Gold and miners rallied yesterday, even though the USD Index moved higher as well.
And as I wrote, it was likely a reaction to Trump’s additional confirmation on the incoming tariffs as well as the better-than-expected employment statistics. We’re happy, as it increased profits from our long positions in gold and GDXJ.
However, please keep in mind that this is just a direct trigger. The technical (emotional) picture is much more important. It might be convenient to think about it in this way:
- Markets correct during each move, and overall, they move up and down within trends. If the upswings are bigger than the downswings, we have an uptrend. If the opposite is the case, we have a downtrend.
- The markets will very likely react to the incoming news and events, especially if they are surprising to the market.
- The extent to which the markets react to news and events depends on how much the market “wants” to move in the direction that a given piece of news or event supports.
If the market wants to move up, then based on a given announcement (point 3), the move in a given direction (point 1) will be bigger than the correction that then follows.
If the market does not want to move up, then based on a given announcement (point 3), the move in a given direction (point 1) will still be visible, but the following correction will likely end up being more than a correction and completely erase it, and then the market will move in the opposite direction.
Given the above mechanism, it makes more sense to estimate what the market really “wants” to do than to try to guess what kind of news or event will take place, especially since the latter tends to work particularly well only if they are unexpected (so, by definition, you can’t really foresee it).
The way to estimate what the market “wants” to do is to analyze the charts from a technical point of view and engage in similar analyses (cycles, self-similar patterns and so on).
That’s one of the ways of applying the “big picture” approach and focusing on the forest/context first before analyzing individual trees/branches – stocks/trades. Does something really work over the long run? For example, we clearly saw that the official sector is a terrible investor. The officials buy using the money of other people without the direct financial responsibility for those decisions, so they have an interest in making it look good (following the general “mood” – which is the opposite of what investors should be doing – remember “buying when there’s blook on the street”?), but no direct responsibility. No wonder that Gordon Brown sold UK’s gold right at the bottom. And yet, every now and then, the argument goes that gold has to go up because the governments are buying. No – the official sector’s heavy purchases indicate that the market likely overheated and that it’s time to think about doing the opposite.
Another similar argument is that since the gold ETFs are buying more gold, its price will go up. In reality, it’s the other way around. The horse goes first, then the carriage. Gold’s price increases, and people buy shares in gold ETFs as they were attracted by the rally. ETF purchases are the consequence, and not the cause of the rally in gold prices.
Anyway, let’s check what the market “wants” to do, starting with charts where we took profits on Jan. 2.
FCX rallied recently, and it seems that the decision was correct. To clarify, this does not improve FCX’s outlook for the medium term, as the breakdown below its broad head-and-shoulders pattern has been confirmed. What we see now is the post-breakdown correction, which is something that is completely natural.
NEM also moved higher recently. No wonder – it broke above its declining resistance line, and then it verified this breakout. While this stock remains weak on a relative basis (and it remains a great shorting candidate for the next short trade), the short-term outlook for it is still bullish.
Moving back to FCX, please note that it’s also a good shorting candidate for the future, as it’s been relatively weak, given how strongly copper rallied this year.
On Jan. 6, I wrote the following about copper’s invalidation of its head and shoulders pattern:
Interestingly, copper already invalidated its breakdown below its head and shoulders pattern in terms of the daily closing prices. Since copper often moves in tune with the precious metals sector, this is a bullish sign - not just for copper, but also for gold, silver, and mining stocks.
Indeed, copper (as well as PMs and miners) moved higher.
Copper is at its December highs, but FCX is not even close to its own December highs, which tells us that FCX really “wants” to move lower. I still think that the USD Index will correct some more in the near term, driving commodity and precious metals prices higher, but once this correction is over (likely in 1-2 weeks), the declines are likely to resume, and FCX is likely to fall significantly then.
Meanwhile, gold continues to move higher in a back-and-forth manner, which is normal. It hasn’t reached its target, but this year’s rally seems to be halfway done, given how much gold moved higher this year and how far the upside target area is.
Like copper, silver invalidated its head-and-shoulders pattern, which is a bullish sign. As silver tends to catch up in the final part of the rally, it seems that it might start outperforming soon. We might be cashing in profits from miners and gold and switching to silver any day now.
Yesterday, SLV closed the day just 0.26% higher, while the GDXJ moved up by 2.28%, which shows you that miners’ outperformance is still here. But, once we see another day when miners soar but silver moves up by just a little, I might switch to the latter. This might happen as early as today or tomorrow, and I’ll send an Alert to my subscribers as soon as I decide to make the switch.
This will probably feel weird, and it might be tempting to stay in the asset that has been performing well recently, but history teaches us that silver is going to catch up. This means outperformance – which we definitely want to participate in. [More trading details follow for subscribers.]
Two more points:
- Thanks to everyone who filled out our survey on education. One of the questions was what courses would be fun for us to have, and someone (it’s anonymous) replied that a wind-surfing course would be fun – this made my day, thank you. Actually, I recall reading that Tim Ferriss was taking surfing lessons via Skype, so, who knows. I live by the seacoast, but I’d be interested in such a course myself, maybe as preparation (especially since right now my beach is covered with snow). And yes, you can still provide your replies to this survey , and I would be very grateful.
- The webinar with Rick Ackerman starts soon (10:30 AM EST). Over 130 people have confirmed attendance so far, so it should be both: valuable and fun. Rick is determined to provide actionable short-term trading ideas for as many markets / provide replies to as many questions as he can during this 1-hour webinar. Also, I’ll be there as well, in the background and I’ll be approving questions that are then sent on the screen. It’s not too late to sign up . If you’re not sure if you’re going to be able to attend, feel free to sign up. And if you don’t, you can still arrive at GoldenMeadow.eu and click “join live” in the bottom corner of the screen, when the webinar is live. But signing up is still preferred, as this way you’ll definitely get the link, you’ll see the event in the “Events” calendar to which link you can see on top of every page on Golden Meadow. This will be useful also in the future, as we plan to have more webinars in the following weeks and months.
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief