Dovish Changes Having Implications. But Perhaps Not the Ones Many Think.

Every now and then, the market behaves in a way that’s surprising. That’s what markets do.

If it wasn’t the case, one would always be able to tell what’s definitely going to happen, instead of what’s probable. And the “probable” word implies that every now and then something other than what’s likely will happen.

This week, the precious metals market moved higher, even though the main trend is down, especially in silver and mining stocks, the entire precious metals market moved higher. Why? The Fed spoke about lowering rates by 0.75% in 2024, so market’s expectations toward interest rates changed.

Even though it’s not really justified, the markets cheered Fed’s decision. After all, in the very short-term the markets tend to be emotional, and the default interpretation prevailed: expectations of lower credit cost is good for business.

Why wouldn’t it be justified? Well, we commented on that last week, and this part of the analysis remains very much up-to-date:

Debunking Rate-Cut Optimism

The recent narrative uplifting stocks and the PMs is the belief that a pivot is bullish. Conversely, pivots are not bullish, and risk assets often crash when they realize why rate cuts are occurring

Please see below:

Dovish Changes Having Implications. But Perhaps Not the Ones Many Think. - Image 1

To explain, the blue line above tracks the S&P 500, while the green line tracks the federal funds rate (FFR). If you analyze the horizontal gray lines, you can see that the last three times the Fed cut the FFR, the S&P 500 was already sinking or was approaching a cliff. 

Therefore, while it may seem like new highs are inevitable for all assets, the recent optimism is more of a ‘buy the rumor, sell the news’ type trade. In other words, investors will likely bail on the S&P 500 and the GDXJ ETF when the Fed actually cuts rates. To that point, with oil prices resuming their crash, it’s a bad look for global growth when crude oil falls below $70. 

Overall, the fundamentals continue to unfold as expected, with higher rates weighing heavily on the U.S. economy. And while the ‘bad news is good news’ trade remains intact, history shows it should end with sharp drawdowns of the S&P 500 and the GDXJ ETF, and a meaningful rise in the USD Index. 

Later, I added:

Again, the immediate-term reaction is one thing, as people reacted emotionally to more dovish approach. We also saw an immediate-term rally in 2019, but then a decline materialized, anyway.

So, no, the current move higher doesn’t change the outlook. The big move is still likely to be to the downside. I know that it might be difficult to think so while gold jumped over $30, but this really is the case. Remember how difficult it was to doubt gold’s breakout to new highs? On Dec 4, 2023, I wrote that the breakout is likely to be invalidated and followed by a massive slide. I started that day’s analysis with the following sentence:

“During sharp rallies, it’s nearly impossible to convince investors that this move is about to end. And yet, that’s exactly what is likely.”

That was the top.

And this sentence applies also today. The breakdown below the rising support line in gold was not invalidated and the next big move is likely to be to the downside.

Dovish Changes Having Implications. But Perhaps Not the Ones Many Think. - Image 2

The S&P 500 Index moved much higher recently, and based on the RSI indicator, it’s most overbought in years. This suggests that the stock market is not likely to break to new highs now. It’s likely to reverse its course, and decline, just like it did from similar price levels in early 2022. Perhaps Paul Rejczak will take profits from his long positions in stocks in this area.

Anyway, yesterday’s small reversal might indicate that the top is already in.

Let’s keep in mind how weak mining stocks have been relative to the stock market in the previous months – the red rectangle shows how far stocks rallied and how far miners declined despite that. This means that once stocks decline, miners are likely to truly slide.

Speaking of stocks, please note that the situation in world stocks hasn’t really improved recently.

Dovish Changes Having Implications. But Perhaps Not the Ones Many Think. - Image 3

The situation continues to be very similar to what we saw in 2008, with the main difference being that now the initial decline was bigger. Because of that it’s no wonder that the corrective upswing is also bigger, and it takes longer.

In both cases, world stocks corrected to approximately the 61.8% Fibonacci retracement, and they declined thereafter. This time, there were two corrections to that level, which is not that odd given that the initial decline was bigger this time.

The implications remain very bearish not just for stocks, but also for mining stocks.

As you can see miners (the XAU Index) suffered enormously in 2008 in the aftermath of the situation that’s so similar to the current one. Let’s take a closer look.

Dovish Changes Having Implications. But Perhaps Not the Ones Many Think. - Image 4

This analogy has very bearish implications for the following months.

And while we’re discussing stock market indices and their long-term charts, let’s not forget about the critical situation in the Toronto Stock Exchange Venture Index – one of the proxies for junior mining stocks.

Dovish Changes Having Implications. But Perhaps Not the Ones Many Think. - Image 5

The TSXV is after a massive breakdown below the rising support line, that’s analogous to the one that we saw in early 2013 – and, to a smaller extent, to the one seen in 2008.

Now we see a pause in the decline, but given that the breakdown was already confirmed, the decline is likely to resume after the pause, and it’s likely to put a very bearish pressure on the precious metals and mining stock prices.

