There are quite a few bearish indications that suggest lower precious metals prices are just around the corner. First of all, the USD Index broke above the triangle consolidation pattern and the breakout is almost confirmed (or confirmed, depending on the approach – some suggest waiting for 2 closes above a certain level and some prefer 3 closes; in the case of the precious metals market we found the 3-day rule to be more useful, but it’s not as clear in the case of currency markets). That’s bearish news for the precious metals sector, because (with local exceptions, like the Brexit vote) PMs tend to move in the opposite way to the USD Index.
All charts courtesy of www.stockcharts.com
In yesterday’s alert we wrote the following:
(…) The USD has been consolidating for about 3 weeks – definitely enough to cool down the previous – post-Brexit-vote emotions, so the consolidation can end any day now – perhaps even later today as only a little additional move higher is necessary.
The cyclical turning point was last Friday and the USD Index indeed turned around and rallied on this day, thus increasing the odds for a rally’s continuation.
The implications for the USD Index are bullish as the move that follows a breakout tends to be similar (mostly in terms of price, but often also in terms of time) to the moves that preceded the consolidation. The move that preceded the consolidation this time was a rally from about 93 to about 96.5 – a 3.5 move. Starting an analogous move from the bottom of the triangle pattern (about 95.5 in early July) provides 99 as the next target.
Consequently, the implications of the current situation are bullish for the USD Index and bearish for the precious metals sector (which tends to move in the opposite way to the U.S. dollar; the Brexit case was an exception from this rule) and they will be much more bullish (USD) and bearish (precious metals) in case the breakout above the triangle pattern is confirmed.
Let’s keep in mind that 99 is only an initial target.
The USD Index indeed broke higher and closed visibly above the 97 level - clearly above the mentioned resistance at 96.75.
Now, the breakout didn’t result in a big plunge in the precious metals sector, but the reason could be that the breakout is not confirmed yet – the move is seen as something temporary by traders and investors. Consequently, it could simply be the case that the metals’ and miners’ reaction is delayed, not absent.
A few hours after writing the above gold and silver indeed plunged – most likely as traders started viewing the breakout in the USD Index as confirmed. At the moment of writing these words, the USD remains above 96.75 (it moved to 96.88, though), so the breakout was not invalidated.
The upper border of the triangle consolidation pattern is not the only resistance that’s in play, though. The USD Index moved to the 61.8% Fibonacci retracement based on the December – May decline, which is also an important resistance level. Consequently, a day or a few days of consolidation will not be surprising. Still, 99 remains to be the initial upside target for the USD Index.