If we were to be guided by history, junior miners behave almost exactly as in 2013. What does that mean? Well, we will most likely see a huge decline.
Silver’s previous quick run-up fooled many, but you weren’t caught off-guard, and yesterday’s decline didn’t surprise you. If so, congratulations!
Q2 2022 hedge fund letters, conferences and more
Time Travel
Today, I would like to show you how the GDXJ (a proxy for junior mining stocks) is repeating its 2013 performance, and I want to emphasize just how bearish the implications are.
Here’s what the GDXJ did in 2013.
Right before the April 2013 plunge, the GDXJ corrected about half of the preceding short-term rally, and it moved above its most recent short-term low. This rally was relatively quick.
Then the decline started, but it was not huge at first. However, it took only a few days for the pace of decline to pick up, and shortly after the GDXJ moved below its recent lows, it truly plunged. The slide was also huge in the rest of the precious metals sector.
The GDXJ declined in a major way, and it formed a short-term bottom once it doubled the initial decline. I marked this with the green Fibonacci extension tool. The initial decline is 50% of the entire decline (approximately), which means that the latter was twice as big.
What does this imply for the current situation?
First of all, it implies that the analogy to 2013 remains intact.
Second, it implies that – based on the size of the recent decline – the GDXJ is likely to decline until it moves below $22 or so. Given the proximity of the 2020 lows that are just below $20, and the fact that right now there are more factors that are happening outside of the precious metals market that favor lower junior miners’ (and gold) prices.
I wouldn’t be surprised to see the GDXJ bottom close to its 2020 low (or even slightly below it), and not slightly above the green target provided by the doubling-the-previous-decline technique.
Those “other factors” are the soaring USD Index, declining stock market prices, and rising interest rates.
The Only Way Is Down
Besides, the above is very much in tune with what I’ve been writing about for months. I’ve been emphasizing that the return to the 2020 target (or lower, perhaps much lower) is likely for mining stocks. Now, we even have even the short-term confirmation of this scenario.
Moreover, please note that yesterday’s almost 5% decline caused the tiny breakout above the declining, medium-term resistance line to be invalidated. Invalidations of breakouts are immediate sell signs.
The additional implication of the recent rally is that since it happened, it’s no longer likely that we will see a rebound from the ~$26-27 area. Why? Because we already saw one recently, and based on the analogy to 2013, what was likely to happen already happened.
Sure, there are no certainties in any market, and there might indeed be a correction in this area, but it’s not likely, let alone very likely, that it’s going to take place.
All in all, it seems that the downtrend continues, and that it’s the final time to make sure one is prepared to take advantage of the upcoming big slide. Of course, I can’t promise any kind of performance or profitability, but in my opinion, it does seem likely that the next big move lower will be truly epic.
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Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care
All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice.
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