It was just yesterday when I wrote how extremely bearish the current situation in gold is, and we didn’t have to wait long for gold’s slide.
Yesterday, gold declined, and – more importantly – it declined below its rising support line and below its October high.
This is truly profound as a short-term confirmation that the top is in and that the next big move lower is underway.
The breakdown below the rising support line needs to be confirmed before it has meaningful bearish implications. However, the invalidation of the move above the October and July highs has immediate bearish consequences.
So, while we might see some back-and-forth movement for 1-3 days here, the follow-up is likely to be bearish. Remember the tiny corrective upswing that we saw in early February? We might see something similar, or we might see gold slide right away. If we do, it’s likely that the corrective rebound will be rather small.
As gold declined, so did mining stocks. They didn’t magnify gold’s gains yesterday, but that seems to be an exception, not the norm.
Why am I saying that? Because of the action in the general stock market.
Stocks just moved slightly above their previous yearly highs, which had a bullish impact on mining stocks. So, the fact that they didn’t decline more at this time is quite normal.
Now, what did gold’s recent invalidation and the following slide just emphasize?
That one shouldn’t trust a breakout until it’s confirmed.
Will stocks really rally from here? I doubt that, especially since the RSI moved above 70 once again.
The more probable scenario is that stocks invalidate their breakout, and then they decline profoundly. That’s how the 2022 started, by the way.
This, in turn, means that the mining stocks are likely to decline at an even faster pace than they did recently.
Moreover, please note how weak junior mining stocks have been compared to what we saw in the S&P 500 in the past several months. Even though stocks moved much higher, miners are much lower.
Consequently, the potential for making enormous gains on the current short positions remains very much up-to-date.
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Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief