It’s constructive to look at the other side of your positions to see where you might be wrong.  If you’re long a market a good way to do this is by taking the inverse of the symbol representing your position.  At stockcharts.com, you do this by putting “$ONE:” in front of your symbol and it shows you a chart of the inverse of your position.

I like to do this instead of looking at the leveraged ETFs because they tend to decay over time.  The non-leveraged inverse ETFs are fine but they don’t exist for many markets.  Therefore using “$ONE:” gives you the bear market perspective of anything you want to look at.

Let’s take a look at the bear market in gold stocks that launched in 2011 by looking at $ONE:GDX.  From a Stage Analysis perspective you can see a nice Stage 1 base that developed in 2011 followed by a breakout of the base in 2012.  Then the bear market in gold stocks retested the base which happens a lot in early Stage 2 transitions.  After the retest the bear market was off to the races in 2013 with the recent high occurring in December 2013.  Notice though that in 2014 we are now seeing the 30-week moving average flatten out, and a head and shoulders topping formation has shown up on the chart.  This is classic Stage 3 topping action.

….more analysis & 2 more charts HERE

Gold is getting hammered. 

Yesterday we drew your attention to the rise of the euro-skeptics in the European Parliament… and the potential threat to the stability of the European Union they bring. 

But gold didn’t rally…

You may also be aware that Ukrainian helicopter gunships and paratroopers just stormed Donetsk International Airport in eastern Ukraine, killing more than 50 pro-Russian rebels. 

Hardly stability in the region. 

But gold didn’t rally…

Not to mention the trouble in the South China Sea. The Vietnamese government has accused a Chinese fishing boat of ramming and sinking a Vietnamese fishing boat near a hotly disputed Chinese oil rig. 

But gold didn’t rally…

And don’t forget the flare up in tensions between China and Japan, after what CNN described as a “close encounter” between their military jets in disputed airspace over the East China Sea. 

Over the weekend, two pairs of Chinese fighter jets were scrambled and flew unprecedentedly close to Japanese spy planes, which the Japanese claim were monitoring a joint military exercise between China and Russia. 

But gold didn’t rally. 

Then yesterday, gold plunged 2% – the biggest one-day drop since December.

And as you can see from the chart above, it’s broken to the downside of its “pennant” chart pattern (so called because of its triangular shape). 

Gold had been consolidating around the $1,300-an-ounce level. 

The big breakout to the downside yesterday will be seen by technical traders as bearish for the metal. 

The combination of gold’s refusal to rally in the face of rising geopolitical tensions… plus its bearish move yesterday… mean more short-term pain could be on the way.

Gold moved sharply lower yesterday after days of indecision. Coupled with the break of the support at 1269, a further short-term decline is likely. A support stands at 1238. Hourly resistances can now be found at 1284 (21/05/2014 low) and 1304 (22/05/2014 high).

Ed Note: As Gold seems to be weakening, in case you missed it, Jim Rogers explains in this Saturday May24th article: GOLD IS A BUY UNDER $1,000 AN OUNCE; HERE’S WHY IT COULD GET THERE: JIM ROGERS

Longer term, we are sceptical that the horizontal range between the strong support at 1181 (28/06/2013 low) and the major resistance at 1434 (30/08/2013 high) is a long-term bullish reversal pattern. As a result, a decline towards the low of this range is eventually favoured.

Silver: Bearish breakout of the support at 19.26.

Silver has broken the support at 19.26, invalidating the recent succession of higher lows. Despite the support at 19.05, a new test of the key support at 18.84 is favoured. Hourly resistances are given by 19.39 (26/05/2014 low) and the declining trendline (around 19.72).

In the long-term, the trend is negative. However, the successful test of the support at 18.84 favours a consolidation phase. A resistance stands at 20.41 (24/02/2014 high). Another key support is at 18.23 (28/06/2013 low).

Briefly: In our opinion speculative short positions (half) in gold, silver, and mining stocks are justified from the risk/reward perspective.

The history repeats itself once again – gold just attempted to move higher but failed to ignite anything more than a small daily rally. Let’s see if there’s anything that this can tell us (charts courtesy of http://stockcharts.com).

Click HERE or chart for larger view

There’s one clue. It’s not a very strong one, but at least we have something new to comment on. The last 2 sessions were very similar to what we had seen at the beginning of the month. Back then gold declined quite visibly, so perhaps the same reaction will be seen also this time. In this case, such a decline would have more bearish consequences, as it would take gold below the previous lows and such a breakdown would likely lead to further declines.

Other than that, there’s not much that we can say about the changes in the gold market itself. What we wrote about gold in the previous alert remains up-to-date:

We wrote that the strength that we could see here would likely be temporary. It turned out that the rally that this reversal generated was indeed very small and temporary. We saw another lower intra-day high in gold, and the move higher materialized on low volume. We’re once again seeing this bearish combination. If the USD Index confirms its breakout, gold might finally break below the short-term support.

How far can it go initially? Our best guess at this particular moment (this might change as the situation develops) is the $1,200 level or close to it. One of the ways to estimate the size of a given move is to assume that the move following the consolidation (which we’ve been seeing since the beginning of April) will be similar to the one preceding it. In this case, the move following the breakdown could be similar to the March decline, and such a move would take gold close to the $1,200 level. This level is very close to the 2013 lows, so we expect gold to pause there (but not to end the decline).

There is not much to comment on in case of silver and mining stocks but the situation in the USD Index has changed more visibly.

The U.S. dollar moved higher once again and almost confirmed the breakout above the declining resistance line. Precious metals are not reacting yet. Unless metals start to react to the dollar’s strength (by declining) we will view this as a sign of their strength. For now we still think that the reaction is delayed – not really absent.

One of the reasons for the lack of reaction could be the situation in the silver market.

Click HERE or chart for larger view

Silver is right at its support line. In addition to the 2013 lows this is the key support level that prevents silver from moving much lower – to the $14 – $16 target area. Once this level is broken, silver may and likely will move sharply lower. Being this significant, it’s no wonder that this support line is not easy to break. Since gold, silver, and mining stocks are highly correlated in the short term, it’s also no wonder that silver’s refusal to move lower already is accompanied by a similar refusal in the case of gold and mining stocks.

Summing up, the outlook for gold, silver, and mining stocks remains bearish, but not extremely bearish, which means that we are not increasing the size of the short position just yet. Precious metals are not responding strongly to the dollar’s rallies so far, but it seems that investors and traders are simply waiting for a confirmation of the breakout in the USD Index (there have been cases when the metals’ reaction was delayed in the past).

To summarize:

Trading capital (our opinion): Short positions (half) in: gold, silver, and mining stocks with the following stop-loss orders:

• Gold: $1,326
• Silver: $20.30
• GDX ETF: $25.20

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position