Breaking? Game-changing? Exceptional? Yes, that’s how it makes sense to describe Friday’s price action.
The why is not that obvious, though.
People tend to view rallies as bullish, ignoring the fact that a rally is the only thing that can actually precede a top. Some rallies are bullish – that’s true.
Not the ones that are also daily reversals.
Not the ones that – through the intraday price moves – result in both: breakouts and invalidations thereof.
Not… the Friday (Dec. 22) one.
What we saw on that day ticked both above-mentioned boxes. It was a move that was invalidated quickly after it started. And we can see the true face of the “rally” in both: gold and mining stocks. Let’s start with the former.
Gold formed a shooting star reversal candlestick. Just as its name implies, this price pattern implies a reversal.
Some might say that it’s bullish that gold moved above the rising support line, but… It didn’t close above it – at least not above the line that’s based on the daily closing prices. This means that we haven’t really seen a breakout here.
Without a breakout (precisely: a confirmed breakout), the bearish implications of the previous breakdown remain intact.
The same goes for the profoundly bearish implications of the massive weekly reversal that we saw in gold over two weeks ago, but I already wrote about it multiple times on Friday, so I don’t want to go into details once again. Let’s move to mining stocks.
For context, I want to emphasize that seeing a double-top here is perfectly normal (note the areas marked with red rectangles – that’s a common pattern), and since the second top formed slightly above the first one, the current situation is similar to what we saw in early 2022. That was the top that preceded the biggest medium-term decline of the recent years (with the exception of the 2020 one, of course). The GDXJ then erased about half of its price within a few months.
History rhymes, so seeing the same thing now wouldn’t be surprising. In fact, cutting GDXJ’s value in half would imply it at about $20, which is where it bottomed in 2020 (by the way, do you remember that we caught that 2020 bottom almost to the minute? Very few wanted to believe the bullish narrative at that point, just as very few want to view the current price set-up as bearish.), which makes it a likely support/target, anyway. Yes, expecting the GDXJ to move to $20 is realistic, even though it’s difficult to look at it in this way, since the more recent short-term move was to the upside – that’s our emotions trying to trick us, just as they tend to do at every top and bottom.
Zooming in allows us to see that junior mining stocks reversed, just like gold did. This price move is particularly bearish, because at the same time two things happened:
- The GDXJ moved above its previous high and then it moved back below it – invalidating the quick breakout
- The GDXJ reversed forming a shooting star reversal pattern
This is one of the most classic and bearish ways imaginable for a market to end its rally. I’ve seen many tops throughout the years, and this is really the case. It’s obvious only in hindsight, but once you see enough examples, it gets easier to recognize those patterns as they appear, without the extra delay. This is one of those times.
From the hourly point of view, we saw an attempt to move above the rising trend channel, and – just like the previous attempt – it was invalidated. The previous attempt was followed by a short-term decline, and the same is likely right now. Only this time, the decline is likely to be much bigger.
Oh, and I saved the best for the end.
Have you considered buying gold recently? Like to the point of searching for it online?
Because many people have.
As you can see on the above Google Trends screenshot, the searches for “how to buy gold” just soared, and it’s not the first time that it happened.
Makes one wonder… What happened to gold price in those other cases?
After all, whatever circumstances triggered this jump in the interest in the topic, they are taking place all over again. I don’t mean the state the world is in – I mean the sentiment among gold investors. By estimating the latter, we can also estimate what’s likely to happen to the price, because… The history tends to rhyme, and people’s emotional reactions to what the market is doing remain more or less the same, regardless of the details of the fundamental situation.
I marked one of the moments on the above chart and here are the other notable peaks:
So, what happened to gold price on those occasions?
I marked all-above-mentioned cases with blue, dashed lines and in three out of four cases those were the MAJOR tops. Ones that were followed by hundreds-of-dollar declines in the price of gold.
The only remaining case was when it was still the end of a short-term rally and the start of a pause (that took gold about $100 lower, anyway). This time was truly exceptional, though, because it was right after the covid-scare bottom – it was not a regular course of action.
So, I’d say that in all “regular” cases, the huge increase in interest in buying gold translated into huge declines in the following months. After all, people tend to buy at the tops – that’s exactly what this sentiment analysis proves.
We are at this stage one more time (in many other stocks, too, including some oil stocks). Once again, it’s difficult NOT to buy into the euphoria, even though looking at the situation from a broad perspective practically “screams” WATCH OUT.
Now, you are informed, you are prepared.
And I will continue to keep you – my subscribers – up-to-date, so that what surprises most investors, will not surprise you, but that it will benefit you. We’re on a streak of 11 profitable (unleveraged) trades, after all, and it’s VERY likely that the current trades will increase this streak soon.
= = =
On a side note, the two previous links will take you to the latest free oil and stock market articles, but if you’d like to check out their premium versions, there are currently 7-day free trials available for both of them (note: they were both revamped, so I really encourage you to give them a go). Since there’s still a 10% discount for the Diamond Package (including Gold-, Oil-, and Stock Trading Alerts), the best course of action would be to take both free trials and if you like what you see, upgrade to Diamond before the 7 days pass, to reap the extra discounts (one is the regular bundle-offer discount, and on top of that there’s the above-mentioned 10% one. For maximum benefits you could go with a yearly subscription or a longer one, though.) Sign up for those free trials here: Oil Trading Alerts - free trial and Stock Trading Alerts - free trial.
Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief