Mining stocks rallied yesterday and the GDX ETF even moved above the neck level of the previously described head-and-shoulders pattern. Did the situation become very bullish? Not really - the HUI Index failed to move above its 2008 and 2009 highs, so the situation is still bearish. So far this rally is nothing to be taken too seriously, especially if one compares it to the size of the rally in gold. In fact, this rally has been signaled by our proprietary indicators - in latest update's Sunshine Profits' Indicators section we wrote the following:

"The SP Gold Stock Extreme Indicator and the SP Gold Stock Extreme #2 Indicator have both signaled extreme readings recently. The local bottom seen in the HUI Index on Thursday is not likely the end of the current decline (as discussed earlier in this update), but it seems that at least a small counter-trend rally will be seen."

As a reminder, we've summarized that section by stating the following: "(…) even though we could definitely see a small rally from here, we believe now is not the time to bet on higher prices in the precious metals sector. The prevailing head-and-shoulders pattern seen in a couple of this week’s charts indicate tough times ahead for gold, silver and gold and silver mining stocks in general."

There's nothing new to report on as far as currencies are concerned, but we have seen interesting action in the main stock indices.

The general stock market moved higher, but the medium-term situation remains bearish. The first reason for that is lack of significant rally in the financial sector - the Broker-Dealer Index that we featured in the latest Premium Update did not move above the 61.8% Fibonacci retracement level. The second reason is that the rally was not accompanied by strong volume.

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.

It's a very tough call to say where would silver or mining stocks top right now as their volatility could change in the final part of the move. Generally, we don't think that silver would go above $38.5 before declining and we don't think that the HUI Index would move above 530 level, before the next decline. As mentioned on Monday, we don't think that gold would move above its previous high.

The most precise signals that we have right now are the general bearish tendency aligned with the true seasonal tendencies and the cyclical turning point for silver, euro and dollar indices in late June. Consequently, unless the short-term upswings are strongly confirmed, then we will likely see a bigger move lower in a week or so.

On a side note, please note that there is a considerable amount of analysts, who emphasize (! - not rationalize - reminding long-term positive fundamentals is not a rationalization of short-term moves) that summer doldrums don't have to happen this year. Please remember that whether someone emphasizes something or not, doesn't make it any less or more likely. Tendency by definition means that something is more likely to happen than not. Of course - it's not a sure bet, but the fact is that it's not certain doesn't mean that it's not likely.

Interestingly, the fact that many people currently negate seasonal tendencies means that they could play out exactly as during previous years. If everyone was expecting weak summer, then everyone would sell ahead of it and consequently, without sellers, the only trade action that could be seen during summer months would be buying. That would of course make summer period very bullish.

However, since we have many people questioning the validity of the pattern, there are still a lot of bulls out there who could become scared and sell their holdings during the summer months, thus - ironically - contributing to the pattern whose existence they had previously doubted. Consequently, the number of the "no bearish seasonals this year" analysts is something that makes this pattern probable.

Quick reminder - we will not provide a Premium Update this Friday, but instead we're providing a few short messages this week to make sure you are kept informed. We apologize for any inconvenience.

Thank you for using the Premium Service.

Sincerely,
Przemyslaw Radomski