USDX: Gold Miners - The Lion And The Jackals

The USD Index let out a roar heard across all markets. The king of the financial jungle arrived, along with the greenback’s largest single-day gain. Just as the animal kingdom sometimes needs to show the strongest of its inhabitants, so too does the less remote but equally ferocious financial environment.

This time, the USDX seems to have won the fight – its fangs and claws turned out to be the sharpest, and so are the rallies. There is nothing left for gold and its acquaintances than to run through the forest. Sometimes, even jackals need to find shelter to lick their wounds in patience, waiting for a better time to come back to fight. However, they will come back eventually – they always do.

What About Gold, One of the Jackals?

With a triple-top in gold’s stochastic oscillator akin to three warning signs of a breakdown, the yellow metal is still recovering from last week’s crisis of confidence. And with the price action mirroring what we witnessed in early January – right before gold suffered a significant slide – the yellow metal could soon need recovery.

To explain, while gold’s corrective upswing was slightly bigger than I had anticipated, please note that the length thereof was in tune with the border of the green ellipse I used to mark the likely upside target area. In other words, the recent rally was not a game-changer.

The yellow metal’s inability to crack $1,800 highlights the medium-term implications that I’ve been warning about. As a result, it’s become increasingly clear that gold’s recent strength was nothing more than a short-term upswing within a medium-term downtrend.

For more on the significance of gold’s stochastic oscillator, I wrote previously:

"The first sell signal occurred slightly below the 80 level, the second was above it, and the same was the case with the third one.

"Since back in early 2021, the stochastic indicator moved to new highs – and so far it hasn’t – and since the USD Index might even move slightly lower before finding its short-term bottom, gold could move slightly higher on a temporary basis, before topping.

"Perhaps (there are no certainties on any market, but this seems quite possible in the near-term) it would be the round nature of the $1,800 level and the 300-day moving average that’s very close to it that would trigger a reversal and another massive decline. From the medium-term point of view, another $20 rally doesn’t really matter. It’s the few-hundred-dollar decline that’s likely to follow that really makes the difference.

"In addition, it seems that gold is moving in a way that’s somewhat similar to what we saw between mid-April 2020 and mid-June 2020. It’s trading sideways below $1,800 but above ~$1,660. Back in 2020, the range of the back-and-forth movement (size of the short-term rallies and declines) was bigger, but the preceding move was also more volatile, so it’s normal to expect smaller short-term volatility this year (at least during this consolidation).

"Why is this particularly interesting? Because both consolidations (the mid-April 2020 – mid-June 2020 one and the March 2021 – today one) could be the shoulders of a broad head-and-shoulders pattern, where the mid-June 2020 – early-March 2021 performance would be the head.

"The breakdown below the neck level – at about $1,660 – would be extremely bearish in this case because the downside target based on the pattern is created based on the size of the head. The target based on this broad pattern would be at about $1,350. Is this level possible? It is. When gold soared above $2,000, almost nobody thought that it would decline back below its 2011 highs. Gold below $1,500 seems unthinkable now, but with rallying long-term rates and soaring USD Index, it could really happen."

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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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Erikas Ivan 2 weeks ago Member's comment

On point with the market moves, as always 👏 Glad to be getting even more daily details from you in my inbox Mr. Radomski.

Przemyslaw Radomski, CFA 2 weeks ago Author's comment

Thank you!