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Will Gold's Dance Turn Bearish?

By Sunshine Profits (Przemyslaw Radomski, CFA)CommoditiesJan 21, 2022 10:26AM ET
www.investing.com/analysis/will-golds-dance-turn-bearish-200615515
Will Gold's Dance Turn Bearish?
By Sunshine Profits (Przemyslaw Radomski, CFA)   |  Jan 21, 2022 10:26AM ET
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Precious metals still pirouette on the trading floor, but they can stumble in their choreography. The bears are just waiting for it.

With the GDX (NYSE:GDX) ETF soaring on significant volume on Jan. 19, the senior miners had a renewed pep in their step. With gold, silver, and mining stocks all dancing to the same beat, the precious metals garnered all of the bullish attention. However, with the trio known to cut their performances short as soon as investors arrive, will the mood music remain so sanguine?

Well, for one, the GDX ETF has a history of peaking when the crowd enters the party. For example, I marked with the blue vertical dashed lines and blue arrows below how large daily spikes in volume often coincide with short-term peaks. Moreover, with another ominous event unfolding on Jan. 19, historical data implies that we’re much closer to the top than the bottom.

To explain, I wrote on Jan. 20:

From the technical point of view, we just saw another day similar to the other days that I marked with vertical dashed lines and black arrows. Those days were either right at the tops or not far from them. As much as yesterday’s (7%!) rally looks bullish, taking a look at the situation from a broad perspective provides us with the opposite – bearish – implications.

The zig-zag scenario is being realized as well. The GDX ETF moved to the upper border of the rising trend channel. Also, doesn’t it remind you of something? Hint: it happened at a similar time of the year.

Yes, the current price/volume action is similar to what we saw in early 2021. The RSI was above 60, a short-term rally that was preceded by a bigger decline, and a strong daily rally on huge volume at the end of the corrective rally. We’ve seen it all now, and we saw it in early 2021.

Please see below:

GDX Daily Chart.
GDX Daily Chart.

What’s more, the senior miners’ fatigue is already present. For example, the GDX ETF declined by 1.40% on Jan. 20, and the index ended the session only $0.30 above its 2021 close. Likewise, the senior miners failed to rally above the upper trendline of their ascending channel (drawn with the blue lines above). As a result, the price action resembles an ABC zigzag pattern, and while the short-term outlook is less certain, the medium-term outlook is profoundly bearish.

As further evidence, the HUI Index’s weekly chart provides some important clues. For example, despite the profound rally on Jan. 19, the index’s stochastic indicator still hasn’t recorded a buy signal. Moreover, the HUI Index dropped after reaching its 50-week moving average, and the ominous rejection mirrors 2013. Back then, the index approached its 50-week moving average, then suffered a pullback, and then suffered a monumental decline. As a result, is this time really different? Remember – history tends to rhyme, and this time the analogies from the past favor a bearish forecast for gold stocks.

HUI Daily Chart.
HUI Daily Chart.

The Junior Gold Miners ETF (NYSE:GDXJ), was off to the races on Jan. 19. However, the size of the rally is actually smaller than what we witnessed in early 2021. Moreover, when the short-term sugar high ended back then, optimism turned to pessimism and the GDXJ ETF sank to new lows. Thus, with the junior miners’ 2021 story one of lower highs and lower lows, 2022 will likely result in more of the same.

Please see below:

GDXJ Daily Chart.
GDXJ Daily Chart.

Finally, the Gold Miners Bullish Percent Index ($BPGDM) isn’t at levels that trigger a major reversal. The Index is now at 30. However, far from a medium-term bottom, the latest reading is still more than 20 points above the 2016 and 2020 lows.

Likewise, when the BPGDM hit 30 in 2013, the HUI Index was already in the midst of its medium-term downtrend (similar to what we witnessed in 2021). However, the milestone was far from the final low. With material weakness persisting and a lasting bottom not forming until the end of 2015/early 2016, further downside for gold (and silver) likely lies ahead.

For context, it’s my belief that the precious metals will bottom when the BPGDM hits zero – and perhaps when it remains there for some time.

Gold Miners Bullish Percent Index Daily Chart.
Gold Miners Bullish Percent Index Daily Chart.

In conclusion, gold, silver, and mining stocks put on quite a show on Jan. 19. However, with their bullish rhythm known to turn bearish in an instant, investors should proceed with caution. Moreover, the data shows that when investors rush to buy the precious metals, their over-enthusiasm results in medium-term weakness, not strength. As a result, the trio’s declines likely have more room to run before long-term buying opportunities emerge later in 2022.

Will Gold's Dance Turn Bearish?
 

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Will Gold's Dance Turn Bearish?

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Comments (6)
Rameez Ali
Rameez Ali Jan 22, 2022 2:41PM ET
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actually it hurts to hear the truth! u r right, i dont see a power in bulls
Paweł Czosnek
Paweł Czosnek Jan 22, 2022 11:26AM ET
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I hope this guy is not from Poland. Shame for our country.
Tatan Mulia Anggono
Tatan Mulia Anggono Jan 22, 2022 11:26AM ET
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hello Pawel, any possible suggestions which best gold trading references?
Al SENT
Silverlightning Jan 21, 2022 5:14PM ET
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Always the same pattern.Talking down PM. Sorry but These articles are more Propaganda against PM than anything else. Pathetic really. "the trio’s declines likely have more room to run before long-term buying opportunities emerge later in 2022.".         Really ?when exactly?  Based upon what?
Tom Sc
Tom Sc Jan 21, 2022 5:04PM ET
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when a CFA only looks at technicals and makes no mention at all, ever, of fundamentals it tells you everything you need to know
Tan Meng
Tan Meng Jan 21, 2022 5:04PM ET
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haha. totally agree with you... I dunno how he pass his CFA? you mean Poland allows open book CFA Exams? haha
Tom Sc
Tom Sc Jan 21, 2022 5:04PM ET
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ya I understand that is one of the harder designations to get. I just dont understand how he has those skills and uses none of them and instead relies in TA, which is perhaps 1 level more legitimate than astrology. never hear any talk from him about m2, inflation, current economic conditions, etc. He's a CFA that favours technicals. this is like a real doctor embracing a naturopath's advice for curing a disease, makes no sense whatsoever.
Joe Chang
Joe Chang Jan 21, 2022 11:49AM ET
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Stupid articles after articles by this guy. How can these guys survive in this world?
Dwain Hobbs
Dwain Hobbs Jan 21, 2022 11:35AM ET
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This is your 12th article this January , all trying to talk down metals ,, giving bad calls is one thing , but repeating the same nonsense 12 times in 3 weeks makes you a really pathetic person,, not that you seem to care anyway
 
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