Gold price ended April with a bang – declining by over $50 yesterday, and closing the month about $150 below its high.
And that, my friends, is an epic reversal.
Gold price was likely to decline here, as it has already broken below the rising support line, and it verified this breakdown. Quoting my yesterday’s analysis:
Consolidations, pauses, and breathers are the same thing (their length differs) and they serve one purpose – to cool down people’s emotions and prepare them for the next moves. When prices move far and fast, it “seems” and “feels” excessive and out of order. But when prices stay there for a long time, what seemed excessive, starts to feel normal. And from those levels (and from this approach / feeling) a new price move can emerge – one that would make prices excessive once again, and thus another break would be needed.
The sizes of price moves differ and often bigger price moves require bigger corrections or longer consolidations (or both), but the overall mechanism is this. And in the current situation, what seemed excessive (gold’s decline and its breakdown below the rising support line) has already become “normal”. This means that another move lower can start.
And quoting my Monday’s comments on the above chart:
Overall, the breather that gold started after breaking below the rising support line continues. The breather itself is a bearish phenomenon as it “legitimizes” the breakdown. It’s been more than three consecutive trading days below the line, so the declines are likely to be resumed shortly.
Perhaps the decline already resumed, even though it’s not apparent, and I’m writing this based on the fact that gold hasn’t made a new intraday high today, which used to be the case in the previous four trading days.
The indication from the intraday highs was true – gold price plunged to new short-term lows and closed the month at very low levels. Congratulations to everyone who benefitted from that decline.
And in the very early trading hours of May, we see a move below $2,300. Since gold already verified the breakdown below the rising support line, the next sharp slide can follow.
Especially that…
Gold just formed a clear, huge-volume reversal on a monthly basis!
This is important not just on its own (heh, “just” – as if a monthly reversal was a small feat – it ISN’T). It’s so critical because we saw similarly clear monthly reversals only a few times in the recent past – twice in 2008 and once in 2008. In all those cases, gold then declined by hundreds of dollars.
What’s so remarkable about those cases is that those were the years when we saw major declines in world stocks! And it was just yesterday when I wrote how bearish those analogies were for mining stocks. We got yet another confirmation that those years are analogous. Since this is a completely different indication – independent from what we see in stock markets around the word, it serves as a reliable confirmation.
Even the volume itself confirms that gold’s medium-term rally is likely over and that it’s going to decline in the weeks (and perhaps months) ahead.
Will gold stop at $2,000 or slightly above, or will it invalidate the move above it remains to be seen. Given the situation in the USD Index, a decline back below $2,000 still seems to be the most likely outcome.
The USD Index appears to have finished its consolidation as it just moved above the recent highs. And while the rally might appear excessive from the short-term point of view, I’d like to emphasize that based on what we saw historically, this rally is just starting.
The USD Index is after a medium-term breakout, and given how sharply and how far it rallied from the current levels previously (about 24 years ago), it seems that we can see a rally by another 10 index points or so in the following months. The green, dashed lines represent the previous rallies that I copied to the current situation.
With big upside potential in the USD Index, and given that gold-USD link is back, AND given gold’s clear monthly reversal, it seems that gold has much further to fall.
It seems that the major tide is here in the case of currencies (USD/YEN!), stocks (tech stocks, broad market), bitcoin, and precious metals. It also seems that junior mining stocks provide an excellent opportunity right now, and I invite you to subscribe and read all key details in my premium Gold Trading Alert (along with trading details). Subscribe today.
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief