As 2020 is winding down, investors are trying to lower the gold fund’s target in the coming weeks. And as the yellow metal is experiencing what appears to be its worst month in the past four years, the Gold Miners Bullish Percentage Index ($ BPGDM) once again provides us with some key insights to read the bearish signs of precious metals.
Last week, the BPGDM showed the highest possible overbought reading.
Excessive optimism was also present at the top of 2016 and did not make the situation any less bearish in reality. All markets periodically get ahead, regardless of how optimistic the long-term outlook really is. So, correct. If the rally was significant, the correction usually is too.
Note that in 2016, there was an additional rapid rally before the crash and this additional rally had caused the $ BPGDM to rise once again for a few days. Then it declined again. We saw something similar also in the middle of this year. In this case, the upward movement brought the index once again to the 100 level, while in 2016 this was not the case. But still, the similarity remains.
In 2016, when we saw this phenomenon, it was already after the peak and just before the big descent.
Based on the decline from over 350 to under 280, we know that a significant decline is definitely taking place. But has it already run its course?
Let’s consider two similar cases where gold miners declined significantly after the $ BPGDM was very high: the 2016 decline and the early 2020 decline.
In both cases, the HUI index continued to decline until it moved slightly below its Fibonacci retracement level of 61.8%. This means that if history repeats itself, we shouldn’t expect any major changes until gold miners drop to around 220-230. However, depending on how things play out in gold, the above may or may not be the bottom line.
Note that the HUI has already declined below its 2016 high. This collapse is another bearish sign.
Note that in 2016 (after the peak), and in March 2020, the buying opportunity did not present itself until the $ BPGDM was below 10. Currently, it is above 30, so it seems like miners are likely to move even lower.
Two weeks ago, when I was preparing the GDX ETF chart analysis above, I commented on the late-week bounce as follows:
On Thursday (November 12) and Friday (November 13) of last week, miners moved and closed higher, but it is important to note that their rally was small and was not accompanied by strong volume. In other words, it has all the characteristics of the respite that will be followed by another move in the direction the market had been moving previously.
The previous move was bearish, so the implications are bearish.
Something similar happened both during the past week and the week before, so today’s comments will be similar. It looks like we now have this specific weekly gold stock seasonality where miners decline sharply earlier in the week and then show limited strength before the weekend.
For now, it looks like we’ve probably seen a regular respite that will likely be followed by more drops.
As stated above, most of the decline could begin shortly after Thanksgiving.
Also, let’s not forget that the GDX ETF has recently invalidated the breakout above the 61.8% Fibonacci retracement based on the decline from 2011 to 2016.
When GDX approached its 38.2% Fibonacci retracement, it dropped sharply, just past 2016 high. Are we looking at the top of 2020 right now? This is quite possible: PMs are likely to decline after the strong rally, and with just over a month left before the year is out, it could be the case that they move north of recent highs only in 2021.
Either way, the miners’ inability to move above the 61.8% Fib retracement level and their invalidation of the small breakout is a bearish sign.
The same goes for the inability of miners to stay above the ascending support line, the line that is parallel to the line based on the 2016 and 2020 lows.
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