Silver tends to outperform the rest of the precious metals sector close to the end of a given rally. We’re not there YET.
Primed for Rally
This provides us with a great trading opportunity when we combine it with miners’ particularly strong performance and the buy signal on the stock market.
Let’s start with the latter.
In yesterday’s analysis, I wrote the following:
Technically, stocks are right after a breakdown below a head-and-shoulders pattern, which is a sell signal. BUT, it’s also true that this pattern tends to be followed by a correction, and this correction might be exactly what is needed to trigger the final upswing in the precious metals sector.
This corrective upswing might start shortly, but the November lows are about 5,700, which is a quite round number, which increases their technical strength.
So, unless I see something profoundly bearish and the above theory is invalidated, I plan to go long silver when the S&P 500 moves to 5,700 or close to it.
The above didn’t materialize, but the invalidation (in intraday terms) of the head-and-shoulders pattern is even more bullish, so the implications are the same – it’s time to go long silver.
Gold, silver, and mining stocks are all up in today’s session, and the remarkable thing about it is how much mining stocks rallied compared to gold. The VanEck Junior Gold Miners ETF (NYSE:GDXJ) is exceptionally strong today, and this is something that usually signals more rallies around the corner.
Some might want to go long gold (or being invested in it while gaining passive income) or miners, but in my view, betting on silver’s rally provides the best risk to reward ratio here. Of course, there are no guarantees that the history will repeat itself, but the truth is that silver tends to perform particularly well in the final parts of the rallies, not in its initial parts (miners do).
So, the fact that silver (silver futures are trading at 30.41 at the moment of writing these words) itself is not rallying significantly today is another reason to buy it – it’s likely that it’s not rallying YET.
Another reason to expect a rally in the precious metals sector comes from the USD Index.
After touching the 110 level, it moved back below its previous intraday high. This invalidation is a sell signal – and the PMs and miners are already responding to it.
The US Dollar Index could stop close to 108, or it could fall even further based on its 23.6% and 38.2% Fibonacci retracement level. Or it could be the 107 level (2023 highs) that stops the decline.
It’s too early to say which of those levels would be most likely to stop the pullback, but the odds are that the precious metal sector will move higher in the near term, anyway.
Strategic Profit-Taking
Before summarizing, I’d like to feature charts of two assets where we took profits from short positions at the beginning of the year: Freeport-McMoran Copper & Gold Inc (NYSE:FCX) and Newmont Goldcorp Corp (NYSE:NEM).
In short, they both moved up since that time, showing that the decision to take profits then turned out to be profitable.
Interestingly, they both have a bit further to run before encountering their resistance levels and target areas. This further confirms the scenario in which the precious metals (and commodities) move higher in the near term.
How long could this rally last? I’d say that between 1 and 4 weeks, with 1-2 weeks being the more likely time target.
After all, we have the triangle-vertex-based turning point in gold close to Feb. 10
And we have an interesting situation in the tech stocks as well.
Based on the similarity to what we saw in late 2021, it seems that this might be a month that tech stocks end slightly higher than the previous one, and the slide will happen only after that time.
Then again, back in 2021, it was the end of the year, which might have prevented Wall Street from selling massively before the year end so that everyone could cash in nice performance-based bonuses. This time, the previous year is already over, so the history might not repeat itself to the letter.
Overall, I think that it would be best to monitor the precious metals market for the relative performance of miners vs. gold and silver vs. gold. When miners lag and silver outperforms (while gold and USDX move to or close to their targets), we’ll know that the trend is turning. For now, we see miners outperform and silver lag, which is why we’re buying the latter.