Powerful Signal from Gold GDX / Commodities / Gold and Silver Stocks 2019

Goldand silver declined a bit yesterday, but mining stocks reversed and closed thesession higher. It seems that the miners showed strength, especially that theyformed a bullish reversal candlestick. But did they? The reversal candlesticksshould be confirmed by strong volume and what we saw in the GDX ETF yesterdaywas the lowest daily volume of the year. In fact, the GDX volume was lowerthan any volume that we saw in 2018.And 2017. And 2016. And even 2015. The last time when we saw as low a volume was onMay 21, 2014 (yes, exactly 5 years earlier). So, how should we read this priceaction?

Itis not the reversal or relative strength that is the powerful signal from the GDX.It’s the extremely low volume reading. What makes it so important right now, isthat since March 2013 there were only four similar cases and they were allfollowed by exactly the same thing.

Quickdeclines.

Divinginto the GDX Lessons

Thereare quite a few lines on the above chart, and they all have a purpose. Let’sstart with the blue lines. These are the lines that represent sessions that aremost similar to yesterday’s session. Namely, these are the sessions, duringwhich GDX moved higher on volume that was as low (or lower) as yesterday’s (May21, 2019) volume of 13.4M.

Thered lines represent sessions that are also similar but not clearly so. Theseare the days, when the GDX moved either higher or when it was flat on volumethat was as low as yesterday, or even lower.

Finally,the thin, black lines represent the days, when the GDX moved in eitherdirection and the volume was equal or lower to Monday’s (May 20, 2019) volumeof 17.6M. In other words, it’s a relatively broad category of low-volume days.

Wemarked all three kinds of similarity to increase the quality of the analysis.Of course, there are some analysts that don’t even wait for a given formationto be completed (especially inverse head-and-shoulders formations are popularamong the goldpromoters disguised as gold analysts) or don’t pay attention to wherethey get data from and arrive at incorrect conclusions regarding the majorcharts (goldto silver ratio clearly broke above its long-term resistance, it’snot at it), but we care too much about you and your financial success tofeature something without researching it really thoroughly first. So, pleasebear with us, as we explain our methodology.

Themore similar a given development is to what happened recently, the more likelyit is that the follow-up action will also be repeated.

However,at the same time…

Themore similar situations from the past confirm the same outlook and the lesssituations indicate a different outcome, the more likely it is that the follow-upaction will also be similar.

Thereis usually a trade-off between the level of similarity and the number ofsimilarities, so the question becomes, which ones should one take into account.Our reply is that one should use all of them, because they might confirm, orinvalidate each-other, thus making a given forecast either more or lessvaluable. After all, the more signals point to the same outcome, the morelikely it becomes.

Theblue lines are the most similar cases, so let’s start with them. There wereonly 4 similar cases when volume was as low during a daily upswing as they wereyesterday, and they were all in a relatively similar part of the year. The mostrecent case took place exactly 5 years ago. The previous cases took place onJune 17 2013, May 6 2013, and in mid-March 2013 (on 14th, 15th,18th, and 19th).

Thefollow-up action was very similar – a quick decline followed either immediately(June 17, 2013 and May 21, 2014) or shortly (May 6, 2013 and mid-March 2013).What is even more profound is that the next bottom formed in all these cases inabout 2 weeks (8-10 trading days) after the low-volume session. This means that we are likely to see the next bottom at the end of May or very early inJune.

Let’sconsider the broader point of view. The red lines are present close to the bluelines, so they approximately confirm their indications. There are only threeseparate cases when we saw them, though, so they don’t provide much additionalvalue. Why did we separate the blue and red lines if that’s the case? Becausethe blue lines are much more precise and by looking at all ultra-low-volumesessions we might have not detected this uncanny similarity. It’s always goodto dig deeper into the data. At worst, you won’t find anything. At best, you’llget a more precise forecast, a confirmation orinvalidation of the more general indication. We have the former.

Thebroadest point of view – the black lines – confirm the bearish indication ingeneral, but are not precise with regard to the follow-up action. The lowvolume sessions were seen right before some of the most powerful declines(multiple similar sessions in August 2014, in May, June and July 2015, and inmid-2018), but we also saw them before smaller rallies (mid-2013, June 2014,March 2018), and smaller declines (November 2017). Overall, low-volume sessionsindicate bigger moves on the horizon which are usually to the downside. Theprecision in the prediction comes from the volume being not just low, butultra-low. The extremely low value is what makes this situation stand out amongother low-volume sessions. And the implications are much more bearish than ifthe volume was “just low”.

Let’sget back to the issue of confirmations. The more confirmations and the morethey vary, the greater the chance that a given prediction will be realized.

Applyingthe GDX Lessons

TheGDX ETF is after a breakdown and the entire back and forth trading that we sawthis month is a post-breakdown consolidation. In other words, that’s how the GDXis preparing for the next move.

Butit’s actually more than that.

Therecent consolidation took form of a triangle. This is important because of tworeasons. First, triangles are usually continuation patterns. Second, the vertexof the triangle is likely to mark a reversal moment. And when is the vertex? Atthe turn of the month, which serves as a perfect confirmation of the ultra-lowanalogy that we described earlier.

On April18th, we indicated that gold stocks are likely todecline to their January lows. And they did. That was not a major bottom – justan interim one. But it was enough to create the right shoulder of the potentialhead-and-shoulders formation (December – January price action being the leftshoulder). This means that once GDX breaks below the early May lows, it’slikely to decline all the way down to the 2018 low of about $17.25. Naturally,this may change as new information becomes available, but that’s what seemslikely at this time. Please note that if one wants to take advantage of thistrade, it might be a good idea to place the exit price above the final target,just in case its off by several cents.

Today'sarticle is a small sample of what our subscribers enjoy regularly. In its fullversion that is reserved for our subscribers, it also covers short-term goldanalysis, silver with its near-term target, and the implications miners’strength we just saw on Friday. To keep informed of both the market changes andour trading position changes exactly when they happen, we invite you to subscribeto our Gold & Silver Trading Alerts today.

Thank you.

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Toolsfor Effective Gold & Silver Investments - SunshineProfits.com
Tools für EffektivesGold- und Silber-Investment - SunshineProfits.DE

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