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Junior Miners Dangerously Close to the Cliff

Written by: Przemyslaw Radomski, CFA

There are times to keep being focused on higher timeframes, yet the finer ones do send valuable signals at times too.

And today, every precious metals investor better pay attention to their message. Take a look at the below chart featuring the miners.

We will compare the junior miners to what GLD ETF and SPY did. The latter are ETFs representing gold and the S&P 500.

We zoomed in to the 2-hour chart to show you something specific that happened in the last few days and to provide the likely explanation for it.

Namely, the miners started to show odd strength relative to both: GLD and SPY, and we marked it with a green rectangle. 

The relative strength started in the final part of the previous week, when the GDXJ approached the $36 level. Instead of falling further, just like GLD did – or at least like the SPY did on Tuesday – the GDXJ stayed above it.

The gold trading tip for today would be always question such situations before taking them at face value. Why would that be the case? What factor could have been strong enough to trigger such strength? Or maybe – in the absence of such a factor – was the mining stock sector really strong enough to withstand the powerful bearish forces in the form of declining GLD and SPY?

There is a good reason for the miners’ “strength”. It’s the $36 price level itself. Or, more precisely, the strong support that it provides.

This is the price level from which junior miners rallied in early March.

This is the price level at which juniors reversed on an intraday basis on March 9th.

This is the price level that stopped the decline on March 10th.

And this is the price level that – once broken on March 11th – triggered waterfall selling that quickly took the GDXJ below $20.

This is also the levels that stopped the late-March rally, and the level that initially served as resistance on April 9th.  

It also served as support after the initial – April 15th – decline. 

Given that this price level worked as both: support and resistance so many times, is it really surprising that without a major breakdown back below the previous 2020 highs in the GLD ETF, this level is holding strong?

It’s absolutely normal. Let’s not overestimate this support’s importance, though. This level doesn’t invalidate the bearish gold price forecast, it only changes its shape a bit. Instead of declining just like GLD, the GDXJ is taking a breather above $36, but once GLD moves decisively lower, the GDXJ would be likely to break below this level, and slide profoundly – catching up with the pace of the slide.

Please note what happened on April 9th and April 13th. The miners first declined (about $2) based on the resistance, but once they finally broke above the $36 level, they soared until topping almost $6 higher. What’s happening now? The GDXJ moved higher first (about $2) and as soon as it gets the bearish lead from gold, it’s likely to catch up, by breaking below the $36 level, and sliding much further.

The very same chart features a specific self-similarity suggesting that the junior miners are likely to get this kind of bearish kick shortly. Not only is the current situation in the GDXJ itself very similar to what happened in mid-March, right before the slide, and right before the breakdown below $36 – it’s also the case with the GLD ETF.

The GLD is moving back and forth around its blue moving average, while the RSI indicator (note: everything on the chart is based on the 2-hour candlesticks, not the daily candlesticks) is moving around the 50 level. 

The similarity in each ETF on a stand-alone basis might just raise an eyebrow, but the fact that both similarities aligned at the same time – along with a breakdown in the general stock market and rallying USD Index – should make one’s both eyes wide open. 

The next big move for the precious metals market is likely to be down, and it’s likely to be really significant.

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Related: The Subtle Precious Metals Signals Keep Coming In