[This is the place where in the full version of today’s analysis – on which this free analysis is based – I included in-depth analysis of gold and mining stocks including comments on GLD’s reversal, GDXJ’s daily and hourly charts along with timely details]

As far as silver is concerned, then it’s analogy to previous periods where it outperformed gold and it rallied on particularly strong volume remains up-to-date:

Dovish Changes Having Implications. But Perhaps Not the Ones Many Think. - Image 6

Silver soared by over 4% initially and then by almost 2% - and the rally was sharp. It took place on strong volume, so many traders – especially those new to the silver market – probably view this as a bullish sign.

In case of many other markets, a big rally on strong volume would indeed be a bullish sign. Silver is different, though.

The white metal is not only known for fake breakouts (and the last – failed – breakout above the January highs proves it once again), but it’s also known for fake rallies in the middle of big moves lower.

I marked similar rallies with red ellipses, and I marked huge-volume rallies with dashed lines.

As you can see, even the high-volume rallies turned out to be fake moves most of the time. So, was this week’s move higher in silver really bullish?

No, it wasn’t.

Besides, please note that the recent back-and-forth movement in silver is similar to what silver did in late 2012 and early 2013.

Dovish Changes Having Implications. But Perhaps Not the Ones Many Think. - Image 7

The final tops (2011, 2021) formed on huge volume, and that was preceded by an initial volume spike. Then the SLV ETF declined in a back-and-forth manner, where we saw 9 bigger highs and lows. Then, after the final (9) top, silver declined in a back-and-forth manner in a smaller range.

We see the same thing right now. The current price movement is what preceded one of the biggest declines in silver’s recent history, so it’s difficult to view the recent performance as something bullish.

The analogy to 2011-2013 had very bearish implications for the following weeks and months, so the implications here are bearish, not bullish.

The USD Index moved to new short-term lows yesterday, and my comments from yesterday’s intraday Gold Trading Alert remain up-to-date:

Dovish Changes Having Implications. But Perhaps Not the Ones Many Think. - Image 8

At the same time, gold, silver, and mining stocks are weak compared to signals coming from the USD Index. The latter just moved below its recent low and below its 61.8% Fibonacci retracement based on the 2023 rally, but gold, silver, and miners didn’t move to new highs.

Also, please note that the session is not over yet, and USDX’s breakdown is far from being confirmed. The previous attempt to break below the 61.8% Fibonacci retracement level failed, and the same is likely to happen now.

The USD Index did close the day below the 61.8% retracement, but two more daily closes would be needed to confirm the breakdown. For now, a rebound is still the most likely outcome, especially that the RSI just moved to 30 once again.

I recently wrote that RSI on its own might not be enough to trigger a rally, but in this case, we have other signals (e.g. the support provided by the 61.8% retracement and the previous low) that suggest a rebound, so it’s very likely to happen.

Also, if we look at USD Index’s greatest component, the EUR/USD exchange rate, we see that what happened recently is a part of a one big – and normal – bearish pattern.

Dovish Changes Having Implications. But Perhaps Not the Ones Many Think. - Image 9

The European currency moved once again to its early-2023 top, thus likely creating a multi-top pattern. This has been a common way for the EUR/USD to top and I marked the previous cases on the above chart.

In 2008 and in 2011 there were sharp, final comebacks to this level before the decline continued. The one in 2014 was small, but it was still there, and the same goes for the one seen in 2021.

What might see chaotic or a game-changer from the short-term point of view, often becomes normal and orderly when looked at from a bigger perspective.

The situation in copper also confirms that a turnaround is here or just around the corner.

Dovish Changes Having Implications. But Perhaps Not the Ones Many Think. - Image 10

The recent rally was quite sharp, but it took copper back to its rising resistance line, which is also the neck level of the head-and-shoulders formation. A decline from here would be a natural consequence of the verification of the breakdown. The target based on the head-and-shoulders formation is below 3.0, and that’s where copper is likely heading, at least initially.

As you can see on the above chart, the big moves in copper align with big moves in precious metals (lower part of the chart), so the situation in copper is yet another factor pointing to lower precious metals prices.

Summing up, this week’s sharp rally sure got many heads turning and many eyebrows being raised, but the initial, emotional reaction to surprising news is rarely the thing that is worth following. The money on the markets is usually made thanks to objective analysis, looking at multiple factors, and patience.

On a side note, this week we sent out multiple intraday Alerts, to keep our subscribers informed and updated when markets got hot. Here’s one of the messages that we received based on that:

“Thank you for the service and gold trading alerts. Please pass it along to Przemyslaw that his multi-faceted technical analysis is exactly what I was looking for in a service along with the trade alerts.

We just experienced a corrective bounce (12/13 -12/14) and his intra day alerts emphasized everyone to keep cool heads. This is above and beyond any service!”

The full version of today’s analysis - today’s Gold Trading Alert -is much bigger than what you read above, and it includes not only the initial downside target for the GDXJ (level from which juniors could rebound) but the entire price path that the GDXJ is likely to take (with specific target areas (for declines and rallies). I encourage you to subscribe and read those premium details today. Of course, as my premium subscriber, you’ll get the intraday Alerts whenever the situation requires them – that’s one of the parts of the service that my subscribers tend to enjoy the most.


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