Yesterday I wrote:
This move is in tune with what we saw at previous local bottoms. The RSI moved slightly below 50, and it’s the turn of the month – this combination was enough to trigger rallies in the US dollar index.
Let’s keep in mind that the latter tends to form important bottoms close to the middle of the year.
So, the scenario in which the USD Index bottoms shortly (or that it just bottomed) seems quite likely.
There’s also the possibility that the USD Index keeps declining until it reaches the very strong support at about the 104 level – the previous long-term highs. Right now, it’s at about 105.5, which means that it could decline by another 1.5 index points or so. It doesn’t necessarily mean that gold, silver, and mining stocks would need to rally substantially if the above materialized. Conversely, since gold might now be reluctant to react to the USD’s lead and miners might be reluctant to react to gold’s lead, it seems that the possible upside for junior miners is very limited.
In other words, even if the big decline really picks up in a few weeks, I think that the risk-to-reward ratio already favors being on the short side of the precious metals sector. In particular, on the short side of the junior mining stocks.
That’s exactly what happened.
The USD Index declined quite visibly yesterday, almost reaching its 50-day moving average – and this average has been serving as reliable support for more than a year now.
While the USDX moved lower in a visible manner, gold didn’t move higher in a particularly meaningful way, and neither did silver.
Yes, it did end yesterday’s session higher, but it rallied by only $5.90 (it moved back from its intraday highs before the closing bell).
Based on the above, gold moved to the upper part of my previous target area, and it touched the neck level of the previously broken head-and-shoulders pattern.
While gold moved insignificantly higher, junior miners actually declined.
Consequently, they are underperforming gold, which in turn is not really reacting to USDX’s bullish (for gold) indications. This is simply a bearish combination.
What’s also quite interesting on the above chart is the similarity between the recent upswing and the one that we saw in May and early June. In fact, even the timing relative to the days of the month is similar.
The previous rally started right before the middle of May, while the current upswing began just before the middle of July. The previous one consisted of two smaller rallies, which I marked with blue dashed lines and copied to the current situation. The first part of the move that we saw in July was not as big as in May, but the timing of the reversals was almost identical.
The second small rally is also aligned – at least so far. If this self-similar pattern is to continue, junior mining stocks are likely to top any day now, and the same goes for other mining stocks, silver, and gold. In fact, perhaps they have just topped.
Oh, and the previous rally ended with an RSI just below 70 – that’s where it is right now as well, which further adds to the credibility of the bearish case for the following weeks.