That Rally in Gold Looks Familiar and It Has Major Implications
So, the USD Index broke above its declining resistance line, and it verified the breakout. What’s next?
On the above chart, you can see that the tiny move to new yearly lows was quickly invalidated and that USDX has moved higher since that time.
Zooming out, however, allows us to see that this move is pretty much nothing compared to the recent decline. The RSI is still below 30, indicating an extremely oversold condition.
This is as bullish as it gets, especially given the USD Index’s tendency to turn around and form bottoms (major ones!) in the middle of the year.
This means that the slide in the value of the U.S. currency is likely overdone and that we’re about to see much higher values soon – perhaps very soon.
And since gold was refusing to rally profoundly given USD’s weakness (it’s not at yearly highs, is it?), the impact of the dollar’s rally is likely to be truly profound – and bearish.
On the very short-term, one can say that gold did indeed rally.
Taking yesterday’s intraday high and the recent intraday low, it rallied by 4.6%, and it almost touched the 50% Fibonacci retracement based on this year’s decline.
And it might even appear somewhat bullish if it wasn’t for the analogy to how gold performed before one of its biggest slides of the previous decades.
Remember the 2012-2013 decline? You know, this one:
If you don’t remember what was the prevailing sentiment in late 2012 and early 2013, let me remind you.
It was pretty much “obvious” to everyone that gold is just consolidating and that its long-term rally is about to be resumed.
The decline that started in the second half of 2012 was shrugged off as yet another boring correction.
In reality, the local rallies that we saw in late 2012 and early 2013 were not just corrections. They were the final corrections and final chances to get out of the precious metals market and even the final signals to enter short positions in it.
Now, the above chart includes the decline, which makes the late-2012 and early-2013 corrections barely visible. Let’s zoom in to see how big they really were.
Surprise, surprise! The biggest one was 4.9%, and the second biggest one was 4.4%. In the first case – the first and biggest correction, gold moved slightly above its 50-day moving average.
Does it remind you of something? It should because that’s exactly what we just saw. Gold moved higher by 4.6% from its recent bottom, and it moved slightly above its 50-day moving average.
So, how bullish the recent move up really was? Barely.
And speaking of analogies to corrective upswings – the GDXJ moved higher by less than it did during the last year’s corrective upswings. What we saw recently is not a game-changer, it’s a regular part of the bigger moves lower.
It wasn’t likely that we’d see a corrective upswing this big from about $34, but ultimately that’s what we’re seeing, and the size of the rally is in tune with the previous corrections. Why is this important? Because it suggests that what we see is normal, not particularly bullish.
The odds for a rally in the USD Index from here are very high, which is likely to translate in much lower precious metals (and mining stocks!) and commodity (including copper and FCX) prices. And yes, this creates a tremendous trading opportunity. If I didn’t have any trading positions open right now, I would be opening them today.
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Przemyslaw K. Radomski, CFA