not as clear as the above picture might suggest.
On the one hand, silver has a combination of resistance levels at about $23, but on the other hand, silver is known for its fake breakouts. Consequently, it might be the case that silver breaks above $23, and it will be the shorting opportunity for the entire precious metals sector.
Now, as the title of today’s analysis suggests, something important happened in the general stock market.
The S&P 500 Index just invalidated its breakdown below the neck level of the head and shoulders pattern. This is a bullish indication, and it’s a sign pointing to higher stock prices.
I don’t view this as a really major bottom because the interest rates are still high, and they are likely to remain high, thus creating a difficult economic environment, which is likely to lead to a bigger decline in stocks.
However, just because something is likely to happen (like silver soaring above $100) doesn’t mean that it’s likely to happen immediately or shortly (the above scenario is still in the cards for silver, it’s just not likely to happen this year).
In the case of stocks, this means that in the next several days, we’re likely to see higher stock prices. They might top close to 4,450, as that’s where see the declining blue resistance line. This would fit the scenario in which mining stocks (and the rest of the precious metals sector also moved higher). As we recently took profits from our short positions in junior miners, it seems that the above would provide us with an opportunity to re-enter those positions at higher prices.
Don’t let the short-term rally fool you – the main trend in stocks remains down, and the world stock chart confirms it.
The situation right now is just like it was in 2008, right before the enormous, very volatile slide. The price itself (its shape) and RSI confirm that. The implications for mining stocks (visible on the lower part of the above chart) remain extremely bearish. The main difference between the two situations is that this time, miners start from much lower levels (even though gold is much higher).
Also, while we’re focusing on the big picture, let’s take a look at what the junior mining stocks are doing from the really long-term point of view.
Enter the Toronto Stock Exchange Venture Index. That’s also a proxy for junior miners because so many juniors are included in this index.
In short, the index is in a freefall. After the breakdown below the rising, long-term support line that happened earlier this year, juniors plunged. The same happened in early 2013.
The mining stocks then declined in the medium term while correcting every now and then. That’s exactly what we see now, and it puts the current move higher in the proper perspective.
This is not a change in the big downtrend – it’s part thereof.
Also, if you look at the long-term picture featuring the ratio between gold stocks and the general stock market, you’ll see that the recent rally was… Pretty much absent.
The HUI to S&P 500 ratio is on the verge of a massive breakdown. The corrections have been smaller and smaller, and this time, it seems that the ratio is ready to fall substantially once again. If it slides similarly to how it declined in 2008, we’re likely to see it at the levels of its all-time low – at about 0.025.
The implications of mining stocks are extremely bearish for the following months – regardless of what happens this and next week (actually, a rally in the precious metals sector in the very short term is quite likely here). It’s great to have a plan on when to short the market again, though – and we do have it.
From the long-term point of view, the analogy in gold between now and 2013 remains intact. There were short-term corrections in early 2013, before the biggest part of the slide, so seeing a corrective upswing right now is normal.
Having said that, let’s take a look at the USD Index.
Based on how far the USDX declined and how long the decline is taking place, it seems that this is already the main correction within the downtrend, not the quick pullback that would be analogous to what we saw in early May 2022. Consequently, the USDX might decline to about 104.5 (the 38.2% Fibonacci retracement, the May/June high, and September lows). This would fit another very short-term upswing in the precious metals market.
From the long-term point of view, we see that the USD Index has been rallying very sharply recently, so seeing a pullback here is natural – it doesn’t change the main medium-term trend, which remains up.
Meanwhile, copper moved a bit higher recently, but very insignificantly so. It remains below its rising resistance line, and since the breakdown below it was already confirmed, the outlook remains bearish.
The same goes for the big copper and gold producer – FCX. It corrected a bit after breaking below the rising, red resistance line, but the breakdown wasn’t invalidated. The outlook remains clearly bearish.
What does it all mean for the precious metals market? That the extremely bearish outlook remains in place for the medium term, and thanks to the bullish outlook for the very short term, it seems that we’ll be able to re-enter our short positions at higher levels, which would imply increasing our overall profits from the medium-term decline.
As always, we’ll keep you – our subscribers – informed.
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Overview of the Upcoming Part of the Decline
- It seems that the recent – and probably final – corrective upswing in the precious metals sector is over.
- If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400 and GDXJ close to $15 . This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
- The above is based on the information available today, and it might change in the following days/weeks.
