Gold Price’s Verification, Not Invalidation
I just wrote about gold touching its previously broken (upper) support line and verifying it as resistance. And since that time, it has happened once again.
This time, the daily closing price was higher, but the overall principle was the same. Gold moved to the previously broken support level and verified it as resistance.
At the same time, gold price moved back to its 50-day moving average (marked with blue), which also served as resistance, meaning that gold is verifying a breakdown also below it.
The action that we saw in the GDXJ, a proxy for junior mining stocks, might seem bullish at first sight, but in reality, it’s also a form of verification.
Just like in mid-2022, junior miners corrected approximately 38.2% of the initial decline, and it was not a bullish thing back then. In fact, it was the opposite – juniors then declined shortly thereafter.
RSI moved just moved close to 50, which was also where – approximately – the correction ended in 2022.
And it ended on a volume that was very similar to what we just saw (marked with red arrows).
The most interesting action, however, happened on the general stock market, and it provides extra insight into what’s happening in junior miners.
You see, the recent price/volume action greatly resembles what we saw in late-2022.
At first, stocks rallied sharply, then they consolidated by moving back and forth, and when they finally broke above the previous highs, they only did so in order to fool the majority and form the final top.
The really important detail here is that when stocks formed the final (relatively broad) top, it was accompanied by a huge volume spike.
In the previous month, we saw that specific intro to the top, and this week we saw this important confirmation from volume.
Consequently, it seems that stocks are topping here.
Now, what does this have to do with the mining stocks? Quite a lot because the latter was recently one of the weakest sectors (especially when compared to what gold was doing). And the thing is that the weakest sectors tend to perform best at market tops.
Why? Because the investment public buys what’s cheap without considering that it might be cheap for a reason.
Consequently, the fact that junior miners just moved higher likely has a different reason behind it other than the trend in them becoming bullish.
The medium-term trend in junior miners definitely remains down.
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Przemyslaw K. Radomski, CFA