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Some swear by price action, many others rely on indicators. There are actually many gold trading tips built around these techniques. Gold Miners Bullish Percent Index, is one of the rare ones that don't issue signals all that often. And it showed the highest possible overbought reading recently.

The excessive bullishness was present at the 2016 top as well and it didn't cause the situation to be any less bearish in reality. All markets periodically get ahead of themselves regardless of how bullish the long-term outlook really is. Then, they correct. If the upswing was significant, the correction is also quite often significant.

Please note that back in 2016, there was an additional quick upswing before the slide and this additional upswing has caused the Gold Miners Bullish Percent Index to move up once again for a few days. It then declined once again. We saw something similar also this time. In this case, this move up took the index once again to the 100 level, while in 2016 this wasn't the case. But still, the similarity remains present.

Back in 2016, when we saw this phenomenon, it was already after the top, and right before the big decline. Given the situation in the USD Index, it seems that we're seeing the same thing also this time.

Please note that back in 2016, after the top, the buying opportunity didn't present itself until the Gold Miners Bullish Percent Index was below 10. It's currently above 70, so it seems that miners have a long way to go before they bottom.

Three weeks ago, we commented on the above chart in the following way:

Now, since the general stock market moved above the previous highs and continues to rally, we might or might not see a sizable decline early this week. Back in March, the slide in miners corresponded to the decline in the general stock market, and this could be repeated, or we could see some sideways trading after the slide resumes, once stocks finally decline.

That's exactly what happened. The general stock market continued to move higher, and mining stocks have been trading sideways instead of declining - or rallying. Before miners' pause (and S&P's breakout) miners were repeating their late-February and early-March performance. The implications of the self-similar pattern were bearish, and they continue to be bearish, only the timing changed.

The GDX ETF didn't manage to break below the lower border of the triangle pattern yet, but given the situation in the USD Index and what we're about to show in you case of gold, it's likely that it will move lower shortly.

Based on the triangle (marked with red, dashed lines), we get a vertex. This means that it wouldn't be surprising to see an intraday rally that is followed by a decline later today or tomorrow.

Also, let's not forget that the GDX ETF has recently invalidated the breakout above the 61.8% Fibonacci retracement based on the 2011 - 2016 decline.

When GDX approached its 38.2% Fibonacci retracement, it declined sharply - it was right after the 2016 top. Are we seeing the 2020 top right now? This is quite possible - PMs are likely to decline after the sharp upswing, and since there are only several months left before the year ends, it might be the case that they move north of the recent highs only in 2021.

Either way, miners' inability to move above the 61.8% Fibonacci retracement level and their invalidation of the tiny breakout is a bearish sign.

Everyone and their brother appear to be bullish on the precious metals sector right now, but if everyone is on the same side of the trade, it's usually a good idea to be on the other side. There are quite a few factors pointing to lower precious metals prices on the horizon, and the situation in the mining stocks is one of them.

Thank you for reading today's free analysis. Please note that it's just a small fraction of today's full Gold & Silver Trading Alert. The latter includes multiple details such as the interim target for gold that could be reached in the next few weeks (or even later this week). You will find details in today's flagship Gold & Silver Trading Alert. We invite you to subscribe and read today's issue right away.

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

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The big news of yesterday's session was that the S&P 500 invalidated its breakout above the previous 2020 high, and that happened after the Fed was even more dovish than previously. What are the implications for the precious metals market, and why didn't miners decline more yesterday?

After topping at approximately the triangle-vertex-based reversal (please note how effective and versatile this technique is), stocks moved lower and ended yesterday's session clearly below the previous 2020 high. Invalidations of breakouts are important on their own, but this development is something special. The reason is similarity to what happened in the late 2018. This is the most recent example of what an invalidation could do to the price in the matter of jus several weeks. In short, stocks plunged shortly after breakout's invalidation.

There are also other factors that need to be kept in mind, but in my opinion stocks are likely to fall in the following weeks. On a side note, if one is into stock investments at all, it might be a good idea to currently consider a market-neutral strategy based on selection of stocks that are likely to fall the most. The short position in one of our stock picks (it was NVDA) just gained almost 20% while the S&P 500 fell by almost 6% during the same period.

Moving back to the precious metals market - how does the above-discussed bearish outlook translate into mining stock prices and PMs in general? In short, it has bearish implications - PMs and stocks fell together in March as well.

Ok, so why didn't the mining stocks decline more yesterday?

Indeed, miners moved just a little lower during yesterday's session. The GDX ETF closed the day above the lower border of the blue triangle pattern, even though it moved below it during the day. Did miners just show strength?

They both did, and didn't. Gold ended yesterday's session slightly higher despite the intraday decline, so the fact that miners closed the day lower is not a sign of strength.

Miners held up very well compared to the general stock market, but this is just a supplementary market for them - the most important influence comes from gold.

Consequently, it seems too early to say that miners are indeed showing strength. They are declining very slowly - just like gold is.

And it's all happening in tune with what we wrote yesterday - gold appears to be repeating its 2013 performance but on a much shorter timeframe. The part of the move that it's currently repeating, is a slow decline that we saw right before the plunge. Therefore, what we just saw is not odd at all - it's normal.

Quoting our yesterday's analysis - the part about the self-similar pattern - seems appropriate:

The history rhymes, but this time, the similarity is quite shocking.

We copied the short-term chart and pasted it on the long-term chart above and next to the 2011 top. We pasted it twice, so that you can easily compare gold's performance in both cases in terms of both: price and time.

They are very similar to say the least. Yes, these patterns happened over different periods, but this doesn't matter. Markets are self-similar, which is why you can see similar short-term trends and long-term trends (with regard to their shapes). Consequently, comparing patterns of similar shape makes sense even if they form over different timeframes.

After sharp rally gold declined quickly. Then we saw a rebound, and a move back to the previous low. Then, after a bit longer time, gold moved close to the most recent high and started its final decline. This decline was less volatile than the initial slide. That's what happened when gold topped in 2011 (and in the following years), and that's what happened also this year. Ok, after the initial decline from the 2011 top, we saw two initial reactive rallies and in 2020 there was just one, but it didn't change the similarity with regard to time.

The patterns of this level of similarity are rare, and when they do finally take place, they tend to be remarkably precise with regard to the follow-up action.

What is likely to follow based on this pattern is that we're likely to see the end of the slower decline, which will be followed by a big and sharp decline - similarly to what we saw in 2013.

How low could gold slide based on this similarity? Back in 2013, gold declined approximately to the 61.8% Fibonacci retracement based on the preceding rally (the one that started in 2008), so that's the natural target also this time.

And we already wrote about this particular retracement - it's approximately at the $1,700 level. This has been our downside target for weeks, and it was just confirmed by this precise self-similar technique.

Another interesting point is that gold made an interim low close to the 50% retracement and the previous lows. Applying this to the current situation suggests that we could see a smaller rebound when gold moves to about $1,760 - $1,800.

This might be the moment to switch from short positions in the miners to short position in silver. It's too early to say for sure at this time, though.

The interim downside target has very important trading implications. Even though gold might rebound just temporarily, something much more profound is likely to take place in case of mining stocks and silver. You will find details in today's Gold & Silver Trading Alert. We invite you to subscribe and read today's issue right away.

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

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