"I try to stay in a constant state of confusion just because of the expression it leaves on my face." -- Johnny Depp
Anyone trying to trade the action in gold and the miners over the past few days has likely needed a new pair of underwear.
Gold and the miners are acting like the line tracings of an EKG print-out. (An EKG is a heart health test.) That's because in the past few days, both have been ping-ponging back and forth like an EKG test result.
In the past couple of days, the miners have been charging ahead strongly, while gold was essentially flat.
Then on Thursday (today), gold cratered, then rebounded strongly. The miners cratered, but so far (I'm writing before the close) they haven't recovered sufficiently to confirm gold's rebound.
I chose the analogy of an EKG because I believe the action may actually be a sign of distress in the precious metals markets, comparable to to a cardiac patient who is having chest pains before the big event.
In other words, I believe the ping-pong action may be masking deterioration. Because my view has returned to being bearish, I view the recent rally in the precious metals complex off the December lows as likely being one of the most devious bear market rallies in gold's modern trading history.
I view the rally as unusually devious because:
- Some key miners and some key gold miner indexes recently made bullish crosses of their momentum indicators on the monthly charts. Crosses on the months charts tend to signify big-picture trend changes.
- Gold made a "golden cross" on its daily chart (when the 50-day moving average crosses above the 200-day). It made this cross after lengthy price deterioration, which makes the cross more significant.
- Some individual miners had spectacular rallies off the December bottom that rivalled the rallies off the bottom made in the 2008 financial panic lows.
I've reviewed some of the signs of technical deterioration that have since occurred in previous posts. To recap, the big red flags as I see them are:
- False upside breakouts in the charts of gold and many key miners. Major false upside breakouts are usually an unwelcome sign in the precious metals complex. I view them as bad news until proven otherwise.
- With the false upside breakouts, and the subsequent price give-back, the move off the December lows no longer resembles bottoms made at major bear market lows in gold and the miners.
- A number of key miners are showing signs of serious and alarming price deterioration.
- When gold and the miners appeared to have bottomed in December, the apparent third leg of the bear market appeared to have truncated as the rally picked up steam. That can happen -- there are no rules in the market. However, the subsequent deterioration in the market posture suggests the third bear market leg may yet complete. Big bear markets tend to have at least three distinct legs. The third leg, when fully expressed, is often where investors throw in the towel in utter disgust.
I refer to such chart formation similarities as "echoes". I take certain types of potential echoes in the charts seriously, and this is one of them. My observation is that major moves, particularly in the precious metals markets, tend to unfold in waves. Often, these waves will feature repeating chart behaviours. Properly identified, these repeating chart behaviours can often provide clues to possible future price direction.
On Thursday, the miners fell hard, even with gold up for the day. This reversed the action of the past couple of days, where the miners were strong, while gold was weak.
There is a reason the miners are not confirming the action in gold on Thursday. Here is a chart of the gold ETF GLD, my proxy for the gold action. Note the back-test of the neckline of a possible head and shoulders top:
That possible head-and-shoulders top, IF it activates, is suggesting gold may intend to make a trip back down to test the area around the December lows in time.
To have any hope of turning the tide, the bulls need to charge hard and push GLD/gold back above that possible neckline with conviction in the days ahead.
The bulls have a headwind: physical demand appears to be on the wane, according to a report by Reuters:
Notable: Reuters reports that gold outflows from the gold ETF GLD vaults continues to decline, and the gold build in GLD inventory since the beginning of the year has been erased. Reuters also reports Asian demand is not as strong as it has been.