Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
Gold Stocks Triple Breakout - 15th Dec 18
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18
Rising US Home Prices and Falling Sales - 8th Dec 18
Choosing Who the Autonomous Car Should Kill - 8th Dec 18
Stocks Selloff Boosting Gold - 8th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

Gold Stocks Break Down below 2017 and 2018 Lows!

Commodities / Gold and Silver Stocks 2018 Feb 28, 2018 - 01:44 PM GMT

By: P_Radomski_CFA

Commodities

The HUI Index just closed below both 2017 and 2018 lows. The interpretations of many developments in the market are vague and subjective. But not major breakdowns. Gold miners just showed exceptional weakness by closing at new lows even though gold is still above $1,300 and the S&P corrected more than half of its recent sharp decline. Can anything save the precious metals sector from falling further?

Yes, but based on what happened yesterday, it seems that the golden Superman may have some trouble getting into the scene.

Another downturn in the USD Index would likely trigger a corrective upswing in gold and silver, which would in turn cause the prices of mining stocks to move higher. The “problem” here is that the USD has just invalidated the breakdown below the declining medium-term support line, which significantly lowered the odds for another short-term decline.


Let’s take a closer look at what happened, starting with the forex action (charts courtesy of http://stockcharts.com).

No More Megaphones for the USD

From the short-term point of view, it’s clear that the USD Index has broken above both declining short-term resistance lines. It hasn’t broken above the previous February high, but the implications of breakouts above the declining lines are already significantly bullish as they were two of the things that stopped the rally about 3 weeks ago.

The third – and most important – thing that stopped the previous attempt to move higher was the long-term declining resistance line based on the 2015 and 2016 lows. Both are important, so the line based on them is also important.

If a line is important, then a breakdown below it is also important, and the invalidation of the breakdown can be even more important. That’s what we saw during yesterday’s trading – the USD rallied above the mentioned resistance line, thus invalidating the previous breakdown.

The implications are already bearish, but they will be much more bearish when we also see a breakout above the previous February high and at least two weekly closes above it. Since the previous move above this line was followed by new lows in the USD (in the following week), we are still a bit skeptical toward yesterday’s move. Still, overall, it was a bullish development and based on the short-term breakouts that we discussed earlier, this invalidation has a much bigger chance of being a true one.

On the long-term chart you can see why we were very skeptical toward the possible long-term bearish implications of the previous breakdown below the mentioned declining support line. It’s because a much more important support was reached, and it held. Precisely, there was only a tiny breakdown below the combination of support levels and it was invalidated immediately.

The key mentioned support levels that held are the 2009 and 2010 tops along with 2 major retracements based on major extremes (marked with red and black on the above chart). The above combination is much stronger than the previously discussed declining line. The reason is that the mid-2015 and 2016 lows are less prominent than the 2009 and 2010 tops and the line based on the former is not strengthened by key Fibonacci retracements, while the latter is.

Consequently, the invalidation of breakdowns below the key, long-term support levels is far more important than the declining shorter-term line.

The above has been the reason for one to expect the move back above the declining resistance line. Yesterday’s session proved that the above expectation was correct. Moreover, thanks to the simultaneous breakout above the declining short-term resistance lines, the odds are that rallies will follow.

Also, the above chart explains the title of this section. The mentioned declining resistance line based on the 2015 and 2016 lows, along with the rising dashed line based on the 2015 and 2017 tops create an expanding triangle pattern that is sometimes referred to as a megaphone pattern.

The Golden Breakdown

Just as the USD Index moved close to its previous highs, the price of gold moved to its previous lows. It also broke below the rising support line based on the previous short-term lows. Gold is at its 38.2% Fibonacci retracement, which is an important short-term support level. The previous breakdown below it was invalidated and followed by an upswing, so gold could still move temporarily higher.

Still, if silver is to outperform gold and the former is to move close to its recent short-term high, then gold should not move as high. The volume that accompanied Monday’s move higher was rather low, which suggests that the strength of the bulls is limited. It fits the scenario in which gold moves higher for a few days (to gold’s cyclical turning point which is marked with a vertical line) or a week and a few days and then starts a big slide.

Again, there are multiple long-term factors in play that favor lower gold prices and they could trigger a decline regardless of the short-term signals – the surprises can and are likely to be to the downside.

Consequently, the medium-term outlook remains bearish, but just as we are skeptical regarding the USD’s breakout, we are still skeptical regarding gold’s short-term breakdown below the rising support line. Yes, it’s bearish, but we will not be surprised by another attempt to move higher before the big slide starts.

The latter is certainly possible in light of silver’s self-similar pattern.

Silver’s Self-similarity

Silver seems to be repeating its performance from the second half of the previous year.

The January 2018 – February 2018 decline is a quicker version of the September – October 2017 downswing. The subsequent corrections are very similar – in both cases, silver moved a bit above the 50% Fibonacci retracement, but not above the 61.8% one. The following decline erased most of the correction. Then, back and forth trading started where intraday highs were not as high as the highest intraday price of the preceding corrective upswing. The intraday lows of subsequent sessions were increasing.

The initial corrective upswing also took silver above both moving averages: the 20- and 50-day one. Then, the back and forth trading took place around the red moving average, but below the blue one. That’s what happened on Monday – silver moved a bit above the red MA, but not above the blue one.

Having established the self-similarity, let’s see how we can use it.

We can use to determine the next silver turning point and the trading opportunity. In this particular case, we see that the final top and the superb opportunity to go short presented itself in mid-November, when silver rallied above the declining resistance line based on the previous intraday highs and visibly above the blue (50-day) moving average.

It took a bit more time for silver to rally in November 2017 than it did for it to decline in October, so in this case, we can expect silver to take a bit more time to rally than it did to decline in the second half of February.

Combining the above price and time analogies, we get the target that we marked with a red ellipse on the above chart. The target is quite wide and there are good reasons for it. Back in November, silver topped below the previous top, but silver is known to get ahead of itself during these intraday outperformance cases, so we’re not ruling out a scenario in which it “breaks out” above the mid-February top only to invalidate the “breakout” shortly thereafter.

As far as time is concerned, please recall that in Monday's free analysis we thoroughly discussed the apex triangle reversal technique for gold and it pointed to two scenarios: one in which the top is already in and a second one in which the top is going to be in in about two weeks (a bit less, counting from today). Moreover, gold’s cyclical turning point is tomorrow, so it could be the case that it triggers silver’s rally and the subsequent reversal. Overall, it’s rather unclear when precisely the silver reversal will take place, but we know more or less when to expect it and we know what signs to look for as a confirmation (silver’s breakouts above the declining, short-term resistance line and the 50-day moving average).

Speaking of apex-triangle-based reversals, please note that the above chart shows yet another confirmation of this technique’s usefulness. The triangle based on the October and November 2017 lows (solid line) and the September and November 2017 tops (dashed line) had their apexes exactly at the time when one would want to reverse their short positions or close them. Perhaps applying this technique to the upcoming decline will serve as a way to detect a short-term reversal as well.

During yesterday’s trading, silver moved a bit below the rising short-term support line, but closed right at it, without a meaningful breakdown. The volume that accompanied it was significant, which is bearish, but please note that since the back-and-forth movement in silver still continues and the self-similar pattern remains in place, we should still take into account the possibility of a quick upswing right before the slide.

Gold Stocks’ Breakdown

Gold miners declined substantially yesterday and closed at new 2018 lows, which means that they also broke below the previous 2017 lows. There was no new intraday low, but the closing prices are more important with regard to breakdowns below important price levels.

More importantly, this time, the breakdown was not triggered by a huge and volatile decline in main stock indices. The S&P Index is above the 50% Fibonacci retracement based on the decline, so it’s definitely not moving to new lows. Therefore, the gold stocks’ performance represents true weakness of the PM sector.

By the way, the S&P 500 Index just invalidated the breakout above the 61.8% Fibonacci retracement level based on the daily closing prices, so we might (!) see another slide lower.

Moving back to mining stocks, the breakdown below the previous 2017 and 2018 lows is not yet confirmed as that was just one daily close, but in light of the long-term breakdowns in the gold stocks to gold and gold stocks to S&P ratios, it seems that bearish outlook is definitely justified.

But, does the above rule out the possibility of seeing another move higher before the big slide in the miners begins? It’s definitely less likely than it was before yesterday’s session, but it’s still possible.

As a reminder, during the previous volatile declines, gold and silver mining stocks quite often corrected twice before another big wave down started. Is this time any different? It could be the case based on the mentioned breakdowns in the ratios, but it’s not certain.

While we’re at it, we would like to provide you with a reply to a question that we received about using the RSI to time the upcoming bottom in the GDX. Our price targets may (and it even seems likely) correspond to the RSI below 30, so the question is if the targets are not too low. Here’s our take.

It seems that we have entered the stage in the precious metals market where aggressive downside targets for mining stocks are justified. The reasons are the key breakdowns in the HUI to gold and the HUI to S&P ratios that you saw in Monday’s alert. Based on them we should expect a lot of negativity from mining stocks in the coming weeks and months. The RSI around (!) 30 is a bullish factor, but please keep in mind that targets based on prices are more precise than those that are based on the RSI.

For instance, about a year ago, on March 2nd, the RSI for GDX was at about 32 when GDX closed at 21.75. It was relatively close to the bottom, but the true bottom formed only once RSI moved below 30 in the following days. On March 9, the closing price was 20.97 - about 4% lower. In August 2016, the RSI-around-32 bottom was $26.68, and the real bottom was several days later with RSI below 30 and GDX at $25.21 (closing price). About 6% lower.

The key thing, however, is what happened during the 2013 decline - as that’s what we think is likely to be seen once again. In late January 2013, the RSI around 30 served as a good buy signal but only for the immediate future. In fact, for many investors, it would have been better to stay short at that time. Most subsequent bottoms were formed with the RSI at or below 25 and exiting positions with the RSI at 30 would have been very premature.

Concluding, the RSI may not be as effective in the next several months as it was in the past 2 years or so. Even if it is, bottoms may form with the indicator a bit below 30, instead of being a bit above it. Consequently, it seems better to look at the price levels based on support lines, retracements and other techniques than to put huge weight to the RSI’s indication. It’s still going to be important, but not to the extent it used to.

Little-known Confirmation from Palladium

Some signs, like breakouts and breakdowns are clearly visible, but some are known only to those who have been in the market for a long time and have taken the time to analyze it thoroughly. One of the latter sings comes from the palladium market.

The less-popular white metal provides us with important short- and medium-term signals, but only if one knows where to look. The volume that accompanies the weekly upswing is the thing that can help us determine what kind of move we should expect. The size of the palladium market is limited and it’s not as popular as gold or silver, so sudden increases in the buying activity may imply big upswings in interest among individual investors (this market may be too small for many institutions).

Where do people want to “buy buy buy!”? At the tops. Therefore, the big increase in the volume may indicate a surge in the sentiment, which in turn indicates a local top. The above worked in 7 out of 9 recent cases, so it seems that the above kind of link does indeed exist. Consequently, the implications of the most recent weekly upswing are bearish and the above strengthens the already bearish case.

Summary

Summing up, the top in gold, silver and mining stocks is probably in, but there’s still a possibility that the PMs’ decline will be delayed by a few days or a week. Mining stocks and – in particular – silver will be the assets to look at for necessary confirmations before making adjustments to the current trading position. However, based on the information that we have today (we’ll provide follow-ups in our daily alerts), it seems that in both cases the outlook for the following months will remain bearish.

 

If you enjoyed the above analysis and would like to receive free follow-ups, we encourage you to sign up for our gold newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Gold & Silver Trading Alerts. Sign up now.

Thank you.

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Tools for Effective Gold & Silver Investments - SunshineProfits.com
Tools für Effektives Gold- und Silber-Investment - SunshineProfits.DE

* * * * *

About Sunshine Profits

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Przemyslaw Radomski Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules