Golden Cannon’s Loaded. Will it Hit The Moon?

Silver soared, while gold and mining stocks moved higher and reached new monthly highs. All that despite a move higher in the USD Index. It seems to be a clear bullish combination for the PMs. The moon appears to be at hand. Is it the last chance to jump into the precious metals market with both feet?

It may be, but only if one means taking on a short position.

What?! After PMs soared along with the USD?!

Yes. First of all PMs didn’t soar. The move higher in gold and mining stocks was once again relatively small and it was more visible only in case of silver. We discussed how bearish it is that we’re seeing silver’s outperformance many times in the previous days, so we don’t want to go into this issue once again today. Instead, let’s focus on other factors: gold’s move higher along with USD’s move higher and silver breaking above its medium-term resistance line. But, before moving to the above, let’s take a look at the key 3 parts of the precious metals market at the same time.

Relative Valuations

Please forget for a moment what happened yesterday and on Wednesday, what the monetary announcements were and how much USD rallied. Looking at the bottom part of the above chart, do you notice anything special? No? Exactly. The move in the mining stocks was nothing special – it was well in tune with the regular, boring, back-and-forth movement that we’ve been seeing for about a month. Even though GLD ETF is days after its breakout above the declining short-term resistance line, GDX didn’t even reach it.

Silver, on the other hand, is clearly showing strength relative to gold. While we don’t want to discuss it again per se, we do want to mention it in the light of the specific nature of the session that we just saw in both: GLD and SLV.

GLD formed a black reversal candlestick on relatively big volume (biggest seen this month) after a prolonged sideways trading period. We marked analogous situations with red ellipses and, as you can see, both similar cases were followed by declines.

SLV’s candlestick is quite obvious to interpret – it was a reversal in the form of a “gravestone doji” pattern. It’s not visible on the above chart, but it was confirmed by huge volume, so the implications are really bearish.

Ok, buy why are you featuring all three parts of the PM market on the same chart?

Because the above-mentioned factors are not only bearish on their own – they actually confirm each other as both cases what we marked based on GLD’s candlestick pattern were accompanied by specific developments. The November 2017 bearish case was confirmed by weak mining stocks and the April 2018 bearish case was confirmed by temporarily strong silver.

We currently have both confirmations at play: strong silver and weak miners. Plus, we just saw reversals in GLD and SLV on big volume. The implications are very bearish, not bullish as one might think after just noticing that gold, silver and mining stocks ended the session higher. They did, but how they performed and what was the context for this move makes all the difference that creates a bearish forecast for gold.

Metals’ Volume Confirmations

ETFs are one way to look at the precious metals sector and the volumes in them are usually important, but if there was no confirmation coming from the futures markets, we would have doubts regarding the above-mentioned signals. In particular, reversals would become doubtful if they were not accompanied by big volume also in case of gold- and silver futures.

We have confirmations from both markets, so the reversals seem valid and so do the bearish implications. Interestingly, the gold futures’ and silver futures’ sessions didn’t take forms of bearish reversals, but it seems that the US markets might be representative here as gold is already back below $1,300 ($1,297) at the moment of writing these words.

Silver is at $17.14, so there was no invalidation yet, but it strongly seems that putting “yet” in bold is justified. In yesterday’s alert, we commented on the above chart in the following way:

Silver moved higher once again and this time it reached its declining, medium-term resistance line. Does this mean that the rally is over? It could, but let’s keep in mind that silver is known for fake breakouts, so a move above this line could also be seen. In fact, today’s pre-market rally took silver several cents above yesterday’s high, which fits the above. At this point it’s imperative to keep in mind that silver breakouts – if they are not accompanied by bullish confirmations from gold and miners – are almost certainly fakeouts and excellent opportunities to enter short positions. We already have such positions, so the above doesn’t apply, but the key takeaway is that it’s not a bullish thing.

In light of the observation that we made in the previous section, it’s very likely that silver’s breakout will prove to be a fakeout shortly, likely within the next several hours.

Also, let’s keep in mind that the very bearish implications of silver’s recent upswing on big volume remain in place especially that the signal was just repeated.

In 9 out of 12 recent cases, big volume during daily rallies meant excellent shorting opportunities (marked with red). In 2 cases it was unclear whether it was an opportunity to go short or long (marked with black), but in both cases entering a short position at that time and keeping it for about 3 weeks would have been profitable. In the remaining case that we marked with blue, silver moved higher but only for 2 weeks – it declined then and if one simply kept the short position intact, for a few more weeks, they would have made sizable gains.

Overall, the implications of a volume spike during a daily rally are clearly bearish.

Silver to Gold Ratio

On Tuesday, we wrote that the RSI indicator that was based on the silver to gold ratio moved very close to the level of 70. We emphasized that this was something that should have made silver bulls consider changing their outlook to at least neutral.

The thing is that practically each time that the RSI based on the silver to gold ratio moved above 70 and then back below it meant that the top was in. In many cases (for instance earlier this year), the RSI didn’t even have to move to 70 – its proximity was enough to have bearish implications going forward.

In the April 23rd, 2018 analysis, we wrote that the outlook for silver was bearish, while the ratio-based RSI was a bit above 69. It turned out that it was the day when the decline accelerated. This was not the case this time (silver didn’t decline after RSI moved above 69) because of all the fundamental stuff that happened this week (Fed, ECB, BoJ meetings), but the decline was likely to follow shortly anyway.

Based on yesterday’s price action in gold and silver, the RSI moved above 72. That’s the highest it’s been since mid-2016. Back then gold declined over $200 and silver declined by more than $5, so that’s a quite bearish analogy.

The full sell signal will flash when the RSI moves back below 70 again and when it does, the implications will be very straightforward and very important. We marked similar situations with red arrows on the above chart and as you can see, this signal has been extremely effective. The silver price forecast, therefore, is very bearish.

The big-volume signal that we discussed previously along with the SLV reversal both suggest that silver will plunge shortly. This means that we’re likely to get the above-mentioned confirmation from the RSI any day now. While the situation may appear very bullish for silver at the first sight, it’s actually exactly the opposite.

Summary

Summing up, sometimes things are not what they appear at the first sight and yesterday’s move higher in gold, mining stocks, and – most of all – silver, has the opposite implications of what seems likely. They all moved higher, but the way in which they did (huge-volume reversals very similar to previous pre-decline cases) make the outlook bearish, not bullish. Gold’s strength relative to the rally to the USD Index might appear very encouraging, but at this time it’s just a one-time event and since the latter was not a consequence of USD strength, but EUR weakness, it’s not justified to speak of gold’s real strength. PMs do indeed appear to be on a verge of a major move, but the direction is likely to be to the downside even if it emotionally “feels” otherwise.

Please note that the above is based on the data that was available when this essay was published, and we might change our views on the market in the following weeks. In order to stay updated on our thoughts regarding the precious metals market and our free articles we suggest that you sign up to our gold newsletter today – it’s free and if you don’t like it, you can unsubscribe anytime.

Przemyslaw Radomski, CFA

Founder, Editor-in-chief, Gold & Silver Fund Manager

Sunshine Profits - Gold & Silver Investment

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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.