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The full version of today's analysis includes details of our current position in the mining stocks and we also provide more specific time target with regard to the upcoming bottom.

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In yesterday's Gold Trading Alert, we commented on gold's breakout above the previous highs and described the completion of the inverse head-and-shoulders pattern in the following way:

Q2: As you can see today, gold future formed inverse head and shoulder pattern with neckline 1700 and depth about 250.

This imply gold can go to 1950.

A2: Yes, it does imply that and that's probably why gold shot up so high once the previous highs were broken. Still... We have very little trust in this formation. One thing is that the breakout above it is not confirmed, and the other thing is that the recent rally was something that was very much in tune with the analogy to 2008. There was some strength, gold even broke to new highs, but... That's pretty much it. Neither silver, nor miners broke to new highs, or were close to doing so - that's exactly what we saw in 2008, before the final slide in gold.

Let's take a look at gold's breakout to new 2020 highs.

Gold has indeed moved sharply above the previous 2020 highs, but it also moved sharply back down. This could be viewed as a small pullback and a verification of the breakout... But only if the price of gold rallies and closes higher for the next two trading days. This seems doubtful due to the above-mentioned factors but also due to the short-term situation in the USD Index.

And what happened in the following hours? Did gold move as we had forecasted?

Gold declined (forming a huge reversal) and closed the day below the previous 2020 intraday highs, effectively invalidating the breakout above them. Gold still closed the session above the previous highs in terms of the daily closing prices, but the intraday invalidation is already significant. It's particularly significant given that the USD Index moved initially lower yesterday. Gold didn't use this move to rally - it only softened its intraday decline.

Since yesterday's decline in the USD Index seems to have already ended, its correction after bouncing from the support provided by the previous highs, it seems that the pressure on gold will now be negative.

The 2008 - 2020 link remains intact, not only fundamentally, but also technically.

In Monday's Alert, we commented on the above chart in the following way:

Silver moved higher, but not above its recent high, and miners corrected about half of their most recent downswing. It seems that the two periods in 2008 and 2020 (both marked with green) are indeed very similar.

Note: silver might exceed its recent high temporarily as the market might focus on the industrial demand due to the upcoming infrastructure projects. That's unlikely to be anything more than a temporary development.

As you can see, there are there are triangle-vertex-based reversals early this week in all key parts of the precious metals sector: in gold, in silver, and the mining stocks. We also get the same indication based on the GLD ETF.

This means that - based on this trading technique - it's very likely that we'll see some kind of reversal today or tomorrow. Based on the analogy to 2008, it's likely to be a local top, even despite the rally in the USD Index.

That's exactly what happened. GLD seems to have topped on Monday, while gold futures and silver futures topped on Tuesday. Miners topped on Monday in terms of the daily closing prices, but they topped in intraday terms yesterday.

The triangle-vertex-based reversals seem to have worked once again - especially in case of gold, and it seems that we were closing the long positions in gold extremely near to the top and the same goes for the timing of increasing the short position in the miners (after temporarily limiting it).

Please note that the top is likely in also based on the analogy to how the situation developed in 2008. The next slide is likely to be particularly volatile.

The final note on the link to 2008 is that back then, gold made more than one attempt to break above previous highs, so while it is not inevitable this time, we shouldn't be surprised if we see something like that. Still, given the size of the rally that immediately followed the fake breakout to new 2020 highs, it seems that the rally is already over after all.

The stock market rallied yesterday... Up to a point. Then it reversed and ultimately created the gravestone doji reversal, which is a major bearish indication for the short term.

The S&P 500 seems to have topped between the 38.2% and 50% Fibonacci retracement levels.

That's exactly where it topped after the most volatile decline of 2008. The mid-October 2008 top was also formed on an intraday basis, which makes these cases even more similar.

Summing up, it seems that the precious metals market is about to slide. Still, the move lower might not remain in place for a long time - we expect a big rebound within the next couple of weeks, similarly to what we saw in 2008.

Thank you for reading today's free analysis. Its full version includes details of our current position in the mining stocks and we also provide more specific time target with regard to the upcoming bottom.

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We just took profits from the long position in gold, and in today's Alert, we are providing details for the current position and we also provide very specific timing with regard to today's session.

