Briefly: In our opinion, full (150% of the regular size of the position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
In yesterday’s alert, we warned that the signs that seemed bullish, like the gold stocks’ strength, should not be taken at their face value as there were multiple signs pointing to a reversal. We have just seen one, not only in the case of the USD and the yen, but also in the case of the entire precious metals market, including gold stocks. The apex technique points to important turnarounds - how will they impact metals and miners in the upcoming days and weeks? Have we just seen this week’s and this month’s top?
It seems quite likely. Let’s take a look at the charts and see why, starting with the currencies (chart courtesy of http://stockcharts.com).
In our previous alert, we wrote the following about the above USD Index chart:
The context is that the two of the sharpest rallies of the past 20 years and two other major upswings started with a small breakdown. This includes the 2014 bottom and the subsequent rally.
Besides, please note that the rally that we saw in the second half of 2015 started after the USD moved a bit below the previous low in mid-2015. The 2016 rally started after the USD moved a bit below the mid-2015 low. The late 2017 rally started after the USD moved a bit below the 2016 low. Now the USD moved a bit below the 2017 low.
If something analogous to what we just saw happened in few of the most bullish situations in the recent and not-so-recent history, then how can we view it as something bearish?
We shouldn’t. At least not yet. If the USD Index continues to slide, then at some point the situation will indeed become bearish, but a single session is definitely not enough to make the picture bearish.
There is a declining support line that could stop the current decline – the one based on the 2015 and 2016 lows. It’s currently at about 90.2.
Since we wrote the above, the USD Index moved to the mentioned declining support line and moved back up. At the moment of writing these words, it’s trading at about 90.6 – not very high, but well above the 90.2. In other words, we saw a reversal, which is a bullish piece of information.
During yesterday’s session, we saw an additional move to the support line and a subsequent rally. The line once again proved to be a useful support level and another show of strength can be viewed as a bullish sign.
In the previous alert, we also wrote the following:
One of the reasons behind the USD’s decline and gold’s upswing was the rally in the Japanese yen. Please note that the value of the Japanese currency moved higher, but it stopped at the rising red resistance line. The same line stopped the late-2017 rally, so we could see a repeat of the above also this time. Still, back then the yen moved temporarily above the line before reversing, so Friday’s action might have not been the final top. Today’s intra-day top, however, might already be the final reversal.
The mentioned line was temporarily broken yesterday, but the yen closed the session back below it. The top might already be in or it could be at hand.
The yen moved lower after Tuesday’s temporary breakout, which makes the above even more probable. This is the case not only because invalidations of breakouts are bearish. It is the case also because that’s exactly the same thing that we saw during the yen’s previous attempt to move above its rising resistance line. Similar cases tend to be followed by similar outcomes. Back then a decline followed – also in the precious metals market.
What happened in gold in the meantime?
In yesterday’s alert, we wrote that gold seemed to have reversed and that the reversal took place on sizable volume (highest since early September 2017), which suggested that the session was meaningful. We noted, however, that back in September, an analogous session had been seen right before the top, but it was not the top, so the implications were bearish, but not necessarily for yesterday.
Interestingly, gold moved higher during the session, but that was only an intraday move that was erased shortly. Gold ended the session below $1,330. It’s not visible on the above chart, though, likely due to a data error. At the moment of writing these words, gold is trading at $1,327 – more or less at the January 4h intraday high. Given the new daily decline, the top may be in.
Please note that the gold-USD link worked exactly as we expected it to. Gold resisted the USD’s decline to some degree and it reacted strongly to the USD’s intraday rally. If the USD just keeps trading sideways, gold is likely to decline based on the way it was reacting to the USD’s movement yesterday and in the past few days.
In other words, gold’s bullish vulnerability is becoming gold’s bearish vulnerability.
Just as the closing price for gold doesn’t seem to represent the true price, the same seems to be the case with the silver chart. The white metal is trading at about $17 and yesterday’s silver’s closing price from Kitco was below $17. In other words, the decline in silver that was likely to be seen based on its extreme volume reading seems to be already taking place.
Still, to be objective, let’s keep in mind that it doesn’t have to work in this way based on the past patterns. Similarly epic volume meant that the top in silver was in or at hand, so it could just as well be a few days away.
In yesterday’s alert we wrote the following on the above HUI Index chart:
Gold stocks are after a move above the declining resistance line and at a level that stopped rallies several times in the past (marked with ellipses on the above chart). This, along with the RSI above 70, makes us doubt the bullish nature of the recent rally and strength relative to gold.
It seems that we were correct to doubt the breakout as it was just invalidated. As we’ve discussed several times previously, unlike breakouts, invalidations of breakouts don’t require confirmations. Consequently, the implications of yesterday’s move are already strongly bearish.
We also wrote the following:
There is also an interesting rule in the case of the sell signals from the Stochastic indicator – it turned out that every other sell signal was followed by a bigger decline and the remaining ones were just initial tops during rallies. This has been the case for over a year now. If this rule is to continue, then the upcoming sell signal will be the real one. All mining stocks have to do for the signal to materialize is to decline a bit. In other words, once miners decline, they are likely to decline significantly.
We haven’t seen the sell signal just yet, but it seems one is coming as yesterday’s invalidation is likely to be followed by at least a brief decline. The brief decline is something that would likely trigger a sell signal in the Stochastic, opening a technical way to much bigger declines.
Another reason that made us doubt the HUI’s breakout was the situation in the ratio between gold stocks and other stocks.
We wrote the following:
This is especially the case given that there was no invalidation of the breakdown in the case of the gold stocks to the general stock market ratio. Yes, miners moved higher yesterday, while the main stock indices didn’t, but that’s just one session. One swallow doesn’t make a summer.
The above chart is a weekly one and the week is not over yet, but it’s already clearly visible that we just saw the ratio touching the resistance line without breaking above it. The breakdown below this line now seems complete – it was just verified. The implications are bearish.
In Monday’s alert, we wrote the following regarding the apexes of the triangles in the GDX and Euro Index charts:
[on the Euro Index] What might be even more important, however, is that the mentioned resistance line together with the rising support line create a triangle that has an apex in the second half of January. This indicates that we can expect some kind of turnaround at that time. This wouldn’t be much of a deal if…
If we didn’t get exactly the same indications from an entirely different triangle in mining stocks. The size of the triangle and the parts of the capital market are entirely different so both patterns perfectly confirm each other.
Some kind of a big turnaround is likely to take place in the 3rd week of January or very close to it.
In terms of weekly closing prices and lines based on them in the GDX, the apex of the triangle was between last week and this week. The Euro Index chart shows that the apex is sometime this week. Overall, it seems the turnaround is at hand.
We have just seen turnarounds in both the Euro Index and the GDX ETF. In fact, this week is currently a decline for the latter. Why do we mention this today? Because the existence of the apex’s triangles strongly indicates that yesterday’s turnarounds were not accidental.
Naturally, all is possible and we could see another small move higher (for instance, the silver chart doesn’t rule out this scenario), but the above apexes make it unlikely. Conversely, they make the scenario in which the metals and miners have already topped a more likely one.
Summing up, the way gold reacted to the USD’s movement yesterday and in the past few days continues to point to lower gold prices, while yesterday’s turnarounds in GDX and the Euro Index suggest that silver’s volume signal is likely to come into play sooner rather than later. In fact, they indicate that the top is already in. Even if this isn’t the case, it seems that the top is at hand. The next big downswing seems to be just around the corner.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full 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:
- Gold: initial target price: $1,218; stop-loss: $1,364; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $38.28
- Silver: initial target price: $14.63; stop-loss: $17.72; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $21.28
- Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $26.14; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $19.78
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: $27.82; stop-loss: $38.22
- JDST ETF: initial target price: $94.88 stop-loss: $37.78
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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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