Topping USDX or Topping Stocks? Miners Still Rallied!

Some things change, and some don’t. Miners invalidated their head-and-shoulders pattern, which is a buy signal. Stocks remain bearish, and the USDX…

The USD Index indicates that a correction might be about to happen, anyway.

Topping USDX or Topping Stocks? Miners Still Rallied! - Image 1

I previously wrote that the RSI might need to get to extreme levels (marked with red) before we see a meaningful top and then a decline. However, given the very recent move lower in the USDX and the corresponding action in the RSI (it moved a bit lower from the 70 level), we might be seeing a local top right now, after all.

I had been expecting that the next local top would come close to the June highs, and that’s more or less where the USDX moved recently.

Topping USDX or Topping Stocks? Miners Still Rallied! - Image 2

The horizontal dashed line (the upper one) is based on the April/June top in terms of the closing prices. Each intraday attempt to move above this level was invalidated. The same happened very recently. Consequently, we might say that the previous high was already hit.

The USDX also moved below its rising support line, which is another bearish factor for the short term.

Now, let’s not exaggerate the meaning of the above.

The USD Index is after a major buy signal, as it invalidated its breakdown to new yearly lows. This was huge, and it continues to point to much higher USDX values in the following weeks and months.

However, since no market moves up or down without periodic corrections, we might be seeing one right now as well.

The 38.2% Fibonacci retracement level at about 102.5 corresponds to the early-August top, and it might be the next target for the U.S. currency. Whether the USD Index moves up from that level or will it need to correct a bit more (or less), please keep in mind that it’s most likely just a correction – a breather – and not the beginning of a new big decline.

The implications for the precious metals sector are bullish.

Having said that, let’s take a look at the S&P 500 index futures that show that there were actually no changes in the technical situation.

Topping USDX or Topping Stocks? Miners Still Rallied! - Image 3

I mean, yes, stocks moved visibly higher yesterday, but they stopped at the rising resistance line, which had already been verified once, and it seems that it was just verified for the second time yesterday.

Moreover, the recent corrective upswing took the form of a zig-zag, which is a very common way for a market to correct. Consequently, it looks like stocks are about to fall.

And since the recent rebound is quite similar to what we saw in June, the entire June-now price performance can be viewed as a potential head-and-shoulders formation. This formation – when completed – would imply a move well below 4,200.

This is bearish for the precious metals sector, in particular for junior mining stocks, as the latter are connected to stocks more than the underlying metals.

What about the flagship precious metal – gold?

Topping USDX or Topping Stocks? Miners Still Rallied! - Image 4

Well, gold moved to the neck level of its head-and-shoulders pattern (based on daily closing prices) and closed pretty much at it. Gold price was close to invalidating it but haven’t done so. This means that the next move is still likely to be to the downside. The next target based on the head-and-shoulders formation is at about $1,740, which is much lower than where the gold price is currently trading right now.

So, what will gold do now? Will it rally based on the USD Index’s decline? Or will it decline along with stocks and in line with what the head-and-shoulders pattern is suggesting?

It’s a tough call at this very moment. As more information becomes available, it will become clear what kind of action the market really wants to take here. Even if gold rallies here, it’s likely to be something temporary, not the start of another multi-month upswing. Of course, I’ll keep my subscribers posted (and I’m adjusting our current trading position to reflect the current outlook).

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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief