This is Why Stocks’ Invalidation is Critical for Junior Miners
Not much happened in gold yesterday, but the key event took place in stocks. And it has profound implications, in particular for junior miners.
Before I move to the key action, let’s take a look at what happened in gold and mining stocks. I’ve been commenting on how important it is to monitor their performance relative to each other in order to detect the current emotional status of the market.
And I explained how bearish it is that mining stocks are weak relative to gold.
Let’s see what happened yesterday.
GLD moved a bit higher, and both proxies for mining stocks: GDX and GDXJ, moved lower.
This means that the very bearish short-term outlook just became even more bearish.
While gold is relatively close to this week’s intraday high, gold miners are relatively close to their recent lows. Again, that’s perfectly bearish.
One might notice that GDX declined a bit more than GDXJ in the last several hours, and this might spur a question about the relative performance of both.
The reality is that just as “one swallow doesn’t make a summer”, a very brief performance of a given asset doesn’t change the overall trend. And speaking of trends…
The above chart features the GDXJ to GDX ratio.
You can see a tiny uptick in it in the very recent past.
However, you can also see that it’s part of a big downtrend, which the very recent uptick didn’t change at all.
This means that junior miners are still likely to decline more (probably much more, but I’ll move to that in just a second) in the not-too-distant future.
And here’s where things get really interesting for junior mining stocks because the additional thing that you can see on the above chart is that the declines in stocks particularly negatively impact the GDXJ to GDX ratio. In other words, when stocks fall, junior mining stocks fall more than senior mining stocks.
I marked all three bigger declines in stocks since 2020 with orange rectangles, and they were all accompanied by declines in the ratio. The 2020 decline was particularly brutal.
Please note that the line that you can see in the main part of the chart is a moving average based on two sessions, and I’m using it to make the ratio’s movement more visible. You can see the ratio itself in the background, and the truth is that it’s quite volatile at times. In 2020, for example, the ratio very briefly moved below 1!
Sometimes, the GDXJ to GDX ratio declined on its own, without the stock market’s help, but the important thing is that in each case, when we saw a major decline in stocks, the ratio declined in a significant way.
And this brings us to the main topic of today’s analysis – the general stock market and the invalidation that we saw in it.
This is huge.
Invalidations of breakouts are by themselves strong indications that the market’s move above a certain level was fake and that the true market forces overwhelmed the fake ones. It is, therefore, a strong sell signal.
The clearer the invalidation and the stronger the price level that prices attempted to “take out”, the stronger the sell signal becomes, and the more bearish the implications get.
In the current case, we had both: a clear invalidation and a very strong resistance level that was not successfully broken.
Actually, the current level served as support (approximately) back in 2022, and after it was successfully broken to the downside, it served as resistance multiple times.
There were quite many attempts for stocks to break above this level, and each of them failed, even though the mid-2022 one was able to push stock prices higher. That was just a temporary upswing, though, and it was followed by a move much lower.
There were attempts to move above this level in late 2022 and several times this year.
The most recent attempt to move higher is exceptional in that the S&P 500 moved above all recent highs except for the mid-2022 one. And it was also a move above the 50% Fibonacci retracement level based on the 2022 decline.
All this failed.
Stocks were unable to hold onto their gains.
They declined, and the invalidation first took place in intraday terms, which served as an early indication. Yesterday’s close below the previous highs “sealed the deal”.
The breakout was invalidated, and the implications are very bearish for stocks.
Circling back to the precious metals sector – as stocks declined substantially, the GDXJ to GDX ratio is likely to decline in a profound manner. And this means that GDXJ is likely to slide not only based on the move lower in gold but also based on the decline in stocks.
In other words, the slide in GDXJ is likely to be truly profound – and the same goes for the profits that are likely to be made on this move lower.
The good news doesn’t end there - a decline in stocks is likely to trigger an additional sell-off in the FCX as well.
This means that the profits from the short positions in the FCX that we entered in early April are likely to increase, and our portfolios are likely to be very happy about the following action in the S&P 500!
This completes today’s analysis.
As a reminder, I’m running a webinar later today, so if you missed yesterday’s info about it, this is the final call :)
Here’s what I’m going to cover:
- What is the potential for long-term profitability from investment in gold (how high will gold price really rally in the long run)?
- Evaluating gold's worth: beyond fiat currencies' benchmark
- Physical bullion or investment funds: assessing the convenience of both and the choice of funds
- Improving security through geographical diversification: convenient applications
To maximize the value everyone gets, the webinar will last approximately 60 minutes, followed by an engaging Q&A session lasting approximately 30 minutes.
I’m going to hold that webinar today at 2 PM ET (which is 11 AM PT and 8 PM CET).
If you can’t participate at those times, no worries, we got you covered. The webinar will be recorded (including the Q&A), and the recording will be made available to those who sign up for the webinar regardless of whether they attend the webinar or not.
If you’d like to attend, please use this link to book your seat.
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Przemyslaw K. Radomski, CFA