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The yellow metal and its fiat nemesis. Gold and the dollar certainly move not in a random relation to each other. The strength and direction of one taking the cue from the other changes over time, but what does it tell us about the present moment?

The key point with regard to the US currency is that it appears to have already ended its pullback and is now ready to soar well above its previous 2020 high.

How do we know that the pullback is most likely over?

Because the USD Index already rallied for (actually more than) two consecutive trading days.

USDX on the Rise

The USD Index just posted a daily rally and it was the third daily rally in a row. This may not seem significant at first sight, but it is significant, because that was what confirmed that the downward correction was already over in case of both similar price moves: the 2008 and 2011 one.

We compared the corrections in similar times and here's what we found.

Based on the above chart, we see that there were two similar cases to what we see today - one in 2008 and the other in 2011. These years are also similar due to the fact that in both cases we saw major tops in gold.

Given the size of the most recent rally, the 2014-2015 rally might appear similar, but the correction that we saw back then, was not big enough and the preceding rally was not sharp enough to be really comparable. That's why we're focusing on 2008 and 2011.

In 2008, the USDX corrected a bit below its 50% retracement, but not to its 61.8% retracement - just like it did recently. There were moves both up and down during the corrective downswing, and the thing that confirmed its end, was the second daily gain.

And in 2011?

Exactly the same thing was the case. The shape of the decline was different, and the decline was deeper (it moved below the 61.8% retracement but the USDX stayed there for just 2 trading days), but once we saw two daily gains in a row, it served as a confirmation that the decline was over.

We already got this bullish confirmation, so the USD Index's rally is now likely to continue.

The good news is that since we know that the correction is most likely over, we can use Fibonacci extension tools based on the previous rally and the correction to estimate how high the USD Index is likely to move before this significant, yet short-term rally is over. Once the short-term rally is over, it would probably be followed by a more meaningful correction and then another wave up, but that's not the key information from the precious metals investor's and trader's point of view, because PMs and miners are likely to bottom even before the USD Index tops.

So, how high would the USD Index be likely to rally in the near term?

Back in 2008, the USD Index topped after it slightly exceeded the level that one would get by doubling the size of the initial sharp upswing. The first, initial top formed slightly above the level that one would get by multiplying the size of the initial sharp correction by 2.618.

Based on these techniques and the analogy to 2008, the USD Index is likely to soar to about 113 before correcting in a more meaningful manner. This level is just above the rising, long-term resistance line that's based on the 2009 and 2015 highs, which is at about 112, so conservatively we will view 112 as our upside target.

The USD Index is at about 100 at the moment of writing these words, so the upside potential is substantial.

And as we wrote in many previous extensive analyses, big moves higher in the USD Index almost always translate into big declines in gold. Consequently, given a high-quality prediction for the USD Index, one is quite likely to make a good gold price forecast as well.

The Big Picture View of the USD Index and Gold

The 2014-2015 rally caused the USD Index to break above the declining very-long-term resistance line, which was verified as support three times. This is a textbook example of a breakout and we can't stress enough how important it is.

The most notable verification was the final one that we saw in 2018. Since the 2018 bottom, the USD Index is moving higher and the consolidation that it's been in for about a year now is just a pause after the very initial part of the likely massive rally that's coming.

If even the Fed and the U.S. President can't make the USD Index decline for long, just imagine how powerful the bulls really are here. The rally is likely to be huge and the short-term (here: several-month long) consolidation may already be over.

There are two cases on the above chart when the USD Index was just starting its massive rallies: in the early 1980s and in mid-90s. What happened in gold at that time?

These were the starting points of gold's most important declines of the past decades. The second example is much more in tune with the current situation as that's when gold was after years of prolonged consolidation. The early 1980s better compare to what happened after the 2011 top.

Please note that just as what we saw earlier this year, gold initially showed some strength - in February 1996 - by rallying a bit above the previous highs. The USD Index bottomed in April 1995, so there was almost a yearly delay in gold's reaction. But in the end, the USD - gold relationship worked as expected anyway.

The USD's most recent long-term bottom formed in February 2018 and gold seems to have topped right now. This time, it's a bit more than a year of delay, but it's unreasonable to expect just one situation to be repeated to the letter given different economic and geopolitical environments. The situations are not likely to be identical, but they are likely to be similar - and they indeed are.

