The link between stocks and the precious metals market has been particularly strong recently.
Consequently, monitoring the indications from the stock market is currently very important when determining when gold, silver, and miners are likely to move next.
As the title of today’s analysis suggests, something important happened in the general stock market.
The S&P 500 Index just invalidated its breakdown below the neck level of the head and shoulders pattern. This is a bullish indication, and it’s a sign pointing to higher stock prices.
I don’t view this as a really major bottom because the interest rates are still high, and they are likely to remain high, thus creating a difficult economic environment, which is likely to lead to a bigger decline in stocks.
However, just because something is likely to happen (like silver soaring above $100) doesn’t mean that it’s likely to happen immediately or shortly (the above scenario is still in the cards for silver, it’s just not likely to happen this year).
In the case of stocks, this means that in the next several days, we’re likely to see higher stock prices. They might top close to 4,450, as that’s where see the declining blue resistance line. This would fit the scenario in which mining stocks (and the rest of the precious metals sector also moved higher). As we recently took profits from our short positions in junior miners, it seems that the above would provide us with an opportunity to re-enter those positions at higher prices.
Don’t let the short-term rally fool you – the main trend in stocks remains down, and the world stock chart confirms it.
The situation right now is just like it was in 2008, right before the enormous, very volatile slide. The price itself (its shape) and RSI confirm that. The implications for mining stocks (visible on the lower part of the above chart) remain extremely bearish. The main difference between the two situations is that this time, miners start from much lower levels (even though gold is much higher).
Also, while we’re focusing on the big picture, let’s take a look at what the junior mining stocks are doing from the really long-term point of view.
Enter the Toronto Stock Exchange Venture Index. That’s also a proxy for junior miners because so many juniors are included in this index.
In short, the index is in a freefall. After the breakdown below the rising, long-term support line that happened earlier this year, juniors plunged. The same happened in early 2013.
The mining stocks then declined in the medium term while correcting every now and then. That’s exactly what we see now, and it puts the current move higher in the proper perspective.
This is not a change in the big downtrend – it’s part thereof.
Also, if you look at the long-term picture featuring the ratio between gold stocks and the general stock market, you’ll see that the recent rally was… Pretty much absent.
The HUI to S&P 500 ratio is on the verge of a massive breakdown. The corrections have been smaller and smaller, and this time, it seems that the ratio is ready to fall substantially once again. If it slides similarly to how it declined in 2008, we’re likely to see it at the levels of its all-time low – at about 0.025.
The implications of mining stocks are extremely bearish for the following months – regardless of what happens this and next week (actually, a rally in the precious metals sector in the very short term is quite likely here). It’s great to have a plan on when to short the market again, though – and we do have it.
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Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief