Do small upswings really matter if one has medium-term goals in mind? Have the bulls come home?
The medium-term back and forth movement in gold continues. If I could make the markets move in a certain direction sooner, and end the prolonged consolidation, I would. However, I can’t, and the only thing that I can do is to report to you what I see in the markets and describe what my course of action will be.
During yesterday’s session, we saw more of what we’ve been seeing in the previous days. Gold moved higher, and gold stocks moved higher (but in a weak manner), and even though gold moved to new monthly highs, the HUI Index is not even back to its late-October highs. It’s boring, discouraging, and demotivating. But the only thing that we can do is to react to what the market is willing to provide us with. What do yesterday’s and today’s pre-market price moves tell us?
First of all, the market tells us that the breakout to new highs in the USD Index is not being invalidated. I know that I’ve written this tens of times, but this factor remains intact and it continues to have very important implications going forward. These are bullish for the USD Index and bearish for the precious metals sector.
Second, as I had already written earlier, gold stocks are not showing strength relative to gold.
The gold price just made new monthly highs and is now visibly above its October highs, but the silver price and—most importantly—gold stocks are not. In fact, they are just a little above their mid-October highs.
Consequently, the thing that one tends to see in the final parts of a short-term rally remains in place.
So, when will the decline in PMs finally continue? Based on what I wrote on Monday—in particular about gold’s reversal points, it’s likely to start soon—perhaps as early as this week.
As a quick reminder, you can see gold’s triangle-vertex-based reversal on the chart below:
And you can see gold’s long-term cyclical turning point on the chart below:
The fact that gold moved to its recent medium-term highs is also a factor here. Resistance provided by those highs is quite likely to trigger a reversal in gold, and based on today’s pre-market action, it’s what we might already be seeing right now.
The move lower is small so far, but all bigger moves have small beginnings, and given the reversal points and the resistance that gold just encountered, this could be “it.”
Also, speaking of resistance levels, on today’s second chart I placed a red resistance line based on the previous highs. It might be tempting to view the price action below it as an inverse head and shoulders pattern, which could have bullish implications. However, let’s keep in mind that without a breakout above the neck level (approximately the previous highs), the formation is not yet complete, and as such it has NO bullish implications whatsoever, as it simply doesn’t exist yet.
All in all, the outlook for the precious metals market is not bullish, even though the last several days/weeks might make one feel otherwise. Before viewing the recent move higher as something significant and/or bullish, please consider how tiny this upswing is compared to the decline in gold stocks between May and October.
No market moves in a straight line, and periodic corrections are inevitable. It doesn’t make them a start of a new powerful upswing in each case, though. And if the part of the precious metals market that is supposed to rally the most at the start of a major upswing is so weak right now, then why should one expect the current upswing to be anything more than a corrective upswing within a bigger downtrend?