Gold Miners: Were Upswings Just An Exhausting Sprint?

Back in 1998, the Nasdaq’s last hurrah occurred after the index declined to its 200-day moving average (which was also slightly above the upper border of the rising trend channel marked with red dashed lines).

And what happened in the first half of 2020? Well, we saw an identical formation.

The similarity between these two periods is also evident if one looks at the MACD indicator. There has been no other, even remotely similar, situation where this indicator would soar so high.

Furthermore, and because the devil is in the details, the gold miners’ 1999 top actually preceded the 2000 Nasdaq bubble bursting. It’s clear that miners (the XAU Index serves as a proxy) are on the left side of the dashed vertical line, while the tech stock top is on its right side. However, it’s important to note that it was stocks’ slide that exacerbated miners’ decline. Right now, the mining stocks are already declining, and the tech stocks continue to rally. Two decades ago, tech stocks topped about 6 months after miners. This might spoil the party of the tech stock bulls, but miners topped about 6 months ago…

Also supporting the 2000 analogue, today’s volume trends are eerily similar. If you analyze the red arrows on the chart above, you can see that the abnormal spike in the MACD indicator coincided with an abnormal spike in volume. Thus, mounting pressure implies a cataclysmic reversal could be forthcoming.

Interestingly, two decades ago, miners bottomed more or less when the Nasdaq declined to its previous lows, created by the very first slide. We have yet to see the “first slide” this time. But, if the history continues to repeat itself and tech stocks decline sharply and then correct some of the decline, when they finally move lower once again, we might see THE bottom in the mining stocks. Of course, betting on the above scenario based on the XAU-NASDAQ link alone would not be reasonable, but if other factors also confirm this indication, this could really take place.

Either way, the above does a great job at illustrating the kind of link between the general stock market and the precious metals market (goldsilver, and mining stocks) that I expect to see also this time. PMs and miners declined during the first part of the stocks’ (here: tech stocks) decline, but then they bottomed and rallied despite the continuation of stocks’ freefall.

Even more ominous, the MACD indicator is now flashing a clear sell signal. And because the current reading is analogous to the one that preceded the dot-com bust, the Nasdaq Composite – and indirectly, the PMs – continues to sail toward the perfect storm.

With all of that said: how will we know when a medium-term buying opportunity presents itself?

We view price target levels as guidelines and the same goes for the Gold Miners Bullish Percent Index (below 10), but the final confirmation will likely be gold’s strength against the ongoing USDX rally. At many vital bottoms in gold, that’s exactly what happened, including the March bottom.

In conclusion, with the gold miners running low on strength, stamina, and staying power, their fragile foundation is already crumbling beneath the surface. With the HUI, XAU, and GDXJ proxies unable to match wits with the GDX ETF, the lone survivor is unlikely to put up much of a fight going forward. Moreover, with the USD Index poised to bounce off of the 61.8% Fibonacci retracement level (the precious metals have a strong negative correlation with the U.S. dollar), the foursome are likely to huff and puff their way to lower prices. However, after a period of medium-term recovery, the precious metals will be ready to run with the bulls once again.

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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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Thomas Callahan 1 month ago Member's comment

You have been on the wrong side of the trade for a while now. At what point do you reassess your charting?

Przemyslaw Radomski, CFA 1 month ago Author's comment

I am reassessing my charts each day, and if bigger moves take place, many times per day. And... have I really been on the wrong side of the trade? I mean - do you know when I entered short positions and (profitably closed long ones) and what instrument I used? The positions that I entered (and discussed in my Gold & Silver Trading Alerts) were profitable shortly after entering them, and currently they are not, but they are very close to being so. Based on today's pre-market decline in gold, they will likely be profitable once again very soon, perhaps as soon as during today's session.