Gold Stocks Break Down Below 2017 And 2018 Lows!

The HUI Index just closed below both 2017 and 2018 lows. The interpretations of many developments in the market are vague and subjective. But no major breakdowns. Gold miners just showed exceptional weakness by closing at new lows even though gold is still above $1,300 and the S&P corrected more than half of its recent sharp decline. Can anything save the precious metals sector from falling further?

Yes, but based on what happened yesterday, it seems that the golden Superman may have some trouble getting into the scene.

Another downturn in the USD Index would likely trigger a corrective upswing in gold and silver, which would, in turn, cause the prices of mining stocks to move higher. The “problem” here is that the USD has just invalidated the breakdown below the declining medium-term support line, which significantly lowered the odds for another short-term decline.

Let’s take a closer look at what happened, starting with the forex action (chart courtesy of  StockCharts).

No More Megaphones for the USD

From the short-term point of view, it’s clear that the USD Index has broken above both declining short-term resistance lines. It hasn’t broken above the previous February high, but the implications of breakouts above the declining lines are already significantly bullish as they were two of the things that stopped the rally about 3 weeks ago.

The third – and most important – thing that stopped the previous attempt to move higher was the long-term declining resistance line based on the 2015 and 2016 lows. Both are important, so the line based on them is also important.

If a line is important, then a breakdown below it is also important, and the invalidation of the breakdown can be even more important. That’s what we saw during yesterday’s trading – the USD rallied above the mentioned resistance line, thus invalidating the previous breakdown.

The implications are already bearish, but they will be much more bearish when we also see a breakout above the previous February high and at least two weekly closes above it. Since the previous move above this line was followed by new lows in the USD (in the following week), we are still a bit skeptical toward yesterday’s move. Still, overall, it was a bullish development and based on the short-term breakouts that we discussed earlier, this invalidation has a much bigger chance of being a true one.

On the long-term chart, you can see why we were very skeptical toward the possible long-term bearish implications of the previous breakdown below the mentioned declining support line. It’s because a much more important support was reached, and it held. Precisely, there was only a tiny breakdown below the combination of support levels and it was invalidated immediately.

The key mentioned support levels that held are the 2009 and 2010 tops along with 2 major retracements based on major extremes (marked with red and black on the above chart). The above combination is much stronger than the previously discussed declining line. The reason is that the mid-2015 and 2016 lows are less prominent than the 2009 and 2010 tops and the line based on the former is not strengthened by key Fibonacci retracements, while the latter is.

Consequently, the invalidation of breakdowns below the key, long-term support levels is far more important than the declining shorter-term line.

The above has been the reason for one to expect the move back above the declining resistance line. Yesterday’s session proved that the above expectation was correct. Moreover, thanks to the simultaneous breakout above the declining short-term resistance lines, the odds are that rallies will follow.