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If gold’s recent rally is just a correction within a larger medium-term downswing, and the 2018 pattern repeats, this could mean the final plunge.

Gold continues to move just like it did at the beginning of this year, and – combined with the bottoming USDX – it heralds declines in the PMs.

I previously emphasized that despite jumping above the upper (red) border of the roughly one-and-a-half-month trading channel, the bearish implications of the yellow metal’s inability to close above its November 2020 low are more important - and this has remained the case.

Despite a daily rally in gold, we haven’t seen a daily close above the lowest one of late November 2020. Consequently, the breakdown below this level was not invalidated and its bearish implications remain intact.

In addition, gold’s stochastic indicator is mirroring the behavior that we witnessed in early 2021. If you analyze the bottom area of the chart above, you can see that the indicator recorded three material moves higher (triple top) before gold eventually rolled over.

In particular, the first sell signal occurred slightly below the 80 level, the second was above it, and the same was the case with the third one.

The stochastic indicator has just moved to new highs, just like it did in early 2021, and it also flashed (so far tiny but still) a sell signal. Back in January, this action meant that the final top was in or about to be in (not more than a few sessions away). The implications here are definitely bearish. Especially given Monday’s session, when gold showed that it’s ready to slide even without the USD’s help.

Speaking of the USD Index, please note that it seems to have bottomed almost right at its 61.8% Fibonacci retracement level based on the previous 2021 rally.

In addition, let’s keep in mind that the very bullish analogy to the 2018 rally remains intact. If you analyze the chart below, you can see that back in 2018, the USD Index rallied sharply and then corrected back to its previous highs. And in similar fashion, the current weakness is nearly identical.

The current correction is much bigger than what we saw in mid-April 2018, so it seems that what we see right now is more of an analogy to what we saw in June 2018. That was the first big correction after the breakout – above the 50-day moving average and the declining blue resistance line – that definitively ended the yearly decline.

I marked the situation from 2018 that seems similar to what we see right now with a dashed, horizontal line. Back in 2018, the pullback ended when the USD Index moved to its first Fibonacci classic retracement level (the 38.2% one). In case of the current rally, it seems that another classic retracement worked – the 61.8% one.

The very important detail about the June 2018 decline (and bottom) is that while this was the moment after which the USD Index’s started to move higher at a slower pace, it was also the moment after which the precious metals market started to decline faster.

At the beginning of the year, I wrote that the precious metals market was likely to decline and that the preceding rally was likely fake. That’s exactly what happened.

Right now, I’m writing that the recent rally was also fake (a correction within a medium-term decline) and – even more importantly – it seems likely that the next downswing could take place at a higher pace than what we saw so far this year. And – just as was the case in 2018 – this upcoming (fast) decline is likely to lead to the final bottom in the precious metals sector.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks 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
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Even though gold “could have, would have, should have” rallied given the USD’s decline, it ended yesterday’s (Apr. 19) session lower. Why? Because it wants to slide.

By. A. Lot.

The decline in the USD Index was huge on a day-to-day basis and the fact that gold not only ignored it, but actually declined, is truly profound.

In yesterday’s analysis, I commented on gold’s chart in the following way:

Despite Friday’s (Apr. 16) intraday bounce ushering gold back above its late November 2020 low, the momentum faded into the close. And because daily closing prices hold much more weight than intraday volatility, the yellow metal’s inability to hold above its late November 2020 low in terms of the daily closing prices signals that the bearish implications of the breakdown remain intact. Moreover, despite jumping above the upper trend line of its roughly one-and-a-half-month channel, the victory does not override the yellow metal’s inability to hold its November 2020 low or bounce above its April 2020 intraday high.

Please see below:

What Does the Stochastic Indicator Say?

In addition, gold’s stochastic oscillator is mirroring the behavior that we witnessed in early 2021. If you analyze the bottom area of the chart above, you can see that the indicator recorded three material moves higher (triple top) before gold eventually rolled over.

In particular, the first sell signal occurred slightly below the 80 level, the second was above it, and the same was the case with the third one. The stochastic indicator is already above the 80 level right now, so it seems natural for one to expect a top any day – or hour – now.

Since back in early 2021, the stochastic indicator moved to new highs – and so far it hasn’t – and since the USD Index might even move slightly lower before finding its short-term bottom, gold could move slightly higher on a temporary basis, before topping. Perhaps (there are no certainties on any market, but this seems quite possible in the near term) it would be the round nature of the $1,800 level and the 300-day moving average that’s very close to it that would trigger a reversal and another massive decline. From the medium-term point of view, another $20 rally doesn’t really matter. It’s the few-hundred-dollar decline that’s likely to follow that really makes the difference.

