From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
I think we can all agree that the market is an absolute hot mess right now.
The Precious Metals complex is as good an example of this as any right now.
In this post, we’ll use this shiny group of commodities as a case study to illustrate the mixed signals we see not just here but in asset classes all over the globe these days.
It’s a major development, to say the least – so we’d be irresponsible not to monitor it closely as the way things resolve from here will likely have implications that span across markets, far and wide.
We’ll also provide an update of our post from earlier in the month whereby we outlined a trade idea in Gold Miners.
Here’s what we had to say,
When we zoom out and look at the weekly chart of Gold Miners, the primary trend is still intact, and price is retesting the same key level we highlighted last spring when the ETF just broke out from a 7-year base.
We wanted to be buyers of GDX above 31 back then. Fast forward to today, and we’re buyers against this same level once again.
We wrote that one month ago. And although the trade setup in GDX is still intact and above our risk level, the environment for Precious Metals has changed… and not in a bullish way.
As more information continues to pour in, the weight of the evidence continues to shift further and further in favor of the bears.
To be fair though, even when we put this trade on, the evidence certainly wasn’t suggesting “all signals go.” While the outlook did look better for gold bulls, it was still mixed. Our long thesis was predicated more on the well-defined and asymmetric risk/reward in addition to the fact the primary trend was still intact.
With that said, the data was certainly leaning more bullish just a few weeks ago than it is today.
While this entire group of commodities remains a giant mess and full of mixed signals, it appears as though the weight of the current evidence is now in favor of the bears…
A lot can change in a month! So, what are some of the most important charts and intermarket indicators that have us feeling this way?
Let’s kick things off with this week’s Mystery Chart* which actually does a great job of illustrating just how much of a mess things are right now.
* Please note the Mystery Chart was INVERTED.
It also paints as complete a picture of the space as possible. This is our custom Equally-Weighted Precious Metals Index (flipped right-side-up, of course):
There was a good mix of responses this week. Thanks to everyone who participated – we love getting your emails!
Many were bearish, expecting a continuation of the breakdown, while others wanted to wait for more information. We believe both approaches have merit.
The Custom Index has struggled to make a decisive breakout as price has been churning around its former all-time highs since last year.
The big question is whether this chart finally resolves higher from its decade-long base… Or, if it’s a failed breakout in the making – in which case we could very well see a swift move lower, back into its massive trading range.
We should have an answer soon!
Take a look back at our original Mystery Chart post for a more detailed analysis of the characteristics present in this chart, as well as the likely resolution of this base.
But the long and short of it is simple: we think it can go either way and that a sound argument can be made by both bulls and bears alike.
For this reason, we’re going to analyze the individual components of the index, in addition to some intermarket indicators, to get a better read on the Precious Metals complex in general.
First up, here’s Platinum. This one is another excellent example of the mixed signals we’re currently seeing.
Last December, Platinum violated a 12-year downtrend line, signaling a potential end to the secular bear market for this metal. It followed through nicely, breaking above a key level to new 5-year highs.
However, the breakout quickly failed, and price has been correcting beneath our risk level at the 2016 highs, yet still above the trendline which is now acting as support.
Though not necessarily a bearish development, Platinum has lost the strong momentum it had earlier in the month when we viewed it as a potential leader.
Next, let’s look at a chart of Palladium, the true long-term leader in the Precious Metals space.
Sellers stepped in and knocked this one lower just as it appeared ready to take a shot at its all-time highs. Price is currently churning between those record highs and its more recent highs around 2500. Metals bulls want to see this level hold.
IF Palladium breaks below 2510, then the bias would turn neutral, and the overall outlook for precious metals would weaken significantly.
Let’s move on to one of the most important intermarket charts we use to gauge risk appetite for Precious Metals.
Check out this failed breakout in the Silver/Gold ratio. This is NOT good…
Since early March, both Silver and Gold have weakened on an absolute basis and have provided nothing but opportunity cost since last summer. Though their recent consolidations haven’t provided much information in absolute terms, Silver relative to Gold sure has.
When the Silver/Gold ratio is moving higher, it indicates a healthy risk appetite as investors favor the more volatile and higher beta play of the two shiny metals. Historically, this ratio rising tends to be a very bullish development as the whole group is usually rallying in an environment where Silver is outperforming.
Today, we not only find the ratio moving downward, pointing to risk-aversion, but it just failed miserably after breaking above a key level of former support, turned resistance. Well, with price slicing right back below it recently, there certainly wasn’t any support there this time around, and that 0.015 level is once again resistance. This could just be a short-term development and it could always reclaim that level, in which case this would have just been a false start.
Although we’re noticing quite a few failed breakouts in looking through our precious metals charts, aren’t we? As long as that remains the case, we wouldn’t hold out hope for this ratio to reverse higher any time soon.
Bottom line, it’s tough to be bullish Precious Metals if the Silver/Gold ratio is below that key 0.015 area.
Finally, we have the Gold Miners ETF $GDX. This is one of few talking points left for the gold bugs.
On an absolute basis, GDX is still above the risk level of 31, so the trade is still intact. However, as we have pointed out, the environment over the last month has changed, especially from a tactical perspective.
Ultimately, when we outlined the trade in GDX the weight of the evidence was suggesting precious metals would soon resume their primary uptrend.
Fast forward to today, though, and that’s not so much the case any longer.
Let’s recap why…
- We have failed breakouts in Platinum and the Silver/Gold ratio.
- Palladium failed to break to new highs and is not close to violating its key former highs.
- Gold just keeps grinding lower and has actually been one of the worst-performing assets for a while now.
With all that as our backdrop, the evidence is now neutral at best. Probably even leaning a bit bearish.
If we lose the base breakout in our custom Precious Metals index, we’d expect things to be firmly in the bears’ court.
The same can be said for Gold Miners and that key 31 level. If GDX violates that, we’re out!
As of this writing, GDX is trading higher toward 32.50, but at what point does the trade become an opportunity cost? This is why some investors employ time stops along with their price stops. The best trades usually reward you pretty quickly after entering. If they don’t, it’s usually not a great sign.
This is why we always have to know our levels, manage risk, and stick to our game plan because anything can happen.
Thanks for reading, and please let us know if you have any questions!