This IS Different: USDX and Gold Price
In my analysis yesterday, I covered quite many long-term points. In particular, I explained why the current market environment is so difficult from an emotional point of view.
If we are in the “return to normal” part of the bear market (which is the first corrective upswing that most investors consider to be the bull market’s continuation), it’s natural for one’s emotions regarding the market to play tricks on them. That’s just the way it is.
We see that through expectations regarding the Fed – that it will lower rates sooner and faster than it says that it might (!) lower them.
We see that through the gap between how priced-in are some economic indicators and how some aren’t.
Finally, we see this through the overall sentiment present on many places on the internet – what people are writing and how they are writing it. And how much they are willing to “defend” their outlook despite the economic data, for example, nominal and real interest rates. On one hand, it’s obvious that it took just a fraction of what we saw now (in terms of rate hikes) to cause the 2008 meltdown, and yet, even though we also saw cracks in the banking system, very few see the similarity between both periods.
Commodity stocks like FCX are leading the way lower, but if you’ve been following my FCX trade, you know that very well, because your profits on this short trade are huge, even though it was entered just about 1.5 months ago.
But I wrote about all that yesterday, so I don’t want to go into the details of the long-term picture for the stock market (and other markets) also today. Quite the contrary.
In today’s analysis, I’d like to zoom in and focus on what we saw very recently, including today’s pre-market trading.
Let’s start with context, which is provided by the USD Index.
After back-and-forth trading close to its previous early lows, the USD Index is showing strength.
Truth be told, saying that it’s just showing strength is like saying that the Fed printed “some” money in the last couple of years. While true, it doesn’t convey the full picture, either.
The way in which the USDX soared this month is very important because we have pretty much all the bullish confirmations that we could get.
- Breakout above a major, medium-term resistance line? Check.
- Verification of this breakout by a small move back to the previously broken line? Check.
- At least three daily closes above the previously broken line? Check.
- The rally then continued? Double check. It’s even rallying as I’m writing these words!
Right now, the USD Index moved above the late-March highs, and it seems that the broad bottom that I’ve been writing so long about is finally over.
Of course, unless one has years of experience in this profession, it’s very difficult to stay on the course. People tend to just look at the recent past and then assume that it will be repeated.
This way, a decline – that has already happened and is a thing of the past! – is somehow “bearish” (which relates to the future!), and a rally – that already happened and is a thing of the past as well – becomes something “bullish” (again, this is not about the past, but about the future!).
The above tendency, plus the stage in which the market is in, creates a dangerous situation for many investors – getting swayed by popular opinion. And you know what? Specialists, insiders, and professionals tend to make money on the markets, but so called “investment public” doesn’t necessarily do so. The latter panics exactly at the wrong moments, and they also tend to buy at the wrong moments. Everyone’s excited at the top, and everyone’s scared at the bottom. Remember how bitcoin was super-risky at $15k? ;) Remember how silver was headed to the moon at $50? While the latter is probably indeed going to soar in the following years, I wouldn’t necessarily bet on the former’s success, but that is another discussion.
The point here is: “following the herd” is usually not a good strategy.
It’s not a strategy at all.
Just like looking at a previous decline or rally and saying that it’s bearish or bullish, respectively, is no analysis at all.
But we’re all human, and humans are emotional. And each of us will make those emotionality-based errors from time to time. As far as markets are concerned, the more experience one has and the more time they dedicate to this craft (and focus on themselves!), the more objective they can become, and over time, it’s likely to translate into greater profits.
So, what to do, if one got waaaay too excited about gold’s rally? And maybe bought close to the top?
On the emotional level, it’s best to just forgive oneself and accept that it stemmed from an inherent part of human nature and that next time one will strive to be more objective – perhaps through more detailed analysis. And that’s it. Accept it, let it go, and focus on what you can do next. Because as far as markets are concerned, there’s always the next trade (just as there’s always the next train on a train station).
Let’s see what’s available in the golden store right now.
Right now (at the moment of writing these words), gold just pierced through the early-2023 high. And yes – that IS a big deal.
It’s not surprising at all, given the recent weekly shooting star reversal candlestick, but I already wrote about it multiple times, so I’ll just focus on the short term today.
It is not a decline itself that makes the current situation bearish. It’s the entire context in which that decline materialized.
Gold is very likely to move much lower, but… Just because something is likely to move much lower, it doesn’t mean that it’s likely to move lower in a straight line. There will be periodic corrections along the way.
Will we see one shortly?
Actually, we might.
At this point, it’s not clear if this will be an opportunity to go long gold, silver, and/or mining stocks but we can indeed see some kind of correction either from one of the rising support lines (based on the late-2022 bottom and the Feb. / Mar. 2023 bottoms) or from the 38.2% Fibonacci retracement level.
And given today’s decline of over $20 so far today, we might see a move to those levels very, very soon.
At this point, it’s too early to say if the situation will become bullish enough for me to say that a long position in any part of the precious metals sector is justified, but I’m not ruling out such a possibility.
As you know, I’m not married to a short position in the precious metals sector, and I picked two corrective upswings in 2022. Actually, Sunshine Profits’ old website still features the chart with them (for the record, that last short position was also closed profitably as far as the GDXJ is concerned).
Will we see a tradable rally soon? For now, the jury is out. If we see a combination of particularly bullish factors, I’ll send out an intraday Gold Trading Alert, but I’m not “pressured” to enter the long position here – the medium-term trend in mining stocks (and silver) definitely remains down, so long positions in them are rather risky. We would need to see really important bullish signs in order to open a position against the medium-term trend. Of course, I’ll take many more factors into account other than just looking at the most recent price moves in gold, silver, and mining stocks…
So, for now, the medium-term outlook remains bearish, and the very short-term outlook is bearish too, but the latter could change in the near future (temporarily, but still).
As always, I will keep my Gold Trading Alerts subscribers informed.
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Przemyslaw K. Radomski, CFA