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Trump Tests COVID-19 Positive - How will The Markets Respond?

October 2, 2020, 9:12 AM Przemysław Radomski , CFA

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The big news of the day is that the U.S. President - Donald Trump, and the First Lady - Melania Trump, had both tested positive for Covid-19. If the markets were waiting on any trigger that the situation is about to worsen - this might be it. In the last several hours, crude oil and stocks have declined, making the entire situation more and more similar to what we have witnessed in March.

And what followed in March? A massive slide in the precious metals market that was then followed by a robust rebound afterward. In the present case, we expect history to repeat itself one more time again.

As far as price action is concerned, it's in tune with the news mentioned above and the technical indications that we had seen previously.

Regarding the USD Index's short-term chart, previously, we've indicated the following:

Last week, the USD Index was just starting to break above the declining resistance line. We wrote that the situation doesn't become crystal-bullish, unless we see a confirmation of the breakout in the form of either a significant move above the resistance (it's not significant so far), or three consecutive daily closes above it.

That's exactly what we saw. The breakout is more than confirmed. We didn't saw a corrective decline, but rather, we've witnessed a pause. So, will we see a pullback soon? That's quite possible, but definitely not inevitable. Such a decline could trigger a rally in gold, but we don't think that any of these moves would be significant.

As it turns out, that's precisely what we've witnessed this week.

The USDX moved slightly lower, while gold, silver, and mining stocks moved marginally higher. And then we saw a pause in all of them. However, the sizes of these moves were not particularly significant.

Just as the USD Index paused, the same happened in gold, silver, and mining stocks. Gold moved a bit above its very recent highs yesterday, but the move was tiny. The same happened when it comes to miners. Silver didn't manage to move above its very short-term highs. All in all, after a substantial short-term decline, the markets took a breather, appearing to be ready to move lower once again.

The above GDX ETF chart points out that miners still closed the day below the red resistance line despite gold's move higher. So, did the most recent upswing made the outlook bullish even for the short term? Not really.

In other words, practically everything that I wrote yesterday and in Monday's extensive analysis still applies - for the next several weeks, the outlook for the precious metals market remains bearish.

Before summarizing, let's answer the question that you're likely wondering about the most - when will this correction end?

The simple answer is that it's relatively unclear, but also, it could be the case that it has already ended.

The short-term triangle-vertex-based reversals were quite useful in timing the final moments of the given short-term moves in the past few weeks. Please keep in mind that the early and late September lows developed when the support and resistance lines were crossed.

We can see the same thing happening once more. Based on the recent highs and lows, yesterday, the support and resistance lines both crossed again. And indeed, gold is trading below yesterday's closing price in today's pre-market trading.

Now, this technique might not work on a precise basis, but rather on a near-to basis, and given the highly political character of the current month (before the U.S. presidential elections), things might move in a somewhat chaotic manner... But still, this technique worked multiple times in the previous months and years, and it has worked recently as well. It seems quite likely that the days of this corrective upswing are numbered.

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

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