Today is an important day for gold price. Will the Dec. 2023 hold? The USD Index might be showing the way.
Here’s the key thing to watch right now:
After failing to move above $2,200, gold declined, and right now, it’s testing its December 2023 high.
At the same time, it’s also testing its rising long-term support/resistance line based on the previous long-term tops.
The million-dollar question is: will gold be able to hold above those levels?
After moving briefly below the Dec. 2023 high, gold moved back up, but not far. The jury is still out.
I already described multiple signs pointing to the scenario in which we see a decline – not only in the precious metals market but also in bitcoin and – quite likely – stocks. Today, I’d like to add a short-term confirmation coming from the analysis of the USD Index.
The USDX is showing strength after bottoming in my downside target, but the really important detail becomes visible when we zoom in.
The USD Index corrected, moved back up, corrected again, and now it’s rallying again. All those moves appear to have created a flag pattern, which is a “continuation pattern”. Once the USD Index moves above its recent highs, it’s then likely to rally once again.
The price moves that tend to follow flag patterns are usually similar to the ones that preceded those patterns. In this case, that would imply a rally to about 103.8. This, in turn, would be likely to trigger visible declines in gold – and an invalidation of the rally above the 2023 high.
Silver’s recent outperformance definitely confirms the above-described scenario.
As far as mining stocks are concerned, I previously wrote about their double-top pattern and how aligned it is with what we saw in late 2023 and those comments remain up-to-date.
The GDXJ moved above its 61.8% Fibonacci retracement one more time, and it even moved above the mid-January highs. It already invalidated the breakout above those highs TWICE, and it’s now it’s trying to break higher for the third time.
The invalidations were sell signs, and they make the current attempt to move higher really doubtful.
(…)
The most bearish thing about this week’s price moves is that they are very similar to what we saw at the late-2023 top.
The previous big short-term rally ended when the GDXJ moved a bit above the previous highs and then formed a double-top pattern. This is exactly what we see right now.
How can something that preceded an almost $10 decline in the GDXJ be something bullish?
This time, we saw a third small move to the January highs, and it, too, was followed by declines. Why did we see three small tops this time and not two? Because the history rhymes – it doesn’t repeat itself to the letter.
The important thing is that overall, the GDXJ moves above and below the previous highs, and the upward momentum is gone. This is exactly what triggered big declines in the past and what’s likely preceding them now.
Having said that, I want to take this opportunity to answer to one of the questions that I received recently from one of my subscribers.
The question is since gold-based RSI moved above 80 in early 2016 as well as in 2019, why wouldn’t it want to rally now, given the same kind of recent reading.
The thing is that those two examples are only a small subset of a bigger number of cases when RSI moved to 80 or above it. In order to estimate what’s likely impact of this kind of reading, one needs to look at the entire dataset (or at least at a longer period), and not just at one or two cases.
The chart below features two decades of gold price movement.
Indeed, there were two cases, when gold rallied in the short term after RSI moved to 80. But these were just two cases. In most cases (9 out of 15), we saw at least short-term declines, and in many cases, we saw truly major tops – including the 2011, late-2012 and 2020 tops.
So, in the end, extremely overbought RSI is bearish after all.
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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief