How Can Gold Break Down And Finish Higher At the Same Time?

Sounds contradictory, but is perfectly true nonetheless. Just like you need to go faster than the car in front of you to be able to overtake it, the price sometimes has to rise faster than a steeply-sloping support level does so that it doesn’t break down. Think about keeping your head above water when swimming. So, how has gold fared at this task yesterday? What kind of consequences will that bring in the very near future? Future that some might say is already knocking on the door...

While yesterday’s Alert was brief, today’s Alert is going to be longer, even though once again not much has happened. Gold is more or less where it’s been trading 24 hours ago (at the moment of writing these words) - yes, it’s below $1,400 once again.

Even though gold closed half a dollar higher yesterday, this was actually a bearish technical development. That’s because of rising support line that we mentioned yesterday. While it’s not clear if gold closed below the support line based on the May low and the early June low if we based it on the intraday lows, it is clear that it closed below it when we consider the daily closing prices. We marked this closing-price-based line with red. Gold moved a little higher, but the line was rising faster than fifty cents per day, which resulted in a rather quiet – but still – breakdown.

What’s likely to follow a breakdown? A decline. And what has gold been doing in the overnight trading?

It’s been declining. Even though it appears insignificant, this move lower is the follow-up of a breakdown in terms of the daily closing prices, which makes it significant. Breakdowns are sometimes immediately followed by volatile declines and sometimes we see a consolidation or a pullback to the previously broken level first. Either of them could take place in gold, but there is a slight indication from other parts of the precious metals arena that volatility is about to increase to the downside...

Making Sense of Miners’ Strength

One interpretation is that the mining stocks are showing strength here. Second one is that this is the final part of the topping formation where we see fake strength (similarly to the fake weakness in miners that we saw right before the powerful 2016 rally). It’s unclear which of these interpretations is the correct one at this time, so it’s better not to focus on this factor until it becomes clearer. In the bullish case, the above could take the form of a breakout above the previous highs, confirming that breakout. This is unlikely. Please note that in October 2018, when miners also formed the island top, miners moved practically right to the previous high before sliding in a volatile manner. It’s not uncommon for mining stocks to “act tough” until the end. But when they give up, they drop hard.

We received a question from one of our subscribers about the nature of the “ongoing strength in senior gold stocks”. In particular, the question was if it was a matter of good news in individual miners, or something more fundamental.

In our view, it’s neither. Gold mining stocks are moving higher as they virtually have to as the price of the product that they are selling is going up and moving above previous years’ highs.

As much as we don’t like to reply to a question with a question, this seems justified here. And our question is:

What strength?

Even taken together, this and last years’ rally in the gold miners is very small to compare to the 2016 upswing, let alone to the enormous 2011 – 2016 decline. It’s just a relatively small correction within a much bigger downtrend. By being bearish here, we are not against the major trend – we are in tune with it.

Some may say that the HUI Index broke above the very long-term declining resistance line based on the 2011 and 2012 tops, which makes the outlook bullish. However, they forget that the same thing happened at the very top that we saw in 2016. And they forget that given where gold is right now (above its 2016 high) the size of the recent upswing in the miners is very weak.

The current move is much more similar to the 2014 or 2015 corrective upswings than it is to the 2016 rally or to the beginning of the 2000s bull market. And what followed the 2014 and 2015 corrections? Big slides during which miners didn’t look back until they reached new lows.

The more fundamental thing about all this that was mentioned in the question is that the miners are suggesting that this is not the beginning of a new powerful upswing that would take gold much higher eventually. It strongly indicates that we will need to see a bigger price decline first.

Summary

Summing up, gold closed 50 cents above $1,400, but it was actually a bearish development as it means that gold just broke below its rising short-term support line based on the daily closing prices. Moreover, it did so after once again failing to break above the mid-2013 high, and shortly after silver broke below its own rising support line, which means that the overall outlook for the precious metals market deteriorated. The above happened after multiple long-term signs pointing to lower prices in the following months, i.a. the clear huge-volume-confirmed bearish shooting star candlestick in gold, huge volume topping signs from both: gold and silver, the triangle-vertex-based reversals, and epic volume from silver stocks. The next big move in the precious metals sector is most likely going to be down, not up.

Today's article is a small sample of what our subscribers enjoy on a daily basis. They know about both the market changes and our trading position changes exactly when they happen. Apart from the above, we've also shared with them our silver analysis as it has provided a valuable clue for the gold price going forward. We have also explained what it precisely means when coupled with the miners’ price action. Check more of our free articles on our website, including this one – just drop by and have a look. We encourage you to sign up for our daily newsletter, too - it's free and if you don't like it, you can unsubscribe with just 2 clicks. You'll also get 7 days of free access to our premium daily Gold & Silver Trading Alerts to get a taste of all our care. Sign up for the free newsletter today!

Przemyslaw Radomski, CFA

Editor-in-chief, Gold & Silver Fund Manager

Sunshine Profits - Effective Investments through Diligence and Care

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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