Gold & Silver Trading Alert originally sent to subscribers on March 5, 2015, 8:04 AM:
Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are keeping the stop-loss levels at their current levels, which means that we are effectively keeping some gains locked and at the same time we’re allowing the profits to increase.
Precious metals declined once again and the HUI Index moved more visibly below its 2013 low. What are the implications?
The precious metals sector might be ready to move much lower soon. We still can’t rule out another corrective upswing, but it doesn’t seem that adjusting the current full short positions is justified from the risk/reward perspective. Today’s alert is going to be short as almost nothing changed yesterday and all points that we made in yesterday’s alert remain up-to-date.
Let’s take a look at gold’s short-term performance (charts courtesy of http://stockcharts.com).
Gold moved lower once again, but didn’t break below the $1,200 level. Once it does, the decline will likely accelerate.
Interestingly, the Stochastic indicator based on daily prices just flashed a sell signal. Please recall that on Feb. 12, right before we saw the preceding buy signal (and expecting to see it), we wrote the following:
Please note that the Stochastic indicator based on the daily prices is visibly below 20 and if we see some kind of strength, it will flash a buy signal. Based on the long-term picture, this signal is not likely to lead to a major rally, but let’s keep in mind that there have been quite a few cases when we saw a small counter-trend rally after similar signals, that were followed by further declines. Please consider the action that we saw after Nov. 11, 2013 and Aug. 25, 2014 - gold rallied by $25 or so and then declined once again. At this time we would not be surprised to see a move up from $1,200 to $1,220 - $1,230 that would be followed by further weakness.
That’s exactly what we’ve seen – gold moved a bit above $1,220 and declined once again. Moreover, the sell signal from the daily Stochastic indicator flashed at lower prices than the preceding buy signal, so not following this indicator was definitely a good idea. The Stochastic indicator is indeed useful for precious metals investors, but only if we use it based on weekly closing prices, not daily ones.
The second chart that we would like to discuss today is the one featuring gold stocks.
We previously commented on the above chart in the following way:
(…) it seems that this decline is not over and that miners have further to fall. (…) The key declining resistance line is currently at about 200, so the odds are that even if gold stocks move higher, they will not move above this level.
However, we have not seen a move higher in the last few days – we saw declines, also yesterday, when gold stocks declined more than gold. Overall gold has declined by 0.84% so far this week and the HUI Index has declined by 4.57%. The previous outperformance of gold stocks has evaporated and gold miners are once again declining, also relative to gold. The implications of the above are bearish and we can say the same about the HUI’s visible move back below the 2013 low.
The above remains up-to-date, and the fact that the move back below the 2013 low is clearly visible from the long-term perspective serves as a bearish confirmation. The outlook remains bearish and it seems that we will have an excellent buying opportunity in several weeks / months.
On a side note, the USD Index is moving close to its long-term resistance level, but based on the recent lack of correlation between gold and the USD, the implications of any move lower in the USD Index or of a post-breakout rally would be rather unclear, so we are not focusing on this market at this time.
Overall, we can summarize the situation in the precious metals market in the same way as we did previously:
Summing up, while we are already seeing some kind of corrective upswing, it doesn’t seem to be justified from the risk/reward perspective to adjust the current profitable positions. The profits may get smaller temporarily, but the odds are that they will become even greater as the medium-term trends remain down and the medium-term sell signals remain in place.
As always, we’ll keep you – our subscribers – informed.
To summarize:
Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks with the following stop-loss orders and initial (!) target prices:
- Gold: initial target level: $1,180; stop-loss: $1,254, initial target level for the DGLD ETN: $75.23; stop loss for the DGLD ETN $63.16
- Silver: initial target level: $15.70; stop-loss: $17.63, initial target level for the DSLV ETN: $66.25; stop loss for DSLV ETN $45.40
- Mining stocks (price levels for the GDX ETN): initial target level: $18.40; stop-loss: $22.17, initial target level for the DUST ETN: $18.99; stop loss for the DUST ETN $11.32
In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:
- GDXJ: initial target level: $23.37; stop-loss: $28.37
- JDST: initial target level: $12.30; stop-loss: $7.00
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.
The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the automated tools (SP Indicators and the upcoming self-similarity-based tool).
As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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