Gold & Silver Trading Alert: The Silver Slide

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

The white metal more or less erased the gains of the last 2 weeks in just one trading session. Is it a fake move (the opposite of the moves to the upside we’ve seen many times in the recent past) and will a rally follow or is the next major leg to the downside already underway? Let’s move right to the charts (charts courtesy of http://stockcharts.com).

Short-term Silver price chart - Silver spot price

In short, the latter is much more likely due to multiple bearish signals that are currently in place that we covered in yesterday’s long alert. Moreover, the decline materialized on relatively high volume, so it seems that it is indeed the true direction in which the market is now headed. No wonder – silver just bounced off the major declining resistance line that we discussed in yesterday’s alert and that we featured on the long-term silver chart.

Short-term Gold price chart - Gold spot price

In yesterday’s alert we wrote the following about gold:

The situation on the short-term gold chart didn’t change last week. The trend remains down and we are seeing a consolidation within it. In terms of daily closing prices gold is well below the July and August 2015 lows – there breakdown remains in place and implications are bearish.

Gold moved higher before closing the week but the corresponding volume was very low, so the session was not really bullish. In fact, we can likely say the opposite (it was not bearish to a great extent as the size of the volume was affected by early close – 1:45 PM on December 24).

The above remains up-to-date. The volume during yesterday’s small decline was not huge, but it was higher than what we had seen during the previous session, when gold had declined. The overall implications are rather bearish. We can say the same about the implications of the tiny sell signal from the daily Stochastic indicator. The daily version of this indicator is not that reliable, but still, sell signals have been more reliable than buy ones in the past several months. Consequently, we have yet another small bearish indication.

GDX - Market Vectors Gold Miners - Gold mining stocks

In the case of mining stocks, we also have bearish implications of the price-volume link. Miners declined on volume that was higher than what we had seen during the previous small upswing. Consequently, we find yesterday’s price action bearish even though miners weren’t able to get back below the declining support / resistance line.

The most visible and important action that we saw yesterday was seen in neither of the above parts of the precious metals sector. It was seen outside of the sector – in the USD Index.

Short-term US Dollar price chart - USD

In the previous alert we wrote the following:

The USD Index moved once again lower, but didn’t move visibly below the 50-day moving average, the 38.2% Fibonacci retracement level and the index remains visibly above the rising support line. Based on the latter, the possible downside seems very limited. Consequently, it seems that the short-term upside for the precious metals sector is limited as well.

The USD Index moved right to the mentioned rising support line. Consequently, it’s unlikely that it will move even lower (visibly lower, that is) and the implications are bullish for the USD. The implications for the precious metals market are bearish.

Generally, the situation became more bearish because of the price-volume link seen in gold, silver and mining stocks and because of the big slide in silver, however, the outlook had already been bearish before yesterday’s session, so overall not much changed.

In our opinion, we are in a similar situation to what we saw in mid-August 2014, in mid-June this year, or in the final part of 2012. If the major move that is going to follow is to the downside, then a daily or relatively small upswing is not that relevant - it’s most important not to miss the big move and thus the speculative short position seems to be justified from the risk/reward perspective. It seems that the current speculative short position in the precious metals sector will prove very profitable in the following weeks even if it will not be the case for the next few days. After all, our target of $960 in gold is well below the current market price and if the analogy to the 2013 slide is indeed in place, then we will likely not have to wait long before this level is reached.

The upcoming year will likely start with major events in the precious metals world and paying extra attention to this market for the first few months should prove well worth it.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:

Gold: initial target price: $973; stop-loss: $1,107, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $81.84
Silver: initial target price: $12.13; stop-loss: $14.83, initial target price for the DSLV ETN: $101.84; stop-loss for DSLV ETN $57.49
Mining stocks (price levels for the GDX ETF): initial target price: $10.23; stop-loss: $15.47, initial target price for the DUST ETF: $31.90; stop-loss for the DUST ETF $10.61

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 ETF: initial target price: $15.23; stop-loss: $21.13
JDST ETF: initial target price: $52.99; stop-loss: $21.59

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.

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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