Thus, if history rhymes once again, another sharp reversal could be in order either immediately or soon.

The stochastic indicator has just moved to new highs, as it did in early 2021. This, plus gold’s extremely weak performance compared to the situation in the USD Index and the fact that the latter is likely very close to forming a major bottom, makes the outlook very bearish for gold.

Let’s keep in mind that the move to $1,800 is just a possibility, not something to be expected, let alone something necessary for gold to decline. Gold just showed that it’s ready to slide even without the USD’s help.

In fact, in today’s pre-market trading, the USD Index moved to new lows, while gold moved slightly lower as well. Yesterday’s performance doesn’t seem to be anything accidental, but rather something truly bearish.

The USD Index

Speaking of the USD Index, in yesterday’s analysis, I commented on its chart in the following way:

In addition, let’s keep in mind that the very bullish analogy to the 2018 rally remains intact. If you analyze the chart below, you can see that back in 2018, the USD Index rallied sharply and then corrected back to its previous highs. And in similar fashion, the current weakness is nearly identical. More importantly, though, with the 61.8% Fibonacci retracement level sitting just below the USD Index’s 50-day MA, the cavalry is already on the way.

Please see below:

The current correction is much bigger than what we saw in mid-April 2018, so it seems that what we see right now is more of an analogy to what we saw in June 2018. That was the first big correction after the breakout – above the 50-day moving average and the declining blue resistance line – that definitively ended the yearly decline.

I marked the situation from 2018 that seems similar to what we see right now with a dashed, horizontal line. Back in 2018, the pullback ended when the USD Index moved to its first Fibonacci classic retracement level (the 38.2% one). In case of the current rally, I marked those retracements with red. The USD Index is already below the first two (taking today’s pre-market decline into account) and it seems to be on its way to reach the final – most classic – 61.8% retracement. This kind of retracement provides substantial short-term support and it’s something that’s likely to trigger a rebounding.

This retracement is slightly above the 90.7 level, and at the moment of writing these words, the USD Index is trading at 91.14. This means that the USD Index can reach its very strong short-term support any day – or hour – now.

The very important detail about the June 2018 decline (and bottom) is that while this was the moment after which the USD Index’s started to move higher at a slower pace, it was also the moment after which the precious metals market started to decline faster.

At the beginning of the year, I wrote that the precious metals market was likely to decline and that the preceding rally was likely fake. That’s exactly what happened.

Right now, I’m writing that the recent rally was also fake (a correction within a medium-term decline) and – even more importantly – it seems likely that the next downswing could take place at a higher pace than what we saw so far this year. And – just as was the case in 2018 – this upcoming (fast) decline is likely to lead to the final bottom in the precious metals sector.

And here’s what happened yesterday and in today’s pre-market trading:

Today’s intraday low (at least so far) is 90.86, which is very close to the above-mentioned strong support provided by the 61.8% Fibonacci retracement. With this support being at hand it seems that the bottom is already in, or about to be formed. The top in gold, however, seems to be already behind us, given how weak gold was during the USD’s decline.

Miners: GDX and GDXJ

And what about mining stocks? In short, yesterday’s comments on them remain up-to-date:

With the GDX ETF attempting to regain its former glory, the senior miners breathed a sigh of relief after breaking above their declining resistance line (the blue line below). However, mirroring the zigzag pattern that we witnessed in late 2020/early 2021, on Apr. 16, the GDX ETF hit the upper trend line of its roughly one-and-a-half-month channel. More importantly though, the development ended the GDX ETF’s rally in early 2021 and ended up being a prelude to the senior miners’ material fall from grace.

Please see below:

Moreover, the GDX ETF’s rally above its declining resistance line is a classic example of ‘been there, done that.’ Case in point: back in November 2020 and January 2021, the GDX ETF managed to peak its head above the aforementioned blue line. However, shortly after declaring victory, the senior miners suffered severe drawdowns. As a result, the current move is nothing to write home about.

