The US elections are over and since the markets were not surprised by their outcome, there was no significant reaction. It seems that the markets can now return to their previous trends. But… the USD Index is down significantly today, while gold and silver are rallying. Does it mean that the trend in the precious metals is currently up?

Not necessarily. The US-elections-driven volatility could extend beyond the very initial reaction and it’s not surprising to see the move higher in the PMs and miners today and along with a move lower in the USDX. What is interesting, however, is the subtle clue that the relative changes provide.

Gold and silver are practically where they were 24 hours ago, while the USD Index is considerably lower.

USD Index and Its Inverse H&S Pattern

Being about 0.50 lower today (at the moment of writing these words), the USD Index is already visibly below the previous November low. This is a clear sign of weakness of the precious metals sector. The PMs should be rallying, but they are not.

But doesn’t this move invalidate the recent inverse head-and-shoulders pattern?

In a way it does, and in a different – more important – way it doesn’t. The line that we’ve been featuring on the above chart and the one that’s being broken today (the rising red line) is based on the intraday highs. As you may recall, the closing prices are more important and thus the formations based on the closing prices of the USD Index can be viewed as more important as well. The neckline of the inverse head-and-shoulders pattern that’s based on the closing prices is currently at about 95.25. Today’s pre-market low (so far) is 95.68, so the USD Index didn’t invalidate the breakout above the inverse H&S pattern in terms of the closing prices. Consequently, even though we may see some short-term weakness in the USD Index (by the way, we cashed in our profits from USD-long forex positions yesterday, before today’s decline), the main trend remains up for the following weeks and months.

Moreover, please note that the reflective nature of the 2017 decline and 2018 upswing remains in place and back in 2017 the USDX moved a bit below the dashed, red line, relatively close to the dashed blue line. Even if the USD Index declines even to the neckline of the short-term inverse head-and-shoulders pattern (95.25), the above analogy will remain intact, and it will continue to favor higher prices in the following weeks and months. The outlook, therefore, remains bullish for the USDX and bearish for the precious metals market.

Since both: gold and silver are practically where they were when we published yesterday’s Gold Trading Alert, all the points that we made remain up-to-date, especially the one about the possible short-term volatility:

The implication is that this build-up in transactions that were not made but are planned may cause bigger volume today and in the rest of the week along with increased volatility. We saw something similar in late February 2018, when gold declined on very low volume. What followed was a quite sharp upswing that was invalidated before the end of the session. There are also bearish examples. For instance, in early August 2018, low volume readings were followed by a big decline.

There were also cases when low volume was not followed by anything special, so the quality of the signal is not particularly high, but it’s important to keep the above in mind nonetheless. Why? So that any temporary price upswing doesn’t come as a surprise. Just like what we saw in February 2018, or like what we saw two years ago after Trump’s victory, the upswing would likely be very temporary. To be clear, even if we see a temporary upswing, we don’t expect it to be even close to the size of the upswing that followed Trump’s victory. The latter was a huge surprise to the markets and implications appeared very significant. We are unlikely to get a big surprise this time and the implications will not be as significant the previous ones.

The more important implication of the US elections is that they will be over soon. Sounds trivial, but it’s important that the tensions will subside. It’s likely one of the main factors that’s been preventing the precious metals market from declining.

While we’re discussing the situation in the USD Index, we would like to take this opportunity to reply to one of the questions that we recently received.

Inverse H&S in the USD Index – Too Slanted?