The markets are connected, and what happens in tech stocks also impacts gold and gold stocks.
Yesterday’s Gold Trading Alert ended with a discussion of the Nvidia shares, and since they declined – taking the general stock market with it – that’s what I’ll start today’s analysis with. It has implications for junior mining stocks (and for FCX) and even for the currency markets. Quoting my yesterday’s analysis:
More groundbreaking moves could take place on Wednesday and Thursday as Nvidia’s earnings will be reported (after Wednesday’s close). Why is Nvidia so important? As it’s the flagship company for the AI-based rally in tech stocks and in the markets in general.
If Nvidia disappoints it could mean the end of the parabolic upswing, and… It’s quite likely that it’s exactly what’s going to happen.
NVDA just reached the upper border of its rising resistance line – one that’s parallel to the long-term support line based on the 2020 and 2022 lows.
Moreover, NVDA moved to its Fibonacci extension target. It’s quite likely that a top is in the making here.
Technical indications tend to precede fundamentals and if this is to play out once again, NVDA is unlikely to rally further without a bigger decline in the following weeks.
With falling stocks and а rallying USD Index, it’s quite likely that gold will decline in the near term soon, taking mining stocks with it. Or, more precisely, mining stocks are about to lead gold higher – even if it doesn’t happen during today’s session.
NVDA declined over 4% yesterday, and the RSI based on it moved back below 70. The last time we saw something like that (after RSI was overbought for a long time) was in late 2021, which meant that a major top just formed.
Since Nvidia gets so much attention from investors, it is only natural that if they see that this company is topping, they will get anxious about other stocks as well. And that appears to have just happened – or, more precisely, it’s just starting to happen.
The S&P 500 moved back below its 5,000 level for the second time. This time it was after the index had formed a lower high. Stocks’ inability to move to new highs is bearish on its own, but another invalidation is even more bearish.
And that’s not all – the S&P 500 index also moved – and closed – below its rising, medium-term support line. After the first invalidation of the move above 5,000, it was this line that triggered a reversal. Since it was already taken out, it might not be able to save stocks this time.
Also, on Feb. 14, stocks rallied sharply right after the daily decline. The immediate comeback materialized also on Feb. 1 and on Jan. 18.
It’s not happening today – the S&P 500 index futures are down in today’s overnight trading. Of course, the day is not over yet – in fact the U.S. session hasn’t even started – but the overnight decline instead of a quick rebound has bearish implications.
With declining stocks, people can turn to safety. Yes, gold is a safe-haven asset, but the recent history shows that – at least in the initial weeks/months – investors flock to the USD.
The USD Index appears ripe to rally on its own, but a decline in stocks would likely provide a significant bullish push.
The current rally in the USD Index has a very specific nature.
The pauses that we saw since this rally started took between 9 and 12 trading days, and there was a distinct volatile intraday action close to its middle. We saw this kind of action also recently – I marked all of them with red arrows.
The history appears to be rhyming, and… Yesterday was the twelfth day of the decline. We already saw the analogy in terms of the intraday volatile spikes. If the analogy in terms of time also continues (and it’s likely to) then today or tomorrow could the final days of the decline and ones that start another move higher in the USD Index.
Please note that the USD Index used to end the consolidations with a fake decline – I marked them with green arrows. Yesterday’s intraday decline appears to be in perfect tune with what we saw previously before the short-term rallies.
Based on the above, it seems that we’re in a situation that’s similar to what we saw in early February.
And what did gold do at that time?
It topped.
Gold was after a four-day rally and it formed top, after which it was declining for about two weeks.
Right now, gold is also after a four-day rally that took it to the 50% retracement based on the previous decline, and we finally saw some overnight weakness in the very near term.
What’s next? If the USD Index rallies here, based on its own technical indications or perhaps based on general stock market’s decline, gold price would be likely to fall.
With lower gold prices and lower stock prices, junior mining stocks would be likely to truly plunge, thus increasing our profits from the current trading position. This is the most likely outcome for the following days in my view.
Then, with gold a bit below the recent lows, a buying opportunity could emerge.
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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief