Hey, Remember About Gold Price's Powerful Reversal? / Commodities / Gold & Silver 2023
Gold price has been falling in today’spre-market trading, but… Given the recent (HUGE!) weekly reversal, does itreally surprise anyone?
The Historical Context
Well, it might surprise those thateasily forget what happened in the previous weeks and focus on just theday-to-day price swings, but the truth is that the context provided by previousweeks, months, and years (and the performance of other markets!) matters a lot.
I previously wrote about some detailscoming from the broader perspective and some from the immediate-term analysis,and all that remains true. The recent weekly reversal was so huge that itsimpact on the next weeks really needs to be kept in mind at all times. It’s notlikely that a daily price moves in any direction (especially that gold is lowertoday…) would invalidate the implications of the powerful weekly (!) reversal.
In case that massive reversal seems likea distant memory, here’s a reminder of what happened.
Gold soared above $2,100 only to plungeto almost $2,000, and in happened on huge volume. This was the most profoundweekly reversal in years. It was similar to the reversal that we saw in May2023 and the one from March 2022, and they both started big declines.
The same is likely this time.
This means that this and last week’s moves higher were just a small rebound before the decline’s continuation.
This is particularly likely given thefact that both previous weekly reversals were followed by some kind of bounce before thedecline really picked up pace. In 2022, it took several weeks before the second(lower) top formed, and in May 2023, the corrective upswing was over within aweek. Right now, we’re 1.5 weeks after the reversal, which means that the decline could start any day now.
Also, please note that in 2022, goldcorrected over 50% of the initial decline before finishing the rebound, and in May 2023, gold corrected slightly over 61.8% of the initial decline beforemoving south. This means that the size of the rally that we just saw is nothingextraordinary. In particular, it doesn’t mean that gold rallied so much that itinvalidates the immensely bearish implications of the recent weekly reversal.
On a very short-term basis – the intradaybasis – we see that silver just outperformed gold, which very often precedessizable declines.
This means that the bearish indicationscome not just from the long-term charts but also from the very short-term ones.What about the junior mining stocks? Didn’t they rally too muchrecently to still be considered bearish?
No.
Analyzing Recent Trends
Please take a look at the areas that Imarked with red rectangles. They mark important tops in the GDXJ ETF. In thosecases, junior miners topped by first declining somewhat, then correcting, andthen sliding without looking back. In two out of three cases, the second(final) top was below the initial one, and in the remaining case (in early2022), the second (final) top, was slightly higher than the initial one.
So, is seeing the GDXJ close to theprevious top (but still below it) a bullish game-changer? Absolutely not.
It’s not even a game-changer when we zoomin.
The junior mining stocks simply moved tothe upper border of its rising trend channel without breaking above it.
The previous highs provide resistance, soit’s unlikely – especially given gold’s weekly reversal! – that a really bigand sustainable rally would materialize here.
Especially given what’s happening in theUSD Index.
And what’s happening there is that we sawa comeback above the 61.8% Fibonacci retracement level based on this year’srally. This serves as the final confirmation that the bottom is indeed in.
The RSI at 30 indicated it, but thebreakdown’s invalidation confirms it. This bullish outlook (which is bearishfor the precious metals market) is also confirmed by the USD Index’s long-termchart, but Ialready wrote about it yesterday, so I don’t want to repeat myselfhere.
Now, before summarizing, I’d like totouch on two markets that also provide extra context for the precious metalsmarket: stocks and crude oil.
As you know, I’m commenting on the stockmarket every now and then, but I’m not providing trading indications for itspecifically because that’s not the area where I have the greatest experience.That’s why I’m using stock market charts and USDX charts not for trading thoseassets but as supportive indications of the main analysis that I’m conductingon the precious metals and mining stock charts. There are others, for example,Paul Rejczak, who specialize in this (stock market) area.
Paul opened his long positions on Feb.27, 2023 (with S&P 500 below 4,000) andis now considering closing them. I also think that stocks areextremely overbought here and, thus, likely to decline shortly, especiallysince they just approached their previous all-time high.
A decline in stocks is likely to triggera decline also in junior mining stocks – that’s the part of the precious metalsmarket that is most linked with the performance of stocks. By the way, the factthat junior miners were weak relative to gold over the medium term despite thestock market’s strong performance is simply another indication that the minersdon’t want to move higher, and that the recent rallies were simply counter-trendrallies, nothing more.
The rest of the precious metals market islikely to decline along with stocks, too (like they all declined in 2020, forexample), but junior miners are likely to be affected to the greatest extent.
The above doesn’t mean that all stockswould be likely to decline, though. This is the case as far as copper stocksare concerned, for example, but the situation in oil stocks is a bit different.They have their own specific technical set-up that could take them higherregardless of stock market’s decline – Anna described it in advance inlate November in her Oil Trading Alert.
So, yes, while I continue to think thatthe biggest trading opportunity is still in junior mining stocks, naturally,there are also other opportunities out there.
All in all, the outlook for the preciousmetals market remains strongly bearish and the potential for our currenttrading positions in junior mining stocks remains enormous.
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Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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