Stocks just moved to new highs, gold moved higher, and mining stocks… Moved a bit higher. What changed?
It does not matter that gold moved higher today, as it continues to trade sideways – from the medium-term point of view – below the rising, dashed resistance line, and it’s doing so in the ABC (zigzag) pattern.
No invalidation of confirmed breakdown = no really bullish implications. Especially given what’s happening and what’s likely to happen in the USD Index, but I’ll move to the latter a bit later today.
In short, it’s just as I described it yesterday:
No important breakdown was invalidated based on today’s move, and overall, the recent price moves took a form of an ABC correction pattern (sometimes called a “zigzag”), which is quite common.
In other words, today’s move higher is really uneventful.
Wednesday’s and Thursday’s sessions might be particularly interesting, as we’re going to get Fed’s next interest rate decision and the follow-up comments on Wednesday (as well as the ADP nonfarm employment change) and on Thursday we’re getting an analogous decision from The ECB. Plus the U.S. initial jobless claims.
The interesting thing about the days that are rich in statistics is the fact that the volatility can precede them, even though nothing is happening (theoretically) on those days. In reality, that’s when many market participants try to guess what the fundamental news are going to be and how the market reacts to them… In a way making the market react before any news is released.
As I explained previously, it’s much better to focus on how the market is likely to interpret whatever is coming its way, and we know this thanks to technical chart analysis.
Thanks to this approach you can be early in price moves and you are less likely to be affected by fake rallies (like the one that we see this week in gold price) or fake declines that tend to happen right before and/or right after important fundamental announcements.
There are many ways in which one can interpret data – and the prevailing way is likely to be determined based on market’s emotional state – and that’s what you can detect using technical tools.
Right now, since gold hasn’t invalidated its breakouts, the outlook remains bearish.
Some might say that silver broke above their declining resistance line, and that it’s bullish.
Silver DID break above its declining resistance line, but it’s NOT bullish.
One of the reasons is that the breakout is not confirmed.
The other reason is that silver is known for its fake breakouts.
I marked some of them on the above chart. There were many times when traders were fooled into thinking that silver is breaking higher. That’s the key reason why silver is so difficult to trade, especially for beginning traders. It has its own dynamics and specific tendencies. One of them is to provide fake breakouts. Consequently, I’m not placing much weight on silver’s yesterday’s breakout.
The USD Index continues its post-breakout consolidation, and in today’s early trading, it moved lower.
And it’s actually a good thing. I’ll elaborate shortly, but I’ll start by quoting what I wrote yesterday about the current situation because it still remains up-to-date:
Meanwhile, the USD Index is moving back and forth after breaking above its declining resistance line. Since this breakout has now been more than confirmed, it’s very likely (I don’t want to use the word “obvious” here, but it’s close to being obvious) that the next move up is a “done deal”. We’re simply waiting for the next “go” signal – a trigger.
The trigger can come from any news release or even without it. A fundamental trigger, like a favorable fundamental statistic being released would be useful. As we’re about to get quite a few of them, it’s quite possible that the market will view at least one of them as something bullish.
And if not, the USDX would simply consolidate for some time and then rally anyway – that’s what we can say based on just technicals. Whatever hits the market if it wants to rally, is likely to either trigger a rally or prolong a pause. Maybe a tiny decline. And a confirmed breakout is exactly what makes the environment bullish.
The trigger could be of technical/cyclical nature, and we’re about to see one.
The USD Index tends to reverse its course right at or close to the turn of the month. I marked the previous times when the USDX reversed close to the turn of the month with dashed, blue lines. As you can see, this simple tendency has proven to be very effective.
Tomorrow is the last day of January, so we could see the reversal today or tomorrow. Or perhaps later this week. Either way, it’s most likely coming.
If it wasn’t for the very short-term move lower that we’re seeing now, the nature of this reversal could have been bearish. After all, the USDX is after a monthly rally.
Thanks to a dip in the USDX value, this cyclical tendency could result in another powerful upleg.
Of course, this would be particularly bearish for the precious metals sector, and it would very likely make our short positions more profitable.
And if the above wasn’t enough to convince you that the current outlook for the precious metals sector is bearish, please take a look at the junior mining stocks.
At the moment of writing these words (about 15 minutes after the markets opened in the U.S.), gold futures are up by about 1%, and the GDXJ is down by $0.01.
The very quick attempt to move higher in the GDXJ lasted only a few minutes and was immediately followed by a decline.
Yes, mining stocks are ridiculously weak here when compared to gold, and that’s an indication that’s far more important than gold’s move higher on its own.
It’s obvious that miners were forced to move higher here by gold’s visible upswing, but that’s not where they really want to go.
We saw a tiny breakout above the declining, dashed resistance line, but this move is far from being confirmed. In fact, it’s been less than 2 trading hours since GDXJ moved above it, as it happened very late during Monday’s trading.
Let me emphasize it one more time: gold’s move up today is bearish because it allowed us to see how extremely weak mining stocks are and at the same time it didn’t cause an invalidation in case of any meaningful breakdowns.
I received a question from one of my subscribers about the rally in the stock market and how it relates to the decline in mining stocks. Wouldn’t a rally in stocks prevent miners from declining?
In short, no. Please check what has happened to both markets since May 2023. Stocks moved much higher, and yet miners are much lower. So, even if stocks continue to rally for the next 6-12 months, mining stocks would still be likely to decline significantly in the following months.
Miners are in such bad shape that even a pause in stocks’ rally is enough to make them decline. I marked two such cases with vertical dashed lines.
When stocks decline, miners will very likely slide. And when stocks decline particularly violently, miners would be likely to fall like a stone in water – 2020- and 2008-style.
When can it happen? When will the decline finally resume?
It might resume as early as this week due to the likely reversal in the USD Index. But that’s not the most important thing. The most important thing is that even if it doesn’t resume right away, it’s still likely to resume soon – as soon as stocks at least take a breather.
Now, please remember that this week – based on the Fed’s interest rate decision and comments and also other statistics – we could see increased volatility in both directions: up and down, but the main trend is unlikely to change.
If things get particularly hot, I’ll be sending intraday Alerts, but for now, I don’t see a risk of the medium-term trend in gold (let alone mining stocks!) becoming bullish.
The bearish outlook for the junior miners remains intact, and it’s very likely that our profits from the short positions in them will grow further in the near future.
The situation in junior mining stocks currently offers an exceptional risk to reward opportunity in my view - I invite you to take the 10-day free trial of my Gold Trading Alerts and take advantage of it before it’s too late.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief