What a Rally in Miners! Wait… Where Did It Go?

In yesterday’s analysis, I wrote that mining stocks’ rally was likely temporary. Indeed, they already moved back below our entry point for the current short position.

This happened even though the general stock market moved slightly higher.

What’s next?

What a Rally in Miners! Wait… Where Did It Go? - Image 1

Gold made a few attempts to move above the all-important $2,000 level and the rising resistance lines, and it failed all of them. The strong short-term momentum is gone, just as the fear of the unknown regarding the situation in the Middle East. To clarify – the situation remains unclear and critical, but the fear/concern already peaked (based on Google Trends data).

I previously wrote that gold was likely to peak up to two weeks after the concern peaked, and that period is over. Gold did indeed move slightly higher after the concern peaked – just like what we saw in 2022 after the analogous fear/concern regarding the Russian invasion also peaked. History is very likely to rhyme, and this rhyme implies much lower gold prices in the following weeks. The fact that the momentum is gone confirms the above.

Besides, if the USD Index soars once again, gold will get a push to lower levels.

What a Rally in Miners! Wait… Where Did It Go? - Image 2

And the USD Index appears to be ready to rally once again. The current corrective pattern is similar to what we saw in March 2022 and early June 2022. The latter is more similar to the current situation due to the size of the preceding rallies in both cases.

In both situations, the USDX corrected to almost the 38.2% Fibonacci retracement level – bottoming slightly above it. That’s where the USDX reversed recently.

On top of that, we see that the RSI moved below 50, which marked local bottoms during the 2022 rally.

So, the USD Index is likely to rally shortly, and since it’s negatively correlated with the precious metals sector, the latter is likely to slide.

And as gold slides, the same fate likely awaits mining stocks.

What a Rally in Miners! Wait… Where Did It Go? - Image 3

Yesterday’s move lower indicates that what I wrote in yesterday’s analysis remains up-to-date:

The green lines that I copied to the current situation show just how much the GDXJ rallied after the previous similar surprise from the nonfarm payroll numbers.

As you can see, Friday’s upswing was very much in tune with what happened in those previous cases. History rhymed.

To be clear – there was one case when the rally was bigger (not much bigger, though, the analogy to it would point to the GDXJ only at about $36.5), but that was when the RSI was much more oversold, so I’d say that the rally that was supposed to happen based on the surprising data, happened more or less right after its release. This also means that the rally might already be over, or about to be over here.

The thing that I would additionally like to emphasize today is that the GDXJ just invalidated its move above the very recent short-term high.

Invalidations are sell signals, which means that we saw another bearish confirmation. If Friday’s rally was the market’s true direction, it would have confirmed the breakout and not invalidated it.

All in all, the daily rally in miners was sizable, but it seems that it was or will be short-lived. The medium-term trend remains down, and it seems that our profits from the short position in the GDXJ will increase shortly.

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