Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Stocks declined. The USD Index declined. Silver declined. Miners declined. Finally, gold declined as well. If the USD had been rallying, we could be speaking of a major deflationary wave, but it declined as well. What’s going on and, more importantly, what are the implications for the precious metals sector?
What’s going on is that no market can move in a straight line up or down and the main stock indices are no exception to this rule. A bigger decline was overdue and that’s what we’re seeing now. The world is not ending. The long-term bull market in the stock market and other assets is likely not ending. The long-term rally in the USD is likely not ending. They declined sharply – yes – but that’s not something that hadn’t happened previously and what was not expected. In fact it’s likely that the previous trends will be resumed sooner rather than later. The previous main trend for the precious metals sector, however, is down.
Let’s take a closer look (charts courtesy of http://stockcharts.com).
In yesterday’s alert we wrote the following:
However, more significant resistance levels remain just above where gold is right now. The 61.8% Fibonacci retracement and the declining resistance line coincide at about $1,170, which is our current target for the yellow metal. The RSI indicator moved above our previous interim target area and at this time it’s likely to move slightly above 70 before topping. This means that gold is likely to move higher but not significantly so.
Gold moved to $1,169.80, so effectively it moved to the mentioned target level, before declining. More importantly, it declined on huge volume, which is a very bearish sign. Moreover, we saw a sell signal from the Stochastic indicator and it very often corresponded to major local tops in the past. The implications are bearish.
In the case of silver, the breakouts above the 20- and 50-day moving averages were just invalidated on huge volume, so the implications are bearish. The move below the declining resistance line was not invalidated, so they are not extremely bearish for the short term.
In the case of mining stocks, it’s hard to find a bullish sign. Miners declined significantly below the rising short-term support line and it looks like the next major downleg is just starting. The previous small breakout above the declining medium-term resistance line was invalidated, which was a bearish sign and yesterday’s decline serves as a confirmation. Until yesterday’ session, the above chart didn’t have bearish implications, but it does now.
On a side note, we didn’t mention the price of mining stocks in yesterday’s second alert, but, for future reference, we would like to note that we sent / posted the second alert a few minutes before 2 PM and the GDX was trading at about $15 at that time (precisely, the alert was posted at 1:54 PM and according to finance.yahoo.com the GDX was at $14.99 at that time). Consequently, we took profits from the long position off the table right before the biggest part of the daily decline and we actually profited on this move as well thanks to the short positions.
How significant is all the above, before we consider the general stock market and the USD Index? Quite significant – it’s bearish, but not extremely bearish.
Taking a closer look at the USD Index, we see that the actual implications for the precious metals market are worse than one would think. The first “problem” is that the USD Index’s decline didn’t cause a major rally in the metals and miners. The second “problem” is that the USD Index seems to be likely to reverse its direction soon anyway. The border of the rising trend channel, the 38.2% Fibonacci retracement and the long-term horizontal support level were reached or almost reached during yesterday’s session, which makes a comeback of the U.S. currency quite likely. Overall, the USD Index is likely to rally sooner rather than later (and we’re discussing details in our Forex Trading Alerts), so the precious metals market is likely to move lower sooner rather than later.
Other than the above, we don’t have much more to say about yesterday’s decline and its implications:
Generally, the most visible bearish sign is the analogy to the October 15, 2014 session and our yesterday’s comments on the above remain up-to-date:
On Oct 15 2014 the S&P 500 declined significantly (after a big slide) and reversed in a major way. It was not the final bottom, but a day ahead of it. It looked very (!) similar to what we’re seeing today.
What happened on other markets? Was the session at least somewhat similar in them as well? Not only somewhat, but very.
That was a few days before gold’s local top and before a great shorting opportunity.
Silver was not outperforming before this local top, but there was significant intra-day volatility at that time. We’re seeing something similar also today and in the past few days.
After the initial sharp rally, mining stocks started to disappoint once again and Oct 15 2014 was a great day to be moving from long to short positions. Miners were rallying sharply recently, but started to underperform recently as well.
What did the USD do? It declined sharply to a significant support level (back then it was the 40-day moving average and right now the May and June 2015 lows serve as support - the USD Index moved temporarily below them but it’s once again above these levels at the moment of writing these words).
The implications of the above similarity are very bearish, and so is the precious metals sector decline despite a major slide in the USD Index.
Summing up, we believe that the outlook for the precious metals market deteriorated significantly yesterday. Gold moved to its previous major high, while silver and miners declined. The analogy to the only similar session (Oct. 15, 2014) makes us think that much lower prices are in the cards. In fact, taking all the signals that we saw yesterday into account makes us think that doubling the size of the short position is justified from the risk/reward point of view.
As we promised yesterday, we are providing targets and stop-loss details. Both are relatively far from the current price levels and the reason for this is that gold and the rest of the precious metals sector could still move higher temporarily (which is unlikely, though) and this move – perhaps to $1,200 or so – would not invalidate the bearish outlook. We are not focusing on day-trading here (even though we already have profits on this trade thanks to the last 2 hours of yesterday’s session and today’s pre-market decline in gold) – we are focusing on the next big downswing, which has a much better risk/reward ratio than betting on a short-term decline. Consequently, even if metals and miners move higher (again, which is unlikely) we are willing to accept the temporary move higher as it is very unlikely that it would result in a major rally. On the other hand, if the decline doesn’t start right away, it could start after a $1 “rally”, after a $2 “rally” or a $10 rally in gold or something along those lines – it seems much better to stay short even if that happens as the following action is likely to be well worth it and the risk of missing it would be too high.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (full) in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:
- Gold: initial target price: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
- Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
- Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54
In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:
- GDXJ: initial target price: $16.27; stop-loss: $24.33
- JDST: initial target price: $16.98; stop-loss: $3.42
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 Tools and Indicators.
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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