What happened after the February 1995 top? Gold declined and kept on declining until reaching the final bottom. Only after this bottom was reached, a new powerful bull market started.

Please note that the pace at which gold declined initially after the top - in the first few months - was nothing to call home about. However, after the initial few months, gold's decline visibly accelerated.

Let's compare the sizes of the rallies in the USDX and declines in gold. In the early 80s, the USDX has almost doubled in value, while gold's value was divided by the factor of 3. In the mid-90s, the USDX rallied by about 50% from its lows, while gold's value was divided by almost 1.7. Gold magnified what happened in the USD Index in both cases, if we take into account the starting and ending points of the price moves.

However, one can't forget that the price moves in USD and in gold started at different times - especially in the mid-90s! The USDX bottomed sooner, which means that when gold was topping, the USDX was already after a part of its rally. Consequently, when gold actually declined, it declined based on only part of the slide in the USDX.

So, in order to estimate the real leverage, it would be more appropriate to calculate it in the following way:

• Gold's weekly close at the first week of February 1996: $417.70
• USDX's weekly close at the first week of February 1996: 86.97
• Gold's weekly close at the third week of July 1999: $254.50
• USDX's weekly close at the third week of July 1999: 103.88

The USD Index gained 19.44%

Gold lost 39.07% (which means that it would need to gain 64.13% to get back to the $417.70).

Depending on how one looks at it, gold actually multiplied USD's moves 2-3 times during the mid-90 decline.

And in the early 1980s?

• Gold's weekly close at the third week of January 1980: $845
• USDX's weekly close at the third week of January 1980: 85.45
• Gold's weekly close at the third week of June 1982: $308.50
• USDX's weekly close at the third week of June 1982: 119.01

The USD Index gained 39.27%

Gold lost 63.49% (which means that it would need to gain 173.91% to get back to $845).

Depending on how one looks at it, gold actually multiplied USD's moves by 1.6 - 4.4 times during the early-80 decline.

This means that just because one is not using U.S. dollars as their primary currency, it doesn't result in being safe from gold's declines that are accompanied by USD's big upswings.

In other words, the USD Index is likely to soar, but - during its decline - gold is likely to drop even more than the USD is going to rally, thus falling in terms of many currencies, not just the U.S. dollar.

Please note that there were wars, conflicts and tensions between 1980 and 2000. And the key rule still applied. Huge rallies in the USD Index mean huge declines in gold. If not immediately, then eventually.

Consequently, it seems most likely that while the USDX rallies, gold would first rally to or slightly above its 2020 highs (topping today or tomorrow), and decline in a volatile manner shortly thereafter.

For now, it seems most likely that we'll get the final bottom in gold close to the middle of the month or in its second half. Perhaps on Easter Monday, when trading is more difficult in many parts of the world (as the markets are closed there) - that's exactly when silver topped in 2011.

Also, let's keep in mind that we have a medium-term triangle-vertex-based reversal in the middle of the month in the GDX ETF.

What happened in other markets once gold rallied for the final time in 2008? Silver and mining stocks moved higher, but not as significantly as gold. Neither silver, nor mining stocks moved above their previous highs. The general stock market moved back and forth, mostly doing nothing, and the USD Index rallied.

What's happening right now in the stocks and the USD Index? The stocks are moving back and forth, while the USD Index is moving higher and it just rallied for two consecutive days.

Silver moved higher, but not above its recent high, and miners corrected about half of their most recent downswing. It seems that the two periods in 2008 and 2020 (both marked with green) are indeed very similar.

Note: silver might exceed its recent high temporarily as the market might focus on the industrial demand due to the upcoming infrastructure projects. That's unlikely to be anything more than a temporary development.

As you can see, there are there are triangle-vertex-based reversals early this week in all key parts of the precious metals sector: in gold, in silver, and the mining stocks. We also get the same indication based on the GLD ETF.

This means that - based on this trading technique - it's very likely that we'll see some kind of reversal today or tomorrow. Based on the analogy to 2008, it's likely to be a local top, even despite the rally in the USD Index.

Thank you for reading today's free analysis. Our long position in gold became profitable almost immediately and it seems that we'll close it very soon, taking profits off the table. The full version of today's analysis includes details of this position as well as details regarding the position that is ready to take advantage of lower mining stock prices.

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