In yesterday’s analysis, we explained why rising stock prices might not lead to significantly higher gold prices before the latter turned south again. The manner in which yesterday’s session was conducted seems to have confirmed it. Stocks (S&P 500) were up by 1.64%, with the second-highest daily close this index has made – ever. And did gold rally that strongly as well? Absolutely not. Gold futures were up, but only by a mere 0.14% ($2.70). Silver futures were up by only $0.16, and the mining stocks – GDX ETF – declined by 0.27%.

Just minutes before writing this, gold invalidated its breakout above the declining resistance line. Before the invalidation happened, we reported that – unless gold declined – it would be just the second day when gold closes above the declining resistance line, and for the breakout to be confirmed, we would need three of such closes.

But, since gold did decline, and invalidated the breakout, the implications are already bully bearish.

At the same time, let’s keep in mind that gold did not break above the 38.2% Fibonacci retracement level based on the recent decline. Gold is also verifying the previous (August and September) lows as resistance. So far, it managed to move just slightly above the lowest daily close from the Aug-Sep consolidation. The resistance holds on.

All in all, gold is trading more or less, where it was trading at the beginning of the month, while the USD Index is trading visibly lower. Keep in mind that gold does not show any strength here, despite what one might think based on Friday’s upswing alone, especially in light of yesterday’s upswing on the stock market.

Gold is after a confirmed breakdown below the important red, medium-term support line, which means that it will most probably slide in the upcoming weeks or months, even if that doesn’t happen right away.

Based on the chart above, the likely downside target for gold is at about $1,700, predicated on the previous lows and the 61.8% Fibonacci retracement, based on the recent 2020 rally.

As far as the white metal is concerned, previously, we’ve indicated the following:

Silver is also after a major breakdown and it just moved slightly below the recent intraday lows, which could serve as short-term support. This support is not significant enough to trigger any major rally, but it could be enough to trigger a dead-cat bounce, especially if gold does the same thing.

Once again, that’s precisely what happened on the market!

So, is the counter-trend rally over? That’s quite possible, particularly if we consider yesterday’s (less than clear, but still) reversal. But, given the possibility that the stock market moves higher, silver could move somewhat higher as well before it slides once again.

Back in early March, silver moved higher before indeed plunging, so the current move up doesn’t invalidate this similarity, especially given that the Covid-19 cases are rising in a quite similar way (most visibly in Europe).

On an intraday basis, technically, silver moved as high as it did on July 28^th. The corrective rally is not as big as one might think if we focus on Friday's upswing alone. However, that’s not the critical matter here. The key point in case is that the breakdown below the rising support line was more than confirmed.

At the moment, one might ask how we can know if that really is just a dead-cat bounce and not the start of a new strong upleg in the precious metals sector. The answer would be that while nobody can say anything for sure in any market, the dead-cat-bounce scenario is very probable due to multiple factors, the clearest of them being the confirmed gold and silver breakdowns, and most importantly – the confirmed USDX breakout.

Meanwhile, the mining stocks had barely done anything yesterday.

To be more precise, this “nothing” is quite informative, as a small decline in miners is a big sign when contrasted with the sizable rally in stocks. It’s a bearish indication, given that miners failed to react to stocks’ positive lead.

Moreover, please note that the miners touched their 50-day moving average, without closing above it. In March, this level served as the initial resistance, which was then broken for three days, the final top before the massive slide. This moving average then served as resistance twice in March and in April. Being broken downwards in September, right now, we can clearly see the verification of this breakdown. Hence, the implications remain bearish for the next few weeks.

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The stock market rebounded very nicely last week, and it even corrected more than 61.8% of the recent decline. Earlier this year, gold and stocks fell sharply together (in March) and then they both rallied back up to new highs. So, does this strength in stocks indicate upcoming strength in gold as well? Not necessarily.

Let’s start with examining the former.

The big news of the previous week was that the general stock market managed to move higher, despite the invalidation of the early-2020 high. This is something unusual for any market, as commonly invalidations of breakouts or breakouts are strong indications that the market is going to move in the opposite way. The invalidation of the breakout was therefore a strongly bearish sign.

So, what happened? Well, it could have been the case that the nothing-bad-will-happen-before-the-elections rule applied, and the rally was more orchestrated than natural. By that we mean that some powerful investors bought enough to trigger the rebound. And let’s keep in mind that the Fed pledged to play an active role right now – even more so than it did in 2008.

What does it mean going forward? It means that the slide could be delayed, but I don’t expect it to be averted entirely. After all, no market can be “triggered artificially”, “supported”, “set”, or “manipulated” for longer periods (of course, except the interest rates), and despite the massive money printing, the economy is not doing great. And that’s an obvious understatement.

From the technical point of view, we would like to point out three things:

1. Stocks have corrected more than 61.8% of the recent decline, so they could move higher in the short term. That’s not something certain, though.
2. In 2018 we saw a tiny invalidation of the breakout, then another move higher (slightly above the previous highs), and stocks plunged shortly thereafter.
3. In early 2020, the very initial decline was relatively small, and it was followed by another move higher (slightly above the previous high). Stocks plunged shortly thereafter.

Consequently, in analogy to two most similar situations to the current one from the recent past, it wouldn’t be surprising to see stocks move to or even slightly above the previous highs, before they turn south in a spectacular way.

This could mean a delay in precious metals’ and miners’ decline as well. Again, a decline, not its absence. Especially that the situation continues to be excessive on the forex market.

