The end of this week has been particularly interesting for Gold and Silver Investors. Gold moved below its long-term rising trend channel and its short-term one and mining stocks moved much lower. If you had opened a short position when we suggested doing so, this week, you are currently holding a position that is already profitable and with a potential of becoming even more profitable. Meanwhile, the decline in stocks appears to be confirmed, and the bearish head-and-shoulders pattern is about to be completed, just like we mentioned earlier this week.
From the non-USD perspective gold moved decisively below both: rising short-term support line and previous highs, thus invalidating the previous breakout. Both events are bearish for gold.
From our regular USD perspective, gold moved below its long-term rising support line and it happened only once in the past few years - in January 2011. Back then gold moved to its 150-day moving average and this is also where gold retraced many times in the past during more significant declines. Consequently, we view the 150-day moving average as a probable downside target also this time - approximately $1440.
Mining stocks are once again significantly below their 2008 and 2009 highs and the bearish head-and-shoulders formation appears to be valid. This implies that our previous target for the HUI Index at/below 450 level.
As far as silver is concerned, we continue to believe that the next major bottom will be seen in the $26 - $30 range. The reasons for this target include 250-day moving average, long-term support line, Fibonacci retracement levels, previous top/bottom and comparison to previous major declines.
The weak summer seasonal tendencies clearly appear to be in play right now, even though they were viewed as irrelevant by many analysts.
We recently received a few questions about the general stock market, so we will provide our thoughts on that matter as well. Just a few days ago we wrote the following:
"The next resistance level for the SPY ETF is at the 131 level, which is the upper border of the previous trading channel. No matter whether it moves to this level or if it stops right now, another local top and a small decline would create a bearish head-and-shoulders pattern (early April high being the left shoulder, the whole May being the head and the coming top being the right shoulder). This pattern would be a reliable set up for more declines."
Soon after we've sent out the above, prices moved lower thus creating the head-and-shoulder pattern. This action is clearly bearish for the stock market. Please note that during the whole previous rebound in stocks, financials (Broker/Dealer Index) stayed below their support - 61.8% Fibonacci retracement level, which - as we indicated previously - was a sign that the medium-term trend is currently down and that another move lower was/is to be expected.
In fact, this move down invalidated the previous move back into the trading channel. Please note that we've seen a similar fake-out at the end of May, which was followed by a significant decline. This could be the case also this time especially that the move below August 2008 high now appears to be verified. Another important point about the stock market that is worth commenting on is high volume that accompanied the recent (Thursday, Friday) move down. It was visibly bigger than the one that accompanied previous several-day rally. This is another sign that further declines are likely.
Summing up, the most recent moves higher in metals and stocks seem to have been nothing more than a short-term correction within a bigger decline. We expect to see more declines in stocks and in the precious metals sector in the coming weeks. As always, we will let you know, should anything change.
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Sincerely,
Przemyslaw Radomski
