The PMs were mixed on July 26, as gold ended the day in the red. However, with mining stocks showcasing relative strength in the face of a stock market sell-off, the outperformance should have more room to run. Therefore, we remain bullish for the short term, while remaining very bearish for the following weeks/months.
Technically Speaking
The fundamental background provides a good basis for what’s been likely to happen for some time now. Namely, that we’re going to see a short-term upswing that’s followed by a bigger downswing.
Does it fit the technical picture? Yes, it does.
First of all, the above would fit the scenario in which the USD Index declines briefly and bottoms very close to the end of the month – for example, on Friday or Monday.
This would be in perfect tune with USD’s tendency to form reversals (usually) bottoms at the turn of the month (or close to it – as visible on the above chart), and also – from a broader point of view – in the middle of the year.
It would also perfectly fit the signal that we just saw in the HUI Index.
In yesterday’s analysis, I commented on the above chart in the following way:
Namely, the gold stocks moved slightly below their Fibonacci retracement and the rising, long-term support line. The latter was broken only once previously. It was in early 2020, and when that happened, a very sharp rally followed practically immediately. Will we see the same thing this time? That’s quite likely. However, I don’t think the rally would be that significant.
Consequently, it could be the case that we’re going to see more strength in the precious metals market before the big move lower continues.
Indeed, the flagship proxy for gold stocks invalidated its small breakdown below its rising long-term support line, which served as a short-term buy signal.
Here Today, Gone Tomorrow
The GDXJ ETF – a proxy for junior miners – rallied by 1.21% on Tuesday, which means that it rallied more than it had declined the previous day, when Newmont's (NYSE:NEM) decline triggered declines in the GDX ETF and HUI Index.
Since the GDXJ is up over 2% in Wednesday's London trading (while gold futures are up by just 0.25%), it seems that its outperformance of the rest of the precious metals sector hasn’t ended yet.
It remains likely that the GDXJ ETF moves higher in the very near term, likely topping close to one of its declining resistance lines. One of those lines is based on the previous tops (the blue line) and the other (the red line) is the neck level of the previously broken head and shoulders pattern.
When we zoom in even more, we see that sudden upswings are not that uncommon in the case of junior miners.
We saw one in early June. If gold jumps higher on dovish remarks from the Fed, juniors would be likely to jump, too.
The resistance line based on the previous July highs could be viewed as a neck level of an inverse head-and-shoulders pattern, which – when broken – would support a rally to the $34-34.5 area.
Gold’s intraday picture also supports such a quick upswing.
Based on the symmetry of how gold recently performed after a local bottom (sharp rally and then a correction), it seems that we’re on the verge of a sharp move higher.
The black lines that I marked on the above chart are identical – I copied the previous lines connecting the bottom with the following top and bottom, and I pasted them on the current situation, attaching them to the recent bottom. Interestingly, the timing of the recent immediate-term top and bottom aligns almost perfectly. This makes it quite likely that the follow-up action will also be similar.
Please note that just because the about-to-be-seen rally is likely to be sharp, doesn’t mean that it’s likely to be a medium-term game-changer. To clarify, a $30-80 rally is what I think is likely to follow, nothing more. The $1,745-$1,770 area seems to be the most reliable short-term target in my view.