In addition, if you analyze the vertical blue dashed line above – connecting the peak-to-trough price action in October/November 2020 – you can see that the magnitude of the correction also mirrors the current swoon. What’s more, the final two days of the November rally culminated with the GDX ETF moving sharply higher on Thursday and slightly higher on Friday. And following the same script, the GDX ETF’s sharp rally on Thursday (Apr. 15) was followed by a tepid bounce on Friday (Apr. 16). Thus, the technicalities of other markets, technicalities of mining stocks, the futures’ traders’ positions, and historical precedent are all signaling a material reversion.

Still, I would like to point out that it’s still possible that the head-and-shoulders formation that I marked previously was not THE formation that is going to take mining stocks to much lower prices. It could be the case that the left shoulder is as I described previously, but that the head of the pattern is bigger, and the right shoulder is being formed right now. If this is the case, then we might still see the GDX ETF at about $37 level or so before it really slides. This would be in tune with how the situation developed in 2008 and 2012 – you’ll find details of this comparison in the following part of the analysis, where I discuss the HUI Index’s very long-term chart. For now, let’s keep in mind that even a rally slightly above $37 in the GDX ETF would not invalidate the bearish outlook for mining stocks (even though it would feel very unpleasant in the short term).

Still, it could be the case the initial head and shoulders pattern is going to hold anyway. As further evidence on this (more bearish in the short term but just as bearish in the medium term) scenario, let’s take a look at other proxies for the mining stocks. When analyzed through the lens of the GDXJ ETF, the pattern is far from invalidated. Case in point: the GDXJ ETF has yet to break above the neckline of its bearish H&S pattern.

Please see below:

To explain, the GDXJ ETF is relatively far from the neck level (which I marked with a thick, black line). On a side note, the breakout that we saw recently (above the short-term declining resistance line) seems similar to the breakout that we saw in January – above the line that was important back then. Just as the January strength turned into declines, I expect to see the same thing this time.

I would like to place some additional emphasis on the relative weakness of the GDXJ compared to the GDX. During yesterday’s session the GDXJ moved below its March highs while the GDX didn’t, and the overall daily decline in the GDXJ was about 3x bigger. This tells me that the decision to focus on the GDXJ instead of the GDX in the current short trade was likely a correct one. Just as was the case last year, junior miners are declining more than senior miners are, and this is likely to get even worse when the general stock market declines in a substantial way.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks 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
Founder, Editor-in-chief

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A culminating point has been reached. With the USD Index being backed up by solid fundamentals, can gold hold the line?

Have you ever noticed how often the language of war is used in finance and economics articles? A given company is on the defensive or the offensive, a stock is pushing forward, something else is rallying, positions are being taken… who will fire first? It’s the case of continuous push and pull factors that makes military strategies and concepts relevant to the subject of money.

Now, when it comes to gold and the USD Index, it’s not the great battle of our time (in reference to today’s title), as Gandalf explained to Pippin in The Lord of the Rings, but it’s a battle, nonetheless. For the yellow metal, it could even be the deep breath before the plunge. We’ll soon find out.

With an epic struggle for supremacy set to unfold in the coming weeks, battle lines have officially been drawn: with the USD Index hovering near its 50-day moving average and gold recapturing its 50-day MA, negatively correlated assets have officially collided. And, as the rules of engagement specify that to the victor go the spoils, which one is likely to wave the white flag?

Well, with the USD Index built on a foundation of relative fundamentals and gold a beneficiary of shifting sentiment, the former remains locked and loaded and poised to neutralize the threat. Case in point: despite the USD Index’s recent recoil, non-commercial (speculative) futures traders actually increased their net-long positions last week.

Please see below:

Source: COT

Moreover, let’s keep in mind that when net-speculative short interest as a percentage of total open interest (based on the CoT data) became extremely high in 2014 and 2018, the USD Index recoded two of its sharpest rallies in history. How sharp? Well, let’s take a look at how things developed in the past – after all, history tends to rhyme.

Let’s focus on what happened when the net speculative positions were significantly (!) negative and then they became significantly (!) positive, without paying attention to tiny moves (like the one that we saw last summer).

In short, rallies that began with extreme pessimism include:

• The big 2008 rally (over 16 index points)
• The big 2009 – 2010 rally (over 14 index points)
• The 2011 – 2012 rally (over 11 index points)
• The 2013 rally (“only” over 5 index points)
• The big 2014 – 2015 rally (over 20 index points)
• The 2018 rally (over 15 index points)

The current rally started at about 89, so if the “normal” (the above shows what is the normal course of action) happens, the USD Index is likely to rally to at least 94, but since the 5-index point rally seems to be the data outlier, it might be better to base the target on the remaining 5 cases. Consequently, one could expect the USD Index to rally by at least 11 – 20 index points, based on the net speculative positions alone. This means the upside target area of about 105 – 114. Consequently, a comeback to the 2020 highs is not only very likely, but also the conservative scenario.

