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The Curious Case of the Miners' Rally

April 2, 2020, 7:47 AM Przemysław Radomski , CFA

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The miners moved higher instead of moving lower yesterday, which might make one concerned about our current positions. And rightfully so - one should be on a constant lookout for the things that might invalidate one's current position (that's the opposite of confirmation bias). That's definitely our aim.

So, what exactly happened in the miners?

In the Miners Yesterday

Miners moved higher on VERY low volume. The volume was the lowest of any session since the final part of the February.

That's exactly what a breather within a decline - a one that doesn't change the trend - should look like.

But miners didn't rally visibly - even just one day - before the mid-March plunge!

Didn't they? Please take a look at what happened on March 10th. The candlestick is black, because GDX declined on an intraday basis, but the closing price is higher than the March 9th closing price. Small, but still, it was a daily rally.

In yesterday's analysis, we explained that the bases (steady parts of the decline) are getting bigger, which likely indicates that the real moves (volatile parts of the decline) are also getting bigger.

If this is the case, then it's only natural to expect the corrective upswings to be more visible during this "base". And, well, it was more visible. The volume was still very low, so yesterday's session appears not to invalidate anything.

But let's double check, by looking at details from the 4-hour candlestick chart.

This chart does not only tell us that what we saw yesterday was normal - it actually provides us with bearish confirmations.

The 4-hour candlesticks mean that each session is effectively broken into two candlesticks, instead of one. While it is relatively normal for the volume to be relatively low during the first half of the day, it is usually the case that the volume during the second half of the session is bigger.

Now, the point is that the volume during the second half of yesterday's session was very low. This emphasizes how weak the bulls are and how little buying power there is right now. But let's compare it to the recent past.

The green rectangles on the above chart represent the second halves of the sessions when the volume was approximately as low as it was yesterday. This was the case on March 4th, and on February 26th. In the latter case, the decline accelerated on the next day. In the former case, it was exactly one daily close away from the top. Based on these similarities, the implications of yesterday's session are actually bearish.

Since we saw an additional day of the "base", we need to update the analogy (in italics just below) in terms of time that we described yesterday:

In late February, GDX declined steadily for 5 candlesticks (the above chart is based on 4-hourly candlesticks). Then it declined quickly for 3-4 candlesticks (there was a double bottom).

In mid-March, GDX declined steadily for 6 candlesticks. Then it declined quickly for 4-5 candlesticks (there was a double bottom).

Please note that there is a specific tendency for both: the base (steady decline) and the real move (quick decline). They were both slightly longer in the second case - each by 1 day. It's also interesting that we saw a double bottom at the end of each.

Now, GDX has been declining steadily for 8 candlesticks, which still seems to fit the above pattern quite well. If the more volatile part starts today - and this seems quite likely - then based on the above analogy, we can expect it to continue for about 5-7 trading days. This means that the bottom would be likely to form on April 8th (Wednesday) or April 9th (Thursday), or April 10th (Friday).

Based on yet another technique (the previous ones are the analogy between 2008 and 2020 in gold, and the one about miners' reaching their declining support line that we outlined on Monday) it seems that we'll see a major bottom in the precious metals market next week.

It could be the case we'll once again see a double bottom formation in the, but we have only one indication for it, so we wouldn't bet the farm on this particular scenario.

Please note that the above time prediction is very far from being written in stone. Conversely, we will be updating it as more details become available. Remember how it was with the recent long position in the miners? We've been changing the upside target for them multiple times, and we ended up closing the long position at the top, anyway.

Thank you for reading today's free analysis. We had taken profits from the previous long positions in mining stocks on March 25th, and we entered new short positions in the miners on March 26th. Given yesterday's weakness in the mining stocks, it seems that we took profits from our previous long positions exactly on the day that the miners topped in terms of the closing prices, and that we entered the new short positions exactly on the day that the miners topped in intraday terms. This assumes using GDX as a proxy. If we use GDXJ, we entered the short position on the day when they made the second intraday top of their double-top formation.

We provide details regarding our profitable short position in the mining stocks in the full version of today's analysis.

Subscribe at a discount today and read today's issue ASAP.

Thank you.

Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager

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