This week's lack of an imminent launch of a QE3, has set mining shares, as well as bullion, back on their heels as traders have made the shift back towards expecting a further slowdown in global growth and more of a deflationary environment.
This shift is showing up in the decidedly bearish chart pattern now forming in the HUI once again.
If you take a look at the Fibonacci Retracement Levels noted as well as the horizontal support and resistance levels I have marked on this chart, you can see just how closely both correspond with the other.
In the middle of May, price rebounded sharply from the decline that began in late February as the gold shares reached levels of valuation that many believed were excessively low. That brought in some very strong buying which took price to near the 460 mark, a level which happens to be both the bottom of a former consolidation range and the exact HALFWAY or 50% Fibonacci Retracement Level of the entire decline.
Price then retreated as expected with dip buyers coming back in and taking the index back up to 460 once again. This time however, instead of continuing to power higher, the index fell back sharply when the lack of QE3 hit traders between the eyes.
The index failed to hold support near the 440 level, a level which formerly had been resistance on the way up and now became support on the way down. It also corresponded to exactly the 38.2% Fibonacci Retracement Level of that same decline that began in late February.
Technical Analysis's REVERSE POLARITY PRINCIPLE tells us that it should have held if the market were going to continue with a bullish posture. Its failure to do so is therefore bearish for the short term.
The index will now probe lower as it seeks to uncover buying support once again. There looks to be the potential for that support to have emerged near 420 but it is too early to say so with an certainty. Confirmation will only occur if the price moves back ABOVE 442 and holds.
If not, the path of least resistance on this index is lower with the level near 410 the next region where some buying should emerge. Failure to hold there and the index faces the real possibility of heading down towards first 390 and then the recent low near 370.
The onus is firmly on the back of the bulls to perform.