In addition, let’s keep in mind that the very bullish analogy to the 2018 rally remains intact. If you analyze the chart below, you can see that back in 2018, the USD Index rallied sharply and then corrected back to its previous highs. And in similar fashion, the current weakness is nearly identical. More importantly, though, with the 61.8% Fibonacci retracement level sitting just below the USD Index’s 50-day MA, the cavalry is already on the way.

Please see below:

The current correction is much bigger than what we saw in mid-April 2018, so it seems that what we see right now is more of an analogy to what we saw in June 2018. That was the first big correction after the breakout – above the 50-day moving average and the declining blue resistance line – that definitively ended the yearly decline.

I marked the situation from 2018 that seems similar to what we see right now with a dashed, horizontal line. Back in 2018, the pullback ended when the USD Index moved to its first Fibonacci classic retracement level (the 38.2% one). In case of the current rally, I marked those retracements with red. The USD Index is already below the first two (taking today’s pre-market decline into account) and it seems to be on its way to reach the final – most classic – 61.8% retracement. This kind of retracement provides substantial short-term support and it’s something that’s likely to trigger a rebounding.

This retracement is slightly above the 90.7 level, and at the moment of writing these words, the USD Index is trading at 91.14. This means that the USD Index can reach its very strong short-term support any day – or hour – now.

The very important detail about the June 2018 decline (and bottom) is that while this was the moment after which the USD Index’s started to move higher at a slower pace, it was also the moment after which the precious metals market started to decline faster.

At the beginning of the year, I wrote that the precious metals market was likely to decline and that the preceding rally was likely fake. That’s exactly what happened.

Right now, I’m writing that the recent rally was also fake (a correction within a medium-term decline) and – even more importantly – it seems likely that the next downswing could take place at a higher pace than what we saw so far this year. And – just as was the case in 2018 – this upcoming (fast) decline is likely to lead to the final bottom in the precious metals sector.

Of course, just because the bottom is likely to be formed in the following months, doesn’t mean that it’s in at this time or that it’s a good idea to ignore the bearish implications of the situation in the USD Index (as well as other indications pointing to lower gold prices).

As further evidence, the USD Index’s 2020 decline has not invalidated its long-term breakout. And with the long-term implications taking precedence over the medium- and short-term ones, the USDX still has its guns pointed in the right direction.

Adding reinforcements to its infantry, the USD Index also has another ally in the U.S. 10-Year Treasury yield. After sitting out much of the rally in 2020, the former has been following in the latter’s footsteps since the New Year’s Day. And while the U.S. 10-Year Treasury yield’s frailty has been a negative over the last two weeks, the dynamic could be about to flip.

Please see below:

Trending in the opposite direction of the USD Index futures, non-commercial (speculative) futures traders have moved from net-long to net-short the U.S. 10-Year Treasury Note. For context, bond prices move inversely of yields, so a lower U.S. 10-Year Treasury results in a higher U.S. 10-Year Treasury yield. And after non-commercial (speculative) futures traders reduced their long positions by nearly 43,000 contracts and increased their short positions by more than 44,000 contracts, speculators went from being net-long nearly 84,600 contracts to net-short nearly 2,700 contracts.

Please see below:

As a result, if the U.S. 10-Year Treasury yield and the USD Index engage in an all-out offensive, their military might could indicate the death knell for the precious metals. Case in point: if you analyze the table below, you can see that gold, silver and the mining stocks often move inversely to the U.S. dollar.

The bottom line?

Given the magnitude of the 2017-2018 upswing, ~94.5 is likely the USD Index’s first stop. And in the months to follow, the USDX will likely exceed 100 at some point over the medium or long term.

Keep in mind though: we’re not bullish on the greenback because of the U.S.’s absolute outperformance. It’s because the region is doing (and likely to do) better than the Eurozone and Japan, and it’s this relative outperformance that matters, not the strength of just one single country or monetary area. After all, the USD Index is a weighted average of currency exchange rates, and the latter move on a relative basis.

