Mining Stocks’ Invalidation – Bigger Than It Seems
In the past cases, when miners bounced for a second time before rallying, they mostly bounced from price levels that were considerably above the previous lows. There was only one exception (November 2016) and that was also the case in which the following upswing was the smallest out of the analyzed cases. Back then, only a bit more than half of the preceding short-term decline was erased before the big decline continued.
If this 1-out-of-4 analogy prevails, we may be looking at a counter-trend rally that takes GDX to 22.5 or so. If, however, the 2-out-of-4 analogy prevails (we’re leaving out the March 2017 action as there was no 2-day breakdown below the initial low), we can see a sharp decline right away.
The reversal that we saw later during Thursday’s session reversal made the analogy to the two-bounce cases more likely. Plus, a reversal on significant volume is generally a bullish phenomenon. The bullish implications of the above remain in place.
However, there is something even more important that happened last week and in order to see it, we need to zoom out.
Gold shares moved below the very important support level created by the 61.8% Fibonacci retracement that’s based on the most important tops of the past years – the 2016 bottom and 2016 top. Both price extremes are very important and the same can be said about the 61.8% retracement, so the invalidation of the breakdown is indeed something very important.
The last time gold stocks invalidated their breakdown below this level, they rallied over 220 relatively quickly. We don’t think that this will be repeated, but some of the bullish implications remain in place.
Based on the above chart, 190 can be reached once again, but we hope for mining stocks’ underperformance and a smaller rally as that would serve as a confirmation sign and decrease the risk of opening new short positions.