Silver Soared, So It's Bullish, Right? Wrong / Commodities / Gold and Silver 2018

It’sbeen only a couple of days since Thursday, when we closed our short positionsand we have already seen a sizable rally in gold and silver. In fact,yesterday’s upswing was so significant that both precious metals already movedto the target areas that we featured onMonday,even though they were “scheduled” to move there at the end of the week. Is thetop already in? Silver’s short-term outperformance definitely seems to suggestthat it’s either in or at hand…

Let’sjump right into the charts, starting with gold (chart courtesy of http://stockcharts.com).

Gold’sTarget Reached

OnMonday, we argued that gold could move to the $1,340s before the rally is overand we marked this level with the red ellipse. Why there? That’s where we havethe previous intraday high and the rising resistance line. The combination ofthese short-term resistance levels and the pace at which gold usually ralliedboth fit a scenario in which gold forms the next local top about $20 higher atthe end of the week or very close to it.

But,gold has already moved to the middle of the target area, so is there any pointin waiting an additional few days before viewing the outlook as bearish? Afterall, gold shouldn’t rally much higher from here if the rising resistance lineis to hold.

Inshort, the above is mostly true – yesterday’s rally made the situation alreadysomewhat bearish, but at the same time it’s not certain if the final short-termtop for this week is already in. We could have a daily pause or so and anotherupswing before the final top is in. Still, it seems that we are already closeto the top.

Themost important bearish signs, however, don’t come from the gold market, butfrom the confirmations that we saw in other parts of the precious metalssector.

PreciousMetals Sector’s Relative Performance

Thetwo key things that simultaneously confirmed the bearish outlook for theprecious metals sector are: silver’s very short-term outperformance and miningstocks weakness.

Theabove strength in silver and weakness in the miners become apparent when youcompare yesterday’s upswing to the February 14th top. Gold is abouthalfway back to this level after the late-February decline. Silver almostreached its Valentine’s Day top and goldstocks (HUI) only managed to move to their February 26 top, which is very far from theFebruary 14 high.

That’sa very classic sell signal –underperforming miners suggest that a top is near and the soaring andoutperforming silver (on a very short-term basis) serves as an effectiveconfirmation.

SilverDetails

OnMonday,we described silver’s similarity to the post-September 2017 decline, so wewon’t get into the details again here, but we want to emphasize that that thepattern continues with remarkable accuracy.

Thesudden jump in the price of silver that we saw yesterday is most likely theanalogy to the November 17, 2017 daily rally. The rally that preceded the bigdaily downswing and that was shortly followed by a decline of over $1.50. Theimplications here are bearish, not only in light of this specific analogy, butbecause silver outperformed gold on avery short-term basis right before declining multiple times in the past.

Wewrote that silver was likely to rally above its short-term declining resistanceline and the 50-day movingaverage and to top close to its mid-February high, likely outperforming gold. This isexactly what we saw yesterday when silver moved to our target area and thus itseems that a bearish outlook is once again justified.

Miners’Second Rally

Miningstocks (we’re using the GDX ETF as a proxy) areunderperforming not only relative to the late-February decline. Theyunderperform also relative to the previous cases that we marked on the above chart. During the previousvolatile declines, mining stocks used to bounce twice before the declineresumed and the second bounce was not as small as what we saw this week. Theimplications of the underperformance are bearish.

Moreover,please note that yesterday’s session took form of a shooting star candlestick, which is a classic reversal sign if itis accompanied by sizable volume. The latter was not huge, but it wasdefinitely sizable, and the bearish implications are already present.

USDIndex and Its Short-term Downswing

OnMonday, we wrote that the decline to the February low could be seen, but thatwe doubted it. The reason was that the USD was after breakouts above thedeclining short-term support / resistance lines, so a move back to one of themseemed more likely. The implication is the above red triangle target area.

Sofar, the USD Index hasn’t moved to it, stopping at the late February lows. Butdoes it have to move lower? Not necessarily.

Let’skeep in mind that the USD Index is above a combination of very strong supportlevels and the big picture remains bullish. Consequently, the surprises arelikely to be to the upside.

Still,with looming comments from Mario Draghi and the employmentnumbers,it seems that we could see some short-term volatility before the end of theweek.

Willthe USD decline further? It’s possible, but not inevitable. Will gold, silverand mining stocks rally further? They could, but we have already seen bearishconfirmations and our target areas were reached, so the outlook is alreadybearish. It could get more bearish (or it could be invalidated) if the USDIndex moves significantly lower in the following days and PMs refuse to reallyreact to this sign. If this is the case we’ll send follow-up alerts.

Summary

Summingup, a major top in gold, silver and mining stocks is probably in, and based onthe signs that we saw yesterday, the follow-uptop could also be in. The key short-term signs: silver’s outperformance andminers’ underperformance point to it, but at the same time we should beprepared for another move lower in the USD and higher in PMs due to Draghi’scomments and the upcoming jobs report. Either way, it shouldn’t take long forthe precious metals sector to reverse its course and move lower once again.

Thank you.

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

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