In conclusion, the generals have mapped out their strategies, soldiers have manned the perimeter, and the loser of the upcoming battle will likely end up losing the war. However, with the precious metals being outmanned and outgunned, the USD Index will likely plant its victory flag, while gold, silver and the mining stocks are forced to retreat and regroup. As a result, a major fallback is likely before the precious metals can resume their long-term uptrend. Due to the USD’s breakdown below the 50% retracement, they could decline in the very near term (while gold rallies a bit more – say to $1,800 or so), but don’t let that trick you into thinking that the next big move is going to the upside. In my view, that’s actually likely to be an important top that’s then going to be followed by an even more important decline in the precious metals and mining stocks. Then, after several weeks or months of declines, PMs can bottom and finally soar without huge declines on the horizon.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks 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
Founder, Editor-in-chief

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Gold had a good day yesterday, but as it hits the $1,770 resistance line, it will be anything but easy for the yellow metal. The real test has begun.

And so, it happened. Gold moved right to its target level that seemed to be the max that it could reach, but that didn’t seem to be the most likely outcome. Just because it wasn’t the most likely outcome, doesn’t make it impossible. The “most likely” can happen all the time – after all its only “most likely” not “certain” or “inevitable”.

Gold declined right after its triangle-vertex-based reversal, but it appears that the market participants didn’t want to give up on the bullish tone until gold finally reached its previous lows and highs.

Just like magnets, the strong support and resistance lines draw investors and traders, and it seems that we saw this play out once again.

Gold moved slightly above its upper border of the near-perfect flag (zigzag) pattern and this small breakout is not completed. This particular breakout is not even close to being as important as the fact that the previous very strong resistance held yesterday (Apr. 15).

Why? Because the level that was just reached – the $1,770 level – is the level that provided strong resistance in mid-2020 (several times) and it provided strong support in late-2020 and early 2021. These were mostly very important reversals, which make this price level particularly important.

Moreover, the current move higher to this level is symmetrical to what we saw in mid-2020. Consequently, even though this week’s rally might seem like a game-changer, it very likely isn’t one.

But miners moved higher, and they invalidated the breakdown below the neck level of the broad head-and-shoulders formation!

…Did they, though?

Mining Stocks: GDX and GDXJ

The GDX ETF did indeed close yesterday above the dashed line that I used to mark the neckline of the head and shoulders pattern. One might view this as an invalidation of the breakdown, and thus a bullish sign. This doesn’t add up with gold’s inability to move above its critical resistance at $1,770, and we see that miners moved only to the line that’s symmetrical to the line based on the recent bottoms.

In yesterday’s intraday Alert, I wrote the following:

Mining stocks are rallying too, but please note that they only reached their upper border of the zig-zag pattern. Back in early January, this was exactly where the rally had ended. The top formed on huge volume and based on the volume that we already see today, it’s almost certain that the volume for today’s session will be huge – just like what we saw at the January top.

I realize that waiting for the next big slide is exhausting and discouraging, and it’s not easy to hold on to the current trading position. However, the outlook didn’t change, and the situation continues to fit the bearish narrative despite today’s intraday upswing. Consequently, exiting positions now seems not only pre-mature, but actually opposite to what appears to be a good trading move from my point of view. After all one wants to sell or short at the tops and tops can only form after rallies.

The above remains up-to-date. Let’s get back to the reason why this invalidation of the breakdown in the GDX might not really mean the true, meaningful invalidation of the breakdown in miners in general. The reason is that other proxies for the mining stocks sector don’t confirm it.

The GDXJ ETF is relatively far from the neck level (which I marked with a thick, black line). On a side note, the breakout that we saw recently (above the short-term declining resistance line) seems similar to the breakout that we saw in January – above the line that was important back then. Just as the January strength turned into declines, I expect to see the same thing this time.

Let’s move to the two key indices for the mining stocks sector, the HUI and the XAU indices.

In neither of them did we see the invalidation of the breakdown. Consequently, the GDX ETF is the odd one out in the entire pack, not to mention the lack of a breakout in gold. Therefore, it seems prudent not to give particular meaning to what happened in the GDX ETF alone.

Silver

And what about silver’s outlook?

Nothing really changed despite yesterday’s strength. Just as was the case in March 2020, silver is correcting after a visible decline. Back in March 2020, the correction ended between the 200-day (red) and 50-day (blue) moving averages. The same is happening right now. Silver’s 50-day moving average is currently at $26.15 and the white precious metal closed at $25.96.

All in all, it seems that quite a lot happened yesterday, but nothing really changed as far as the outlook for gold is concerned.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks 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
Founder, Editor-in-chief

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