How did gold respond to the sizable upswing in stocks?

Gold moved above the declining resistance line, but stopped at its 38.2% Fibonacci retracement. Let’s keep in mind that stocks erased more than 61.8% of the preceding decline. This means that the reaction in gold was much smaller – not something that we would expect in case of a market that’s supposedly about to “take off”.

So, even if the general stock market moves to or slightly above its previous 2020 highs, it doesn’t mean that the same would be likely for gold. The decline of the latter would likely be delayed in this case, though. If the general stock market fails to rally, but the USD Index does, the gold price would be likely to plunge.

Moreover, please note that the move above the declining resistance line was not significant, and thus it would require a confirmation. Gold closed last week practically right at the resistance line, so it’s not that clear if the breakout is anything more than a blip on the radar screen. In today’s pre-market trading gold moved a bit lower, but not yet enough to invalidate the breakout.

Overall, gold is trading more or less, where it was trading at the beginning of the month, while the USD Index is trading visibly lower. Gold is not showing strength here, despite what one might think based on Friday’s upswing alone.

Gold is after a confirmed breakdown below the important red, medium-term support line, which means that it’s likely to slide in the upcoming weeks and/or months. Even if it doesn’t happen right away.

Summing up, the stock market’s strength is far from being a proof that gold is about to decline. Conversely, the relatively small size of gold’s upswing compared to the one in stocks is yet another factor pointing to lower gold prices over the next several weeks (not necessarily days, though). Gold is likely to move to new highs, based on many fundamental reasons, but not without declining first, on technical grounds.

Thank you for reading our free analysis today. Please note that the following is just a small fraction of today’s (this week’s flagship) Gold & Silver Trading Alert. It includes multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

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Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager

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It didn't take long for the mining stocks to turn south once again. No wonder, given that their breakdown was more than verified.

Additionally, they also got bearish support from gold, the stock market, and the USD Index, which also confirmed their decisive move. For more details, let's take a closer look at the chart below.

We've witnessed the USD's breakout and breakdowns in the precious metals market, followed by smaller corrections. That's both: normal and natural.

If the USD Index tendency was really descending, and it was upward in case of PMs:

1. The USD Index would have declined to new lows, or at least it would've moved below its 50-day moving average.
2. Gold would have rallied back above the $2,000 level, or at least it would've moved visibly above its August lows in terms of the closing prices.
3. Silver would have invalidated its breakdown below the rising support line, instead of verifying it as resistance.
4. Gold miners (represented by the HUI Index in the middle of the above chart) would have shown strength relative to gold. For instance, they would not have declined yesterday more than gold or GLD ETF did.

Today, it's evident that nothing from the above happened. And why is that? Because the medium-term trend changed in August and what we see now is just the early part of the decline. It seems that the noticeable pause after this decline is close to being over. But why? We'll get to that shortly. In the meantime, let's take a look at the general stock market performance.

The S&P 500 Index chart is second from the bottom and based on yesterday's profound reversal. Stocks failed to rally back above the early-2020 highs. This is important evidence in determining the precious metals sector's performance, particularly in the case of mining stocks and silver.

The correlational values in the rows that show the links between various parts of the precious metals market and the S&P 500 Index indicate that these links are indeed positive. However, it is only in the mining stocks that this link remains strongly positive in every examined period (ranging from 10 to 1500 trading days). As far as medium-term moves are concerned, the S&P 500 and silver connection is stronger than the one between S&P 500 and gold.

Stocks failed to rally back above the early-2020 high, and therefore, in my view, they are quite likely to move lower, which would be in tune with the worsening pandemic situation.

Thus, the implication for the next several weeks remains quite bearish. Let's get back to the previous question - why do we think that the current pause within the decline is over.

In short, it's because that's what the triangle-vertex-based-reversal technique is currently suggesting, and it was able to pinpoint the last three short-term reversals very well. In short, whenever support and resistance lines cross, there's likely to be some type of reversal. But does it work? Of course, not all the time, but in general - you can bet it does. Please take a look at the chart below for details.

The short-term triangle-vertex-based reversals were quite useful in timing the final moments of the given short-term moves in the past few weeks. Please keep in mind that the early and late September lows developed when the support and resistance lines were crossed.

Now, this technique might not work on a precise basis, but rather on a near-to basis, and given the highly political character of the current month (before the U.S. presidential elections), things might move in a somewhat chaotic manner. In previous months and years, this technique worked multiple times, and it has worked recently as well.

Based on yesterday's decline, it seems that the early-October reversal point did mark the end of the rally. To be precise, gold did move slightly higher after that time, but the vast majority of the upswing was over at that time, and it was the "pennies to the upside, dollars to the downside" kind of situation.

Since this technique was so useful recently, and since we already saw a sizable downswing yesterday, it seems that the corrective rally is already over.

Other than that, instead of being strong, mining stocks declined profoundly yesterday.

The GDX ETF - the flagship ETF for the precious metals mining stocks - closed at the second-lowest levels since July. That's now how a medium-term rally looks like. That's how a post-breakdown decline looks like.

Instead of rallying, miners simply corrected to the previously broken rising red support line, and they verified it as resistance. Since miners have already taken a breather, they appear ready to fall further.

Thank you for reading our free analysis today. Please note that the following is just a small fraction of today's all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today's issue right away.

Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager

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