Gold rallied yesterday – at least in terms of the closing prices. But it also reversed. What really happened?

As always, it’s the context that provides the necessary details.

In this case, gold’s breakdown below its rising support lines is what one needs to look at when determining the true implications of recent price moves.

Gold price moved higher – that’s a fact. But a rally does not have to be bullish. In fact, tops have to be – by definition – preceded by rallies.

Gold’s move to the rising resistance line and then a move back down is a clear verification of the previous breakdown below this line. This is the context. The breakdown was verified – that’s it.

The shape of yesterday’s session makes the implications even clearer. Daily reversal candlesticks can take several forms: e.g. shooting star candlesticks and gravestone doji candlesticks. But the implications are the same in all cases – that price most likely ended its rally and is about to turn south.

Some might say that the above is not enough to make the outlook bearish, and they wouldn’t care about the myriad of factors pointing to lower mining stock prices that I mentioned in the previous weeks. But even in this case, they would have to agree that mining stocks are extremely weak right now.

Despite yesterday’s reversal, gold ended the day a bit higher. So, the miners ended their own session a bit higher as well, right?

Wrong.

The GDXJ ended the day almost 1% lower, closing below the neck level of the bearish head-and-shoulders top pattern that I marked with orange.

That’s as bearish as it gets. Oh, did I mention that miners were so weak even despite a daily move higher in stocks?

Miners tend to lead gold, and this exceptional weakness that’s been in place for weeks makes the current period similar to what we saw in early 2013. Many investors were expecting gold to soar as it was “just consolidating” after moving close to its previous highs. Miners were very weak but many investors kept ignoring it focusing on gold price alone.

Miners were leading gold back then, and they are most likely leading it right now. They are leading gold lower.

Besides, have you noticed that the tiny rally in the GDXJ is only visible from the above zoomed-in perspective? The above chart is based on hourly candlestick. Once we zoom out to the regular – daily – point of view, we get the following:

We see a pause after a sharp decline that followed a double top pattern – something common for the GDXJ ETF. I marked the previous cases with red rectangles. Pauses after those initial, volatile downswings were normal, too.

Taking all this into account makes it clear that gold’s “rally” is no true rally at all.

Silver, stocks and the USD Index are not doing much right now, but this might change later today.

After all, today is the day when we get the interest rate decision from the Fed, and the markets will be trying to estimate the most likely future based on today’s press conference. As people react (and overreact) to each word, prices can move in both directions in a meaningful way. Many investors will be trying to make sense of all this, and they will end up getting caught in emotional trading that would be likely to make them sell at local bottoms and buy at local tops – or close to them.

You are prepared – thanks to knowing the technical background, you can analyze market’s emotional status instead of being dragged into it and harmed by it.

Once the dust settles (or even based on the news alone), the mining stocks’ decline is likely to resume, further boosting our profits from the current short position, and with our new approach, those profits (in my view) are likely to have a much steadier path of growth.

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