In our previous commentary we discussed the implications that the most recent moves in the USD Index and the general stock market are likely to have on the precious metals market. Today, we will briefly discuss two parts of the PM market: silver and mining stocks (precisely: SLV and GDX ETFs). We summarized the previous essay in the following way:

(...) the impact that the USD Index and the general stock markets are likely to have on the precious metals market is weak and bullish on a short-term basis, but more meaningful and bearish in the medium term.

Since that essay was posted, we have seen a small move higher, which was in perfect tune with the above. Now, however, it seems that it is the medium-term decline that we should focus on as the resistance levels have already been reached in case of silver and mining stocks. That's the case with gold as well.

Let's take a look at the SLV ETF chart (charts courtesy of http://stockcharts.com.)

Looking at the above chart we see that the SLV ETF moved above the 50-day moving average and reached the medium-term declining resistance line (based on daily closing prices - February and August highs) in the previous week.

Although silver closed the week slightly above its 50-day moving average, which is a bullish sign, we didn't see a breakout above the medium-term declining resistance line in the following days. On top of that, we saw a move lower after silver reached it.

From this point of view, it seems that further increases will likely be limited, especially when we take into account the fact that silver's cyclical turning point is just around the corner. Therefore, it's quite possible that we will see its impact on silver in the coming days. This can lead to a pause or even stop further increases.

Can we see a confirmation of the above in the chart featuring mining stocks? Let's have a look at the whole senior mining stocks sector with Market Vectors Gold Miners ETF as a proxy.

On a short-term basis, we have seen strong performance since mid-October. Additionally, in the previous week the GDX ETF broke above the declining resistance line and continued its rally in the following days. In this way, yesterday, it reached a resistance line – the neck level of the previously completed head and shoulders pattern. The 50-day moving average was not successfully broken and the temporary move above the 38.2% Fibonacci retracement level was invalidated. The latter provides us with bearish implications for the short term. In other words, it looks like the rally that was likely to happen, is already behind us or quite close to being over (we wouldn't rule out another move to the "neck" level, but we don't think that we will see a confirmed breakout above it).

Summing up, although we've seen an upward move in silver in recent days, it hasn't changed much from the medium-term perspective. When we factor in the impact of the USD Index and general stock market that we discussed in the previous essay, silver's cyclical turning point, which is just around the corner, and the fact that the short-term resistance lines have already been reached in case of the GDX ETF, we can presume that the top of the recent upward move in the precious metals may be already in (or is very close to being in). In fact, we have suggested closing speculative long positions in yesterday's Market Alert.

Thank you for reading.

Sincerely,
Przemyslaw Radomski, CFA