You will find my general overview of the outlook for gold on the chart below:
Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
Please post your questions in the comments feed below the articles, if they are about issues raised within the article (or in the recent issues). If they are about other, more universal matters, I encourage you to use the Ask the Community space (I’m also part of the community), so that more people can contribute to the reply and enjoy the answers. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
Summary
To summarize, the medium-term trend in the precious metals sector remains clearly down, but based on the possible escalations of the conflict in the Middle East and the technical invalidations of breakdowns in junior miners and in the S&P 500 index, it seems that miners might move even higher in the next week or so.
That the extremely bearish outlook remains in place for the medium term, and thanks to the bullish outlook for the very short term, it seems that we’ll be able to re-enter our short positions at higher levels, which would imply increasing our overall profits from the medium-term decline.
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Finally, please note that we just took profits from the 11th profitable trade in a row, which is not a small feat – congratulations! And since we’re likely to re-enter our short position at higher levels, this year’s profits are likely to grow even further! Please keep in mind that the possibility to extend your subscription for up to three years (at least by one year) with a 20% discount from the current prices is still open.
Locking in those is a great idea not only because it’s the perfect time to be ready for what’s next in the precious metals market but also because the inflation might persist longer than expected, and prices of everything (including our subscriptions) are going to go up in the future as well. Please reach out to our support – they will be happy to assist you and make sure that your subscription days are properly extended at those promotional terms. So, for how many years would you like to lock-in your subscription?
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): No speculative in the precious metals market are currently justified from the risk to reward point of view.
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Optional / additional trade idea that I think is justified from the risk to reward point of view:
Short position in the FCX with $27.13 as the short-term profit-take level.
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)
Insurance capital (core part of the portfolio; our opinion): Full position
Whether you’ve already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.
Please note that we describe the situation for the day that the alert is posted in the trading section. In other words, if we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).
Additionally, you might want to read why our stop-loss orders are usually relatively far from the current price.
Please note that a full position doesn't mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder - "initial target price" means exactly that - an "initial" one. It's not a price level at which we suggest closing positions. If this becomes the case (as it did in the previous trade), we will refer to these levels as levels of exit orders (exactly as we've done previously). Stop-loss levels, however, are naturally not "initial", but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks - the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGL, GLL, AGQ, ZSL, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as "final". This means that if a stop-loss or a target level is reached for any of the "additional instruments" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) as closed. In other words, since it's not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can't provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the "additional instruments" without adjusting the levels in the "main instruments", which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels daily for the most popular ETFs, ETNs and individual mining stocks.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Furthermore, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
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On a side note, while commenting on analyses, please keep the Pillars of the Community in mind. It’s great to provide points that help others be more objective. However, it’s important to focus on the facts and discuss them in a dignified manner. There is not much of the latter in personal attacks. As more and more people join our community, it is important to keep it friendly. Being yourself, even to the point of swearing, is great, but the point is not to belittle other people or put them in a position of “shame” (whether it works or not). Everyone can make mistakes, and everyone does, in fact, make mistakes. We all here have the same goal: to have a greater understanding of the markets and pick better risk-to-reward situations for our trades. We are on the same side.
On another – and final – side note, the number of messages, comments etc. that I’m receiving is enormous, and while I’m grateful for such engagement and feedback, I’m also starting to realize that there’s no way in which I’m going to be able to provide replies to everyone that I would like to, while keeping any sort of work-life balance and sanity ;) Not to mention peace of mind and calmness required to approach the markets with maximum objectivity and to provide you with the service of the highest quality – and best of my abilities.
Consequently, please keep in mind that I will not be able to react / reply to all messages. It will be my priority to reply to messages/comments that adhere to the Pillars of the Community (I wrote them, by the way) and are based on kindness, compassion and on helping others grow themselves and their capital in the most objective manner possible (and to messages that are supportive in general). I noticed that whatever one puts their attention to – grows, and that’s what I think all communities need more of.
Sometimes, Golden Meadow’s support team forwards me a message from someone, who assumed that I might not be able to see a message on Golden Meadow, but that I would notice it in my e-mail account. However, since it’s the point here to create a supportive community, I will specifically not be providing any replies over email, and I will be providing them over here (to the extent time permits). Everyone’s best option is to communicate here, on Golden Meadow, ideally not in private messages (there are exceptions, of course!) but in specific spaces or below articles, because even if I’m not able to reply, the odds are that there will be someone else with insights on a given matter that might provide helpful details. And since we are all on the same side (aiming to grow ourselves and our capital), a ton of value can be created through this kind of collaboration :).
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief