Gold Invalidates Its Breakout While Silver Outperforms
Another day, another indication. These are popping up like mushrooms after a rain. What’s in store for today?
Two major short-term indications and one extra.
The first major indication comes from gold.
Gold just invalidated the move above its 61.8% Fibonacci retracement level. In fact, it’s even slightly below its 50% retracement. This means that the link to what we saw about a year ago just got even clearer. As a reminder, I wrote about it yesterday:
Gold also moved on huge volume, and the last time it did so was at its 2022 top.
Also, I’ve been writing about the similarity between now and what happened in the middle of the previous year, but it seems that the analogy should be adjusted. The early 2023 top seems to be similar to the early 2022 top, and what we see now is actually similar to what we saw in mid-April 2022.
In fact, if you consider that gold formed a double bottom in March 2022 and also in February and March 2023, the link becomes even clearer.
Now, how high did gold rally back in April before launching a powerful, almost $400 slide? It rallied (almost) to its 61.8% Fibonacci retracement level.
How high did gold move yesterday? Slightly above its 61.8% Fibonacci retracement level. At the moment of writing these words, gold futures are trading at about $1,906, which means that they have already moved back below the 61.8% Fibonacci retracement, thus making the situation even more similar to what we saw last year.
If the analogy were to continue, what would be the next step for gold? A decline – a powerful one.
Based on what we’re seeing right now, the analogy does indeed continue. The implications are very bearish.
The second indication for today comes from the silver market.
Do you recall what silver is likely to do right before bigger declines?
It’s likely to outperform gold on a very short-term basis. And guess what happened yesterday?
Gold futures ended the day lower, but silver futures ended the day higher.
Consequently, we just saw what used to precede many other big declines – the implications are bearish.
The implications coming from silver’s recent volume (that I described yesterday) also remain up-to-date:
Silver provides an extremely clear indication of just how important yesterday’s volume was.
In practically all cases, when silver moved higher on volume that was similarly big (there were four such cases), it marked a major top. This includes the 2021 top (slightly above $30) and the 2022 top. It also includes this year’s top that we saw in early February.
It’s not particularly complicated, nor is it perplexing. The difficulty in applying this knowledge in practice is the ability not to follow the herd, despite it being difficult on an emotional level.
The remedy is simple: take at least a small break from the market’s emotionality, stop checking prices for at least a while, and do something that relaxes you. Take a walk, talk to your loved ones (but not about the markets ;) ), meditate (perhaps with ceremonial-grade cacao, which is my personal favorite), or do whatever you know works best for you.
Then, once you have grounded yourself and can look at everything – including markets – with a calm mind, look at what the chart is really saying.
In my opinion, based on what we see on the above chart, the silver price is saying “don’t let this fool you, I’m about to decline after showing strength, just like it’s happened many times before – the cycle is almost complete, you still have time to react, but not much thereof”.
The “extra” that I mentioned earlier is the fact that the GDXJ almost touched its 38.2% Fibonacci retracement based on the recent decline.
This means that the corrective upswing is quite likely over, especially given what’s happening in gold in today’s pre-market trading, and given the way silver performed relative to gold yesterday.
The left shoulder of the head-and-shoulders pattern that we see on the above chart remains very similar to what we see right now. The fact that the GDXJ moved slightly above the declining dashed line means that it’s not perfectly symmetrical, but “only” very much so. The very bearish implications remain fully intact. Consequently, my yesterday’s comments on the GDXJ remain up-to-date:
Just like I wrote in one of the comments below yesterday’s Gold Trading Alert (…), the current correction seems similar to two previous corrections that we saw in the middle (approximately) of big declines.
That happened in mid-2021 and mid-2022. I marked those cases with red rectangles. The similarity might not be obvious in terms of prices as the shapes of corrections were a bit different, but the similarity is definitely visible in the RSI indicator.
The thing is that in both previous cases, the RSI “had to” rally above 50 in order to “complete” the correction.
Anyway, yesterday’s closing price was a mere $0.13 above the entry price for our current short position, so we’re basically neutral here (while being profitable in the FCX), and given today’s pre-market declines in gold futures and in the GDXJ in today’s London trading, it seems that the short position in the GDXJ will become profitable once again soon – perhaps as early as today.
The most interesting part of this correction is that it’s very similar to how the GDXJ traded in December 2022. That was when we also saw the back-and-forth movement. That was during an upswing, and now the tables have turned – it’s taking place after a decline.
The really important detail is that this makes the head-and-shoulders top pattern in the GDXJ even more symmetric and therefore even more reliable!
This means that the downside target of about $26 that’s based on the size of the head of the pattern as well as the 2022 low is even more likely to be reached in the following weeks/months.
If stocks slide in the 2008 style, just like I wrote previously, then the $26 level could also be reached in a quite volatile manner (remember how fast GDXJ declined in 2020?). This, in turn, means that the odds of a decent (but brief) rebound from those levels are increasing. It’s too early to say if I will want to switch into a long position once the GDXJ moves to $26, but I’m not ruling it out at this point.
Either way, even though the immediate term might look chaotic or unclear, the outlook for the following weeks and months remains extremely favorable. This is one of those opportunities that are hard to come by – and very few people realize it at this time.
On a final note, our profits from the short position in the FCX are likely to increase shortly, based, i.e., on the way the FCX moved yesterday compared to what happened on the general stock market.
The former moved somewhat higher, but the FCX only had enough strength for an early-day rally – and it then gave away a large part of those gains before the day was over.
The black candlesticks represent days when the price closed higher but declined on an intraday basis (the close was lower than the high). The last time we saw a session that was really similar to yesterday’s session was in mid-December 2022. And yes – short-term declines followed.
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Przemyslaw K. Radomski, CFA