Ready to see the big moves? Very few are, but it seems that the calm before the storm is ending.
The key thing that happened this week was the fake rally in stocks, gold, silver, and miners that was based on Fed’s comments, and the subsequent invalidation of this rally. Since I discussed it yesterday, I’ll start with a quote:
The Fed has spoken, nothing changed, and the markets were volatile – FOMC day as usual.
The rates stayed where they were as there was no progress made on the path to Fed’s 2% inflation goal. When will the Fed cut rates? They are not sure – it depends. The most fun thing about Powell’s yesterday speech was when he said that "it is unlikely the next policy move will be a hike."
Saying this makes it clear that it’s something that they are actually considering, but putting a “no” on. Sure, they might not hike further, but it tells a lot about how likely a further rate cut is – its further than most think.
And this, on its own, without any extra details is enough to push stocks lower. This simply means that companies will have to bear the burden of higher interest for longer. Some of them will have to terminate some contracts, limit some purchases, production, output, the revenue might fall, so will profits, and thus stock valuations and prices.
Markets are forward-looking, so knowing that this is likely, will make people want to sell now instead of waiting for the prices to fall in the future – after all… Please raise your hand if you want to sell later at lower prices rather than now while they are still high. I’m pretty sure I would see no hands in the air if I was in a closer physical distance.
Here's what happened yesterday.
I put all (junior miners, gold, silver, and stocks) charts on one image to emphasize how aligned the price moves were. In short, the markets rallied in anticipation of a rate-cut and then instead of it, they got the above comments.
While it may not be apparent from the above charts alone, the back-and-forth move made the situation more bearish for the markets than it was before – it was not neutral.
The reason is that it’s now clearer that what prevented the markets from falling further – expectations of rate cuts in the near future – is gone. It seems that initially, it was only those that had bought during the day, quickly sold whatever they bought (at least in case of stocks), but the remaining investors (so, the vast majority) is likely to react now and in the following days/weeks. The hope is gone (or adjusted) only in their case, too. They simply weren’t focused on trading the intraday moves.
All in all, stocks are likely to slide, just like they did in 1929 – the price patterns in both cases are remarkably aligned. Sure, the history doesn’t repeat itself to the letter – so it’s no wonder that this time we saw the corrective pullback several days earlier – but it does rhyme. And since the concentration of growth in the market in case of the biggest companies that we saw in the previous weeks was comparable only to what we saw in August 1929, it’s likely that a huge slide is about to take place.
Mining stocks are likely to slide in this kind of environment, and we saw example of how connected they are to the near-term stock price movement yesterday. As stocks reversed their course, so did miners. I wrote this multiple times before, but it’s worth repeating once again – if stocks slide, miners are likely to truly plunge in an unreasonable manner.
Yes, unreasonable manner.
Was anything reasonable in the enormous slide of 2008? No, but it happened, anyway.
We’re likely to see something like that once again.
The interesting sign that you can see on the above chart is that the moves in gold and silver were also connected with what we saw on the stock market, but the metals haven’t reacted as much as miners did. That’s probably because the USD Index also moved lower yesterday, but it still shows that junior miners are more connected to stock market’s performance than metals are.
The USD Index is still likely to soar, and it’s likely to soar in a MAJOR way – the only thing that happened based on yesterday’s decline is that the post-rally consolidation got a bit longer.
The USDX is likely to rally in a major way as it’s after a medium-term breakout. Also, if you compare the current situation with how the USD Index previously rallied from similar levels about 24-25 years ago, you’ll see that the current rally’s place is in perfect alignment.
In other words, the USD Index is not really moving “too fast” from the medium-term point of view – it’s moving in tune with what already happened.
The situation in the EUR/USD also continues to support declines and rallies in the USD Index.
Multi-tops were common in case of the EUR/USD pair and the 2023-2024 performance seems to be one broad top.
The particularly interesting thing is that the first part of the pattern was accompanied by RSI moves to about 70 – something that often meant that the rallies in the euro are ending. This makes the current status of this currency pair clearer. The rally had ended, then we saw the broad top and now we’re in the early stage of the decline.
Moreover, please note that the EUR/USD faked a breakout in 2014, and it did so earlier this year as well. The previous fake move up preceded one of the biggest declines, so the implications here are bearish.
The above might translate into a big decline in the precious metals sector right away, like it did in 2008, or the link might be more approximate, like in 2014 and 2022. Either way, the ultimate implications of the situation in the euro are bearish for the precious metals market
Moving to gold itself, the very bearish implications of the monthly April reversal remain in place.
This is important not just on its own (heh, “just” – as if a monthly reversal was a small feat – it ISN’T). It’s so critical because we saw similarly clear monthly reversals only a few times in the recent past – twice in 2008 and once in 2008. In all those cases, gold then declined by hundreds of dollars.
What’s so remarkable about those cases is that those were the years when we saw major declines in world stocks! We got yet another confirmation that those years are analogous. Since this is a completely different indication – independent from what we see in stock markets around the word, it serves as a reliable confirmation.
Even the volume itself confirms that gold’s medium-term rally is likely over and that it’s going to decline in the weeks (and perhaps months) ahead.
Will gold stop at $2,000 or slightly above, or will it invalidate the move above it remains to be seen. Given the situation in the USD Index, a decline back below $2,000 still seems to be the most likely outcome.
On a very short-term basis, gold is after a breakdown, and a post-breakdown consolidation. The decline is likely to continue also from this point of view.
Oh, and do you remember when I wrote that bitcoin was topping here? I wrote about it multiple times, and the reasons that I mentioned were: the invalidation of the move to new highs, the analogy to how the same thing in 2011 led to huge declines, the analysis of momentum, and how the buy-the-rumor-sell-the-fact phenomenon is likely to make bitcoin price FALL after its halving.
It's sliding.
And it’s only the beginning – not just for bitcoin but for other markets like stocks and precious metals as well.
Stay tuned.
It seems that the major tide is here in the case of currencies (USD/YEN!), stocks (tech stocks, broad market), bitcoin, and precious metals. It also seems that junior mining stocks provide an excellent opportunity right now, and I invite you to subscribe and read all key details in my premium Gold Trading Alert (along with trading details). Subscribe today.
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief