Ambiguous Rallies

tools spotlight

Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

The USD Index barely moved yesterday and it declined in today’s pre-market trading, while gold, silver and mining stocks moved higher once again. What are the implications? Does the PMs’ strength relative to the USD indicate higher prices on the horizon?

In short, it seems unlikely. It’s more likely the case that yesterday’s pause in the USD Index was simply similar to other bottoms in the USD – there were quite a few cases when there was an additional day after a big daily slide when the USD didn’t do anything and only after this pause did the USD rally or form the final bottom.

Let’s take a closer look (chart courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The most recent case, when the USD paused at the bottom was seen on June 30th, and the previous one took place on June 7th.

Considering the above, our previous comments on the USD Index remain up-to-date and so do the final implications:

The most important details regarding Friday’s decline remains unchanged – the decline took place exactly at the turning point, which suggests that we will see a reversal very soon – perhaps event today.

The daily RSI indicator also supports a turnaround as its very close to the 30 level, which very often (please note the red arrows on the above chart) corresponded to bottoms. The USD Index also reached the lower border of the declining trend channel. To be precise, it moved a bit below it, but the same thing happened in late June and that proved to be a local bottom anyway and – more importantly – this was enough to start a sizable downswing in gold and silver.

In today’s pre-market trading, the USD Index moved to 94.609 (Bloomberg data), which is a bit below the 23.6% Fibonacci retracement. This support is something that could stop the decline. What’s more interesting, however, is gold’s and silver’s lack of reaction to the pre-market decline. A decline of about 0.5 is something significant, which should theoretically generate a visible ($10+) rally in gold. At the moment of writing these words, gold is barely $5 higher (silver is 8 cents higher), which is next to nothing. The implications of this underperformance are bearish.

The second important detail that we saw yesterday comes from the gold market.

Short-term Gold price chart - Gold spot price

Namely, gold moved higher on very low volume, which is a bearish sign – it shows that the buying power is drying out and that the rally’s days are likely numbered.

In terms of price, gold moved higher, but only to the two resistance lines (one rising and one declining). It had already closed above the declining black resistance line on Friday, so yesterday’s $6 upswing didn’t change much as far as breakouts and breakdowns are concerned.

HUI Index chart - Gold Bugs, Mining stocks

GDX - Market Vectors Gold Miners - Gold mining stocks

Gold stocks continued to underperform gold. While they did move higher and closed the session above the declining short-term resistance line, the breakout was tiny and very doubtful.

The reason is that the HUI Index (the same was the case with GDX) reversed before the end of the session and closed it visibly below the session’s high. That shows intra-day underperformance of gold, which is a bearish sign for the following days. That’s important, because weakness here implies the invalidation of this small breakout, which by itself will serve as a bigger sell sign and perhaps a start of a bigger decline. Based on multiple bearish factors that we discussed in yesterday’s alert, you know that it takes little for a big slide to start. Yesterday’s weak rally in mining stocks might have been the sparkle that starts a big fire.

Summing up, yesterday’s session didn’t invalidate multiple bearish points that we had made in our previous alert and there are even some bearish implications of yesterday’s upswing. Namely, gold moved higher on tiny volume and mining stocks showed weakness on an intra-day basis. Overall, the outlook remains very bearish for the following weeks. As we had already written previously, we could see higher prices in the coming days, but much lower prices in the coming weeks and months. Any strength here is likely to be only temporary.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:

Gold: initial target price level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37

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: $14.13; stop-loss: $45.31
JDST ETF: initial target price: $417.04; stop-loss: $43.12

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)

Insurance capital (core part of the portfolio; our opinion): Full position

Important Details for New Subscribers

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

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 signs 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 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.

=====

Latest Free Trading Alerts:

This month, the World Gold Council (WGC) released a new edition of Gold Investor. What can we learn from the report?

WGC’s June Gold Investor: Gold in Digital World

=====

Hand-picked precious-metals-related links:

Investors Are Pouring Money Into Silver ETFs

Gold lacks urgency to rally further

=====

In other news:

Dollar Falls as U.S. Reform Hopes Dim; Stocks Drop: Markets Wrap

Fed to announce balance sheet unwind in September, hike rates in fourth quarter: Reuters poll