Gold Forecast: What’s Better than a Verification of a Breakdown?

How can a verification get even clearer? If it looks just like the previous ones. And that’s what we see in the GDXJ.

I wrote about verifications in yesterday’s analysis, and almost all of what I wrote remains up-to-date:

Gold Forecast: What’s Better than a Verification of a Breakdown? - Image 1

And the context is that gold price, silver, and miners just broke below their May lows (precisely: the GLD, SLV and GDXJ ETFs).

It’s natural for the markets to move below certain levels and then test whether that move was true or not. If it fails, it means that the market was actually strong, and the decline was accidental or artificial. If the price fails to move back up and declines once again, it becomes obvious that the move lower was real and it represented the true trend.

That’s all the early Friday rally was – a test. The fact that all three: GLD, SLV, and GDXJ declined shortly thereafter confirms that the next short-term move is to the downside.

In today’s pre-market trading gold and silver futures are moving higher once again (silver to a much greater extent), so we might see a second verification of the move, and it wouldn’t be odd either.

The important take-away from Friday’s price action is that the bearish case for the short term got another confirmation.

The part that I put in bold is exactly what we saw yesterday. The GLD, SLV, and GDXJ ETFs moved a bit higher, and they verified the breakdown once again by moving to the previous support line and treating it as resistance.

To be precise, that’s what we saw in GLD and GDXJ but not in the SLV. This is where having experience with the precious metals sector becomes very important. The thing (that people new to the sector almost always get wrong) is that silver is very often providing fake indications. And in particular, it’s known for “fakeouts”.

We’ve seen this tens or many hundreds of times. Moves higher when silver outperforms gold (which also happened yesterday) are very often seen before bigger declines. Consequently, the fact that SLV moved a bit above its May low doesn’t invalidate the bearish case because the rest of the sector (its key parts) didn’t move above those lows.

Moving back to the opening statement from today’s analysis, what we saw in the GDXJ is perfectly bearish also because it’s in tune with what we saw right after previous breakdowns.

Gold Forecast: What’s Better than a Verification of a Breakdown? - Image 2

Twice this year, the previous breakdowns below the preceding lows were characterized by a very similar pattern. I marked those previous cases with orange rectangles.

In both cases, the GDXJ took a week or so to consolidate before launching another quick decline. Since that’s what we just saw, another quick decline appears to be in the cards.

All in all, the precious metals sector just provided us with a bearish confirmation for the near term, and it’s likely to decline soon. However, we might see a short-term buying opportunity very soon – similar to the ones that we took advantage of in May and in July last year.

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