GDX, GDXJ: A Fall Before The Carnage

And speaking of powerful slides, gold stocks could no longer wait and they declined before gold did.

The GDX ETF (senior gold miners) moved below the recent lows, and it closed the day below the neck level of a head-and-shoulders pattern in terms of the closing prices. The stochastic indicator flashed a fresh sell signal as well. While gold is far from its late-April lows, the GDX just closed the day below them.

And if you think this kind of relative weakness is bearish, just wait until you see what the junior mining stocks did.

Junior miners just declined not only below the neck level of the recent head-and-shoulders pattern (in a clear way, in both: intraday and closing price terms), but they actually closed the day at new 2021 lows!

Yesterday’s close in the GDXJ was the lowest close in more than a year.

There are two markets that primarily impact the performance of the junior mining stocks. One is gold, and the other is the general stock market. Gold is now about $140 above its 2021 lows, while the S&P 500 is over 16% above its 2021 highs. And yet, the GDXJ is below its previous 2021 lows.

Juniors are underperforming senior gold miners too. You can see that by comparing two previous charts and by examining their ratio.

The ratio declines when junior miners underperform seniors. This happens often when the general stock market declines – juniors are more correlated with the latter than the seniors. Interestingly, juniors underperformed recently, even while stocks were strong. If the general stock market declines from here, the underperformance is likely to take an epic form – just as it did in early 2020.

This level of underperformance and weakness is truly breathtaking.

If miners – in particular, juniors – were able to decline so much without meaningful help from gold and the general stock market, just imagine the carnage they will suffer once this “help” finally arrives.

And given the breakout above the neck level of the inverse head-and-shoulders pattern in the USD Index, it seems like the key trigger to set the wheels in motion is already here.

Silver reacted too.

After the lengthy, boring consolidation, the silver price is moving lower once again. Unlike junior miners, it didn’t break below its previous 2021 lows, but it’s showing where the precious metals sector wants to go. Gold’s relative strength is an anomaly, not the key news.

Having said that, let’s take a look at the markets from a more fundamental point of view.

The Almighty Dollar

With U.S. equities suffering their first major bout of panic in months, unfamiliar lights lit up Wall Street on Jul. 19. However, while the sea of red drowned everything from crude to casinos, the development green-lit the USD Index for another rally.

Moreover, while stocks’ one-day weakness was merely a blip on the radar screen, a meaningful correction could light a fire under the USD Index. Case in point: With Bank of America’s Global Wealth and Investment Management (GWIM) clients’ exposure to equities at an all-time high, a reversion to the mean could elicit plenty of sell orders in the coming weeks.

Please see below:

To explain, the blue line above tracks BofA’s GWIM clients’ stock holdings as a percentage of their total portfolio. If you analyze the right side of the chart, it’s easy to spot the excess. However, if their allocation returns to its historical average (roughly 56%), the USD Index should be a major beneficiary.

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Disclaimer: All essays, research and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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