Why did the miners’ decline pause? Might this be a bottom?
In short, it might, but it’s highly unlikely that this is indeed a bottom. Yesterday’s pause is natural given the support that miners are encountering and given the situation in the USD Index.
Let’s start with the latter.
On Jan. 4, I wrote the following on the above chart:
Besides, gold’s correction corresponds to USD Index’s correction, which is as normal as it gets. After four days of rallying, it’s natural for a market to take a breather, and that’s exactly what we see today.
USDX’s pause here could mirror the pause that we saw in the second half of December (marked with rectangles), which would both serve as shoulders of an inverse head-and-shoulders pattern – a bottoming formation.
This is in perfect tune with what I wrote previously, and those comments still remain up-to-date – they continue to support even higher USDX values.
The right shoulder of the inverse head-and-shoulders formation has indeed formed. It’s even very similar in length. This means that once we see a rally here, it’s likely to be sizable – based on the size of the patterns head. In the current case, this means a rally to at least 104 or so.
The one thing preventing the USD Index from rallying right away is its declining, medium-term resistance line. Once this line is taken out, and the breakout is verified, USD Index would be free to rally. And this is exactly what appears likely at this time. Let’s keep in mind that the USD Index has just invalidated a breakdown below a long-term support line, and the last time it happened (in the middle of the year), it generated a big rally in the USDX and big declines in the precious metals sector.
The implications are very bullish here. What used to be the ceiling for the prices (in 2016 and 2020) is now a floor.
On a very short-term basis, we see that just as the USD Index is hesitating before breaking higher, mining stocks are hesitating before breaking lower. Some indices and ETFs moved below their important support levels, but others haven’t. Here’s how the situation looks like in various proxies for mining stocks.
The GDXJ ETF – a proxy for junior mining stocks (gold and silver) is after a breakdown below the very short-term (orange) support line and verification of the breakdown, and they just moved close to the rising support line based on the October and November lows.
The GDX ETF, a proxy for senior mining stocks, is at its very short-term support line.
The HUI Index, a proxy for gold stocks, is above its very short-term support line, but it moved very close to it recently.
The XAU Index, a proxy for gold stocks and silver stocks is at its very short-term support line.
The SIL ETF, a proxy for silver stocks just broke below its rising support line.
The same goes for the SILJ ETF, a proxy for silver junior mining stocks. They too moved below their rising support line.
All in all, mining stocks are either verifying their breakdowns or are taking a pause above their rising support lines. Thus, a pause here is quite normal. The same goes for the general stock market. The latter just flashed a sell signal as the S&P 500 Index futures moved back below their previous highs, but it doesn’t mean that the market has to plunge right away – today. The currency markets are really important, and if the USD Index hesitates here, so might the stock market.
You know, with higher USD values, the U.S. exports become less competitive, which is generally bad news for the stock market. Consequently, it’s normal that a pause in the USDX translates into a pause in stocks as well.
Silver’s recent breakdown below the head-and-shoulders pattern and its verification continue to point to much lower silver values in the following days and weeks. And since the entire precious metals sector is likely to move together, the implications are bearish for gold and miners as well. Additional confirmations come from other commodities and commodity stocks, which form their own bearish patterns.
So, just as the USD Index is preparing to break higher, but it’s very likely to proceed, the opposite is the case for the mining stocks and silver price.
Gold moved slightly higher in today’s pre-market trading after yesterday’s decline, and that’s a normal phenomenon. Especially that gold just touched its rising, short-term support line.
Again, a good reason for a pause. Not a reason enough for a major bottom to form, though.
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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief