Don’t Buy at the Top. Analyze.
The reversal in stocks is crystal-clear. The ones in the USDX, gold, silver, miners, and crude oil are not. They’re still super-important, though.
The USD Index is soaring today, so let’s start today’s free analysis with this market. You can probably already tell that it’s likely that today’s (0.6+) rally is the start of something bigger and not just a one-day event. Let’s check why – starting with my previous comments on this market as they remain up-to-date:
There are really important buy signals and there are moderately-important ones. And then there are weak ones. What we see on the USD Index is not one, but a combination of three important buy signals.
The USD Index is after a corrective downswing that took it to the 61.8% Fibonacci retracement level (almost). This level provides strong support in general, but it works particularly well for the forex market.
Now, since the USDX almost (!) moved to this level, it might be the case that it dips before rallying back up, but the move lower is unlikely to be significant, if we see it at all.
I marked the downside target with a green ellipse, and as you can see, it was already reached, but there’s still some room for the U.S. currency to move a little lower.
The second important bullish indication comes from the RSI indicator. The latter moved very low compared to its usual course of action. It just bounced off the 30 level, which serves as a classic buy signal, and something that indeed worked for the USDX over and over again.
The only time, when the RSI was lower than it just was, was at the yearly bottom in July. At that time almost nobody wanted to view USD’s move below 100 as a buying opportunity, just as it’s not being viewed as such right now. And yet, that was exactly what started USD’s massive rally.
The third important factor that needs to be kept in mind is the aspect of time. The USDX has the tendency to reverse its course close to the turn of the month. The month is about to end and there’s no doubt that the most recent move was to the downside.
This means that it’s not only the case that the USD Index is likely to reverse from the current price levels – it’s also about time that it does that.
Given the negative correlation between the USD Index and the precious metals sector, this very likely means that the tops in gold, silver, and mining stocks are either in or about to be in.
There’s more to the entire picture than just the rallying USD Index. The copper market is currently verifying the breakdown below its rising support line, which now turned into resistance.
As this line holds, the medium-term trend remains down. Since copper and the precious metals market (and stocks) usually move together, the implications for the PMs are bearish.
The FCX is also corrective after a breakdown. Unlike copper, FCX wasn’t able to touch its own rising support line, showing weakness. And since it was weak during the correction, the odds are that FCX will be declining profoundly, when the decline resumes. And since copper already touched its resistance line, the odds are this will happen soon.
Interestingly, we see something similar on the chart featuring the gold to oil ratio.
The ratio moved approximately to its rising resistance line, and then it moved back down. It seems that the top is in. When the ratio topped previously this year, it also meant top in gold.
Now, it could also be the case that the above implies a bottom in the crude oil price, and as Anna described it recently, it could be the case that the inverse head-and-shoulders bottom in crude oil is in the making, which could be a buying opportunity for this market.
It could also be the case that both would happen at the same time – a bottom in oil and a top in gold. After all, crude oil topped in late September, and gold bottomed shortly thereafter. It could be the case that crude oil bottomed already, and gold is topping right after that had happened.
All in all, the junior mining stocks' values and the share price of the FCX are both likely to decline strongly in the coming weeks, and it seems that they will start their next big decline soon.
I know it's difficult not to get carried away by the day-to-day price action, but please keep in mind that what's usually difficult is also profitable in the end. And let’s also keep in mind that we’re on a record of having 11 profitable (unleveraged – e.g. in GDXJ) trades closed – in a row. In my view, the current ones are very likely to join this profitable trend, and right now is a perfect moment to take advantage of the prices that the market is offering.
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Przemyslaw K. Radomski, CFA