Many people are focusing on the implications of the lower-than-expected CPI, but the real deal is taking place on the S&P 500 chart.
Stocks just closed the day above their mid-March high and above their 78.6% Fibonacci retracement. Now, the questions is, if this breakout will hold. The support and resistance lines are one of the key technical tools, but they are not perfect. After all, when markets are particularly emotional and/or are moving based on an important and unexpected piece of news, they might not be able to stop a given price move. This imperfection is quite understandable.
Now, it doesn’t mean that the support/resistance levels are useless – quite the opposite. The thing is that one should use them as they are supposed to be used – and not in a very strict way. The key thing that most people don’t pay attention to are confirmations and invalidations of breakouts and breakdowns. People rush to get into a position based on a breakout or breakdown, and they don’t take into account the possibility that the market might have been “forced” to move above or below a certain level based on the weight of the news, and not because this represents the true shift in the sentiment.
That’s why verifications of breakouts/breakdowns are so important – to check if they stand the test of time. If the move was accidental, the market forces will likely move the price back where it came from, at least to a certain extent – enough to invalidate the move above/below a given support/resistance level. This way we know that the breakout/breakdown was accidental, and the sentiment actually favors a move in the other direction.
Yesterday’s breakout in stocks is being tested right now. Stocks are slightly up and the breakout could be easily invalidated at any hour now. On a side note, I saw that Paul is preparing (btw, that’s not his only position in stocks, he has two more) to switch his position (taking profits from the long position) if S&P 500 moves to/below 5685.96, so this might be another level (in addition to the above-mentioned resistance levels) worth watching when determining the outlook. (Of course, this means that he’ll cash in profits even if stocks decline.)
If we get a daily close back below the mid-March high (in terms of the closing prices), the breakout will be invalidated, and we’ll get a powerful sell signal.
How powerful? Well, this year’s (February) top was formed in this way, so the same technique could easily confirm the current top.
The way gold and silver are performing today seems to indicate that we’ll get more weakness soon. The reason is that while gold corrected yesterday’s decline in a way that’s not that meaningful, silver rallied quite visibly.
Remember – silver’s very short-term outperformance is a sign of an upcoming weakness in both metals (and likely in other markets). Especially when it’s accompanied by relatively weak rally in mining stocks (which IS the case today).
Why would the silver vs. gold relative performance indicate anything for stocks (and vice-versa)? Because the markets are interconnected, and – just like it was the case in 2008 and 2020 – they are likely to move together in case of bigger declines. And the USD Index is likely to move in the opposite direction.
The USD Index is after a clear, major breakout and it’s currently verifying it by not declining back below the declining support line.
I wrote about the same thing with regard to stocks, but unlike it is the case with stocks, the USDX has moved significantly above the resistance line, and the latter is declining, which makes a move back below it unlikely.
It’s unlikely also because the rally in the USD Index is supported by the fundamental outlook (once again, U.S. tariffs are positive for the USD), and by the technical signals coming from USD Index’s long-term chart.
USDX bottomed at the combination of powerful support levels after political news triggered an emotional sell-off – just like it was the case with the 2018 Mnuchin bottom. Lower USDX values were never seen since that time, and perhaps we saw a multi-year bottom in the USDX now as well.
What does the above tell us? That most likely a major top in gold, silver, copper, and mining stocks is in, as they are all likely to move in the opposite to the USD Index.
And since gold’s final top is most likely in, the question becomes: where are the downside targets? This, however, as well as the near-term downside target for the GDXJ is something that I’ll leave to my subscribers.
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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief