The implications are bearish for the following few weeks…
Practically everything that we wrote yesterday, remains up-to-date today. Consequently, we will quote some parts of the analysis, and we’ll supplement them with additional discussion of the relative performance of various sectors, as we saw interesting details yesterday that further confirmed our earlier writings.
In short, the USD Index is after a huge rally and a correction. In late March, the USD Index corrected the previous rally in terms of price moves, but not in terms of time. The latter is what it seems to have been doing for the past month. The USD Index did move higher in April, but the moves were relatively boring – somewhat similar to how it rallied in January and February. And what did gold do at that time? It moved higher, and then declined at some point once it got too high too fast – practically regardless of what the USD Index was doing. That was in the final part of February.
Please check what silver did in January and February. It moved mostly higher, only to decline in the final part of the month. Overall the initial action was positive but rather nothing to call home about. Gold’s rebound in early March was accompanied by rather weak action in silver.
What’s happening now? Gold declined in mid-April, similar to how it declined in late February. The USD Index initially triggered the move, but then gold declined for a few days regardless of what the USDX was doing. And the rebound that we saw last week? Silver’s upswing was nothing to call home about – just like what we saw in early March.
Back in March, gold’s rally ended after the first clear intraday decline. Interestingly, the very first day of gold’s March slide – March 9th – took place when the USD Index also declined. That daily decline, however, was actually the start of a powerful rally.
That USD Index rally was not only powerful, but it was also volatile. It was volatile not only in general, but also in terms of each individual trading day.
Guess what – Friday was the day when gold clearly declined on an intraday basis, and that was also when the USD Index declined a bit. Silver hasn’t done much.
What is even more interesting is that today, gold is also declining (about $10 at the moment of writing these words) along with the decline in the USD Index (about 0.26 decline at the moment of writing these words).
Just like it wasn’t clear that gold was topping in the first half of March, it’s far from being clear now – at least for most market participants.
Neither we would bet the farm on the scenario in which gold topped on Thursday, but it does seem quite likely.
Gold ended the day lower and so did the USD Index, confirming the indications from the previous day.
Today, gold is also lower while the USD Index is virtually flat (lower by 0.02). Based on the similarity to how the situation developed in early March, gold might be moving very close to the cliff, from which it would fall. In other words, yesterday’s session could be similar to what happened on March 9th.
“Ok, but if so, then why aren’t the miners declining? That’s exactly what they did on March 9th!”
It’s true that they declined and were the first to drop profoundly at that time. However, it’s also true that back then, it was the decline in the stock market that helped them plunge first. On March 9th, the general stock market was already in the full decline mode. That’s not what’s going on right now.
The Lessons from Stocks
Conversely, the stock market is moving higher in the short term. That’s pointless compared to the fundamental situation, but that’s exactly what’s taking place right now.
Quoting our yesterday’s analysis:
In general, the above chart shows that the S&P 500 lost its momentum and broke below the rising trend channel. It moved higher since that time, but the breakdown was not invalidated. This has bearish implications going forward. In reality, it’s just a confirmation of what we wrote with regard to how the situation is developing from the fundamental point of view and how it’s likely to develop in the future.
Stocks are too high given what’s likely ahead as investors don’t seem to realize the long-term implications of what’s happening right now, still counting on the V-shaped economic recovery. The market is forward looking and once more people start to realize what’s going on, the stock market is likely to fall.
You know that UBER’s stock price just moved to new April high on Friday? It makes little sense given that the restrictions are likely to be in place longer, not shorter than initially expected. Instead of looking at data, investors seem to be focusing on the fact that the re-opening talks are taking place – which “seems to suggest” that re-opening the economy is somewhat close or that it would be the first step toward getting quickly to how things were before. It’s not quick, and it might even require a step back first, if the second wave of the virus hits first – which seems quite likely given how the protests are taking place.
It’s very likely that stocks will decline over the next several weeks, but the question is when will investors start to – massively – realize that the worst is yet to come?
The vertical dashed lines provide interesting details from the precious metals investors’ and traders’ point of view. Namely, they show that in late February and early March, the PMs and miners were lagging the stock market. The declines in stocks started earlier. In fact, when the first serious daily decline in the stock market took place (February 24th), the PMs and miners topped. We marked this day with the red vertical line.
Then the stock market declined, and when it bottomed, gold, silver and miners also formed a daily bottom. That was on February 28th and we marked it with a green line. What happened next is that we saw a corrective rebound, which lasted longer in case of the precious metals market than it did in case of the general stock market. Once again stocks topped first, and the precious metals market topped approximately on the day when the stock market declined quite visibly (red line – March 6th).
We’re seeing something similar also this month. The initial top in stocks formed on April 14th (red line) and that was also the top in the precious metals market. Then stocks bottomed on April 21st, which was also the day when the precious metals market bottomed (more or less).
The late-February – early March performance seems to be repeating.
The difference is in the performance of the mining stocks, which used to lag, and now they leap gold and the general stock market. What gives? Well, during the analogous period in March (around March 6th), stocks moved higher, but they didn’t even manage to correct half of the decline from the February high. Right now, the stock market (taking the overnight futures into account) is slightly above the April 14th high. Mining stocks, being more correlated with the general stock market are moving higher relative to gold as they take their strength from the general stock market. Moreover, if the general stock market is about to top shortly, it’s quite likely to expect the previously worst performing stocks, to shine now (that’s what tends to happen at the market tops).
All the above suggests that the general stock market is likely to top any day now, and when the first sizable daily slide takes place, we’ll have a good indication that the next huge decline in the precious metals market is about to start or that it has just started.
When could that take place? Quite possibly as early as this week. Please note that the spacing between the horizontal lines that we saw in late February and early March was approximately symmetrical. Plus, they were about a week apart.
Based on the above symmetry and the week analogy (which remains intact as the initial top and the most recent bottom were exactly one week apart) it seems that the next top or the significant daily slide could take place tomorrow – on Tuesday. Of course, there’s no guarantee that it would happen, but it does seem quite likely.
This means that the next local top in the precious metals sector – including the mining stocks – might be at hand, quite possibly today or tomorrow.
The first sizable decline in the stock market will serve as an indication and the sizable daily decline in gold, silver, and mining stocks that follows – likely on the next day – will serve as a confirmation.
Given the price level to which stocks rallied yesterday and the proximity of a combination of very strong resistance levels it seems that they will move even higher before topping. It still seems relatively likely that it will happen this week – perhaps today or tomorrow.
The strong resistance levels are: the 61.8% Fibonacci retracement, the rising resistance line, and the upper border of the early-March price gap. There’s also the 200-day moving average.
This means that while stocks might attempt to break above the 3000 level, they are unlikely to do so, and if they do manage to do so, this move is likely to be invalidated shortly.
Is it any wonder that in this environment mining stocks are not leading gold and silver lower? Absolutely not. But the above is also a reason to expect miners to slide with vengeance once stocks finally do decline.
Silver in the Spotlight
Meanwhile, silver is acting exactly as we outlined yesterday:
On the short-term note, we see that silver is more or less repeating its early-March performance. The price moves are not identical in terms of the Fibonacci retracement levels, but comparing the size and shape of the initial rallies (blue dashed lines) we get almost identical results. After rallying sharply initially, silver started to do… pretty much nothing. That was the same in early March. It was after a few additional days, when silver’s corrective upswing had really ended, and the big slide started.
If the similarity to the early-March continues, we can expect the decline to start on Wednesday or very close to it. Please note that silver’s first few days of the decline were noticeable, but not huge. However, once silver broke below its previous lows, it took only three sessions for the white metal to slide below $12. Let’s keep in mind that previously silver started from higher price levels.
The implications are bearish for the following few weeks and rather neutral for the next few days.
Silver declined below $15 in today’s pre-market trading – it could be the case that it’s the beginning of the final slide, but it could also be the case that silver is doing what it did on March 9 – declining profoundly before the US markets open and then coming back only to level off in the next 2 days. Either way, the implications are bearish, the only difference is when the big move lower is going to take place: shortly, or almost immediately.
And what about the miners? Once again, the situation is just as we’ve described it yesterday.
The HUI Index declined significantly, and then it rebounded significantly.
Both are likely linked. Miners first declined more sharply than they did in 2008, so the rebound was also sharper. Based on the stimulus and gold reaching new yearly highs, miners also rallied and tried to move to new yearly highs. It’s not surprising.
However, if the general stock market is going to decline significantly one more time, and so will gold – and as you have read above, it is very likely – then miners are likely to slide once again as well. This would be in tune with what happened in 2008.
At this time, it may seem impossible or ridiculous that miners could slide below their 2015 lows, but that’s exactly what could take place in the following weeks. With gold below their recent lows and the general stock market at new lows, we would be surprised not to see miners even below their 2020 lows. And once they break below those, their next strong resistance is at the 2016 low. However, please note that miners didn’t bottom at their previous lows in 2008 – they moved slightly lower before soaring back up.
Please note that the HUI Index just moved to its 2016 high which serves as a very strong resistance. Given the likelihood of a very short-term (1-2 days?) upswing in stocks and perhaps also in gold (to a rather small extent, but still), it could be the case that gold miners attempt to rally above their 2016 high and… Spectacularly fail, invalidating the move. This would be a great way to start the next huge move lower.
The GDX ETF managed to break above the previous 2020 highs and confirm this breakout in terms of three consecutive daily closes, and a weekly close. The above chart is now bullish for the mining stocks.
However, given how close the powerful long-term resistance (as presented on the previous HUI Index chart) is, and what’s likely ahead for the GLD ETF and the general stock market, we doubt that this breakout would be able to generate anything more than a 1-2 day upswing.
It seems that those who are more short-term oriented (or the more advanced traders) might want to limit their exposure to the mining stocks or the precious metals sector until the situation clarifies, while those who aren’t might prefer to keep the short positions intact as it seems that within the next 1-3 weeks, gold miners will be much (!) lower.
The full version of today’s analysis includes details of our currently open position as well as supports and targets of the upcoming sizable moves in gold, silver and the miners.