Gold and silver rallied today in pre-market trading by more than $20 and $0.30, respectively, so the question is if this changes anything.

Gold corrected 38.2% of the August - October decline on an intraday basis, but moved back to the resistance levels: the one created by the neck level of the head and shoulders pattern and the one based on the declining resistance line (based on August and mid-September highs). At this time, we don't view these resistance lines as broken.

The head and shoulders formation was completed and verified. We would need to see a daily close above the neck level to speak of an invalidation of the pattern - a very brief, intraday move is not enough to change the outlook. The situation is similar in case of the move above the 38.2% retracement level based on the entire bull market - we'll need to see a weekly close above it (or simply a bigger move) to say that the breakdown below it is really invalidated. The same goes for silver and the 2008 high.

The USD Index moved below the 80 level - to the support line that stopped the decline in October, and the bottom might already be in. If it's not - the next significant support is very close (at about 79.5), so the downside is quite limited.

Generally, it's not that investors around the world view gold as more appealing - they view the USD as less appealing. The dollar lost some value relative to other assets like gold, so gold's price in the USD went up. Today's move is much less visible from perspectives other than the USD one.

What was the likely reason for the above price moves?

Quoting today's Oil Trading Alert: "The agreement was reached just a day before the deadline, which means that the U.S. will avoid a costly default on its debt and that lawmakers will be able to fully reopen the government. The Senate struck a deal to fund federal agencies at current spending levels through Jan. 15 and extend the country's debt ceiling through Feb. 7. A negotiating committee would be charged with devising plans for longer-term solutions."

So, the largely expected debt deal was made and the USD Index declined (and US stocks rallied). More debt will be allowed and more money will be created - gold should soar. It didn't move higher yesterday, and it moved up by slightly more than $20 today, which is not a sign of strength - if the market was ready to start a major rally now, we would have already seen a much bigger price move.

Yesterday, we wrote the following regarding the stock market:

"The above gets particularly interesting when we compare it with what the stock market did - and it declined. This confirms the current negative link between stocks and metals and, at the same time, is bearish information for metals, as the outlook for stocks didn't change - it remains positive as stocks didn't move below the important support levels. Stocks simply pulled back to their 50-day moving average (DJIA) - a small breather after a sharp 4-day rally."

Tuesday's decline turned out to be nothing more than a breather and stocks rallied once again. This is a bearish piece of information for the precious metals sector, even though the metals haven't declined just yet. Stocks rallied as the risk of a government default decreased.

In terms of the daily closing prices, the HUI:gold ratio is once again below the previous 2013 lows. Yesterday, we wrote that a single close back above this important level is not that significant - and it wasn't - the ratio didn't stay above this level - what was bullish based on Tuesday's price action, is no longer at present.

Overall, we think that the situation is still bearish enough to justify keeping small short positions in the sector (half of the regular size) and at the same time be in the market with only half of one's long-term precious metals investment capital.

To summarize:

Trading – PR: Short position (half of the regular size of the position) in gold, silver and mining stocks.

Long-term investments: A half position in gold, silver, platinum and mining stocks. As far as long-term mining stock selection is concerned, we suggest using our tools before making purchases: the Golden StockPicker and the Silver StockPicker

The stop-loss orders for the speculative short positions are:

• Gold: $1,330
• Silver: $22.60
• HUI: 240
• GDX: $26

As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Market Alerts on a daily basis (except when Premium Updates are posted) at least until the end of October, 2013 and we will send additional Market Alerts whenever appropriate.

As a reminder, Market Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA