The history rhymes, and it happens in virtually all markets. This includes gold, silver, and mining stocks.
One of the ways in which we can take advantage of this tendency is through the use of the indicators. There are some default ways, in which those can be used, but before applying them, one needs to check how a given indicator performed on the market where one is trying to use it.
In case of the RSI indicator, we know that it worked multiple times in gold and in mining stocks. And the RSI was just pointing to GDXJ being most overbought IN YEARS. Literally.
That was one of the reasons due to which it was very likely to decline, and that’s exactly what happened.
The top formed similarly to how it formed back in 2022. And since the GDXJ already moved back below its previous 2023 high, the breakout was invalidated. That’s bearish on its own, but given the analogy to 2022, its super-bearish. After all, once the GDXJ invalidated the breakout then, it quickly erased the entire recent short-term rally and then declined some more – before correcting and declining again.
Let’s not forget that we also just saw a sell signal from the MACD indicator which is visible at the bottom part of the above chart. When we saw similar signals in the past (at similar levels), bigger GDXJ declines followed. For example, in mid-2021 and in the first half of 2022.
The same (a big decline) is likely to take place this time.
On the above hourly GDXJ chart, we clearly see GDXJ’s invalidation as well as its attempt to rally yesterday. Ultimately, the GDXJ closed the day below the previous highs. This invalidation is very bearish.
Also, let’s keep in mind that overall context – it is likely the investment public that has been buying recently, and we saw indications from several places. High volume in gold is only one indication. Another comes from the recent performance of the GME (Gamestop) stock price. I wrote about it three weeks ago:
Having said all the above, it’s time to move on to the one “extra” chart that I mentioned in the opening paragraph.
It’s GME – the GameStop stock symbol.
Why GME? Because it’s one of the recently (or not so recently) popular “meme stock” that got the spotlight in 2021. The fundamentals of the company are not favorable in my view, and it’s been slowly declining from its 2021 “pumped” peak.
The thing is that since it doesn’t have a favorable fundamental situation but was popular with the investment public, it’s now a useful barometer of sentiment.
It’s likely getting cheaper for a reason, and yet, every now and then, we see sharp rallies and peaks in its price. Why would that be the case? It is most likely the phenomenon that I described previously – the worst performers get a boost at the end of the rally as the investment public enters the market.
Why is this relevant to us?
Well, please take a look at the moments that I marked with red arrows:
- November 2021
- Late March 2022
- Late May 2022
- Early August 2022
- Early February 2023
- and now.
What happened in the GDXJ at those times?
Let’s check:
- November 2021 – major top
- Late March 2022 – very close to the final top; before a huge slide
- Late May 2022 – major top
- Early August 2022 – major top
- Early February 2023 – major top
- and now.
The first two of those cases (I put them in bold) were accompanied by a big volume. The declines in the GDXJ in the following weeks were particularly big in those cases.
So, the situation in the GME makes it very likely that it was the general investment public’s buying that recently pushed GDXJ higher. This means that this rally should not be taken at face value.
Instead – and the analysis of GME shows that – this should be treated as a very bearish indication of medium-term importance.
Last week I added the following:
I’d like to focus on one major thing with regard to the GME – GDXJ link. Namely, it was common to see a delay between the exact top in the GME and the exact top in the GDXJ. I marked those delays with red rectangles. The current one is only slightly bigger than what we saw in last year at the top. Interestingly that top formed in mid-April, and since markets tend to like anniversaries… The implications are very bearish.
Indeed, after the delay, the GDXJ declined significantly. And it seems it’s just the beginning.
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Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief