It’s Not a Rally, It’s the Final Chance to Prepare
The tiny consolidation continues, making the overall picture even more bearish – just like the calm before the storm.
In the last few days, we saw some back-and-forth trading, which is a perfectly normal kind of reaction to the early-September slide. The other type of reaction that would be perfectly normal – and bullish – would be a rebound and a strong rally.
Instead of that, we see a relatively weak rebound and a consolidation. This is a classic bearish sign. The back-and-forth trading can be described as the flag pattern. Those patterns tend to be followed by a price action that’s similar to the price action preceeding them. In this case, GDXJ declined by $2 before entering the flag pattern, so it might decline by $2 right after the pattern ends. This would imply a move to about $32.
Of course, this doesn’t mean that this has to be the end of the decline – it’s just an indication that we could see some kind of rebound at that time.
It’s not only miners that are consolidating; we’re seeing the same thing in gold and silver.
Gold moved lower after breaking below the rising red support line, and the breakdown below it has now been more than verified. The implications are clearly bearish.
One could say that miners didn’t decline yesterday, while gold did, which means that miners showed strength vs. gold, which would be bullish. However, given the flag formation and the fact that junior miners declined before gold and underperformed it significantly in the previous week, more than nullify the potential bullish implications of yesterday’s strength in the miners.
Silver staying below its rising support lines has the same implications – bearish ones.
What does it all mean? It means that the precious metals market is likely to decline, quite likely profoundly so, and junior mining stocks’ prices are likely to truly slide, thus increasing the profitability of the current trade and extending our streak of profitable trades (10 closed trades so far).. While I can’t promise any specific rate of return, it seems to me that the profits on this decline are going to become astronomical.
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Przemyslaw K. Radomski, CFA