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Stocks' very important reversal and its implications for gold miners

Commentaries & Views

After a daily rally, precious metals took a breather. But will it last?

Let’s check the technical situation on the GDXJ’s chart, which serves as a proxy for junior mining stocks. We’re focusing on them, as mining stocks often lead gold and silver prices, so by addressing miners, we can be earlier with regard to indications for the gold market.

Stocks’ Very Important Reversal and Its Implications for Gold Miners - Image 1

The GDXJ ETF – a proxy for junior mining stocks moved a little higher yesterday, but it didn’t close above the August lows, let alone its rising support line, which means that my previous comments on this chart and gold price analysis, in general, remain up-to-date.

Simply put, the GDXJ remains below its rising resistance line, and it just touched its August lows. The breakdown is being verified. Since it was not invalidated, the bearish outlook for the short term remains intact. Still, one needs to be on the lookout for signs of a bigger short-term rally – like a move above the rising red resistance line on the above chart.

Let’s zoom in for extra details.

Stocks’ Very Important Reversal and Its Implications for Gold Miners - Image 2

Junior miners have just moved to their August lows and then moved slightly lower, and the above chart shows clearly shows that.

This is the second verification of the breakdown below the August lows. The first one that we saw in late September was quickly followed by more declines. This might happen here as well.

The next resistance levels are provided by the rising and declining resistance lines as well as the late-September high at about $34.5, $35.5, and $36, respectively.

Stocks’ Very Important Reversal and Its Implications for Gold Miners - Image 3

The RSI just moved visibly below 70. In fact, it’s now close to the middle of its trading range. There was only one similar case to the current one, taking into account both: RSI and the USDX itself, and it was in May 2022.

Back then, we also saw such a move lower in RSI, and it was actually the pause before the final run-up in the USDX before a bigger correction followed.

This suggests that the USDX is likely about to rally once again, and if that happens, it’s likely that it will trigger another decline in the precious metals sector. This would make sense on a fundamental level, given the increased tensions and news coming from the Middle East. Why? Because the U.S. dollar is often viewed as a safe-haven currency, just as gold is. And – unlike gold – the USD is providing interest at rates that are no longer so close to 0.

Meanwhile, the stock market did something particularly interesting.

Stocks’ Very Important Reversal and Its Implications for Gold Miners - Image 4

Due to its move higher, the S&P 500 index moved to the slightly rising neck level of the previously broken head and shoulders pattern. In other words, just like the mining stocks, the general stock market is verifying its previous breakdown.

Zooming in provides extra details.

Stocks’ Very Important Reversal and Its Implications for Gold Miners - Image 5

You see, it was not only the case that stocks moved to their resistance. It was the case that they temporarily moved above it and then invalidated this move. This already proves that resistance matters.

The additional signal that we got was from the shape of yesterday’s candlestick. It was a shooting star reversal candlestick. The implications of seeing one are very bearish, so it could be the case that the corrective rally is already over, and the verification of the head-and-shoulders pattern was successful.

What does it all mean for the precious metals market? That the bearish outlook remains in place, so our profitable positions in the GDXJ are likely to become more profitable. At the same time, it seems that having a plan for the scenario in which the conflict in the Middle East escalates is also a great idea right now.

And we have that plan in place due to the combination of profit-take levels (one set of which is protective in nature – theoretically, it’s a stop-loss but activating it would also imply profits).

This plan is included in my today’s Gold Trading Alert.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.