Wait, what?! Isn’t the inverse head-and-shoulders a bullish pattern that was supposed to take gold miners much higher? Indeed, it is. But it didn’t take gold miners much higher and all that the completion of the above-mentioned pattern generated was a corrective upswing that didn’t even take gold stocks back above their December 2016 lows. And we warned that this is the likely outcome as the more important, long-term factors continued to favor lower mining stocks values. Why is there a sell signal based on the inverse H&S pattern? Because the breakout above its neck level was just invalidated and this invalidation by itself is a strong sell sign.
Let’s take a closer look at the charts for details:
The HUI Index closed the day visibly below the neck level of the formation – we marked it with a red dashed line. But, at the same time, the gold miners index closed below the October 10th session. Why is this important? Because that was the last daily close before miners strongly rallied. This means that the entire mid-October rally is now more than erased.
Comparing the value of the HUI Index to gold provides us with an even more bearish picture. The golds stocks to gold ratio closed well below the neck level of the inverse H&S formation and at the same time it closed below the both lows that created the “shoulders” thereof – the mid-August and late-September lows.
When gold stocks underperform gold to a considerable extent, it’s a major sell signal. Yesterday, we saw them not only underperform in an extreme way, but also we saw an outstanding technical sign based on it – the invalidation of the inverse H&S pattern.
This is a very strong sign that the recent upswing was nothing more than just a correction within a bigger downtrend and that it’s already over – at least in case of mining stocks.
