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 Fed raised the rates and provided the market with additional confirmation that it believes the economy is doing great – from the fundamental point of view implications for gold are negative. What about the technical ones? What happened yesterday could be even more important from the technical point of view than from the fundamental one (as bearish news from the Fed were more or less expected). Let’s jump right into charts, starting with gold (charts courtesy of http://stockcharts.com). More precisely, we’ll start with the GLD ETF as the closing prices for gold’s and silver’s futures prices as reported by Stockcharts.com are too different from the spot closing prices. Besides, the analysis of ETFs provides us with a few extra details that are important at this time.
GLD’s Intra-day Reversal
GLD moved higher right before the comments from the Fed, silver outperformed greatly while miners lagged greatly – that was a perfectly bearish combination that we usually see before tops. Silver’s moves in such cases should not be trusted and can even be a signal for opening short positions.
Moving back to GLD’s price changes, we see that the entire pre-Fed-comments rally was erased and GLD even closed a bit below the previous close. It was a big reversal, which took place on huge volume. That’s a very bearish sign on its own, but it is extremely bearish when you compare it to what happened in the first half of November 2016.
In both cases, we initially saw a monthly rally that ended with sharply higher prices on big volume. Then we saw lower prices on lower volume and finally the big daily reversal on huge volume. In both cases, the intra-day high of the reversal didn’t take GLD back above the previous high.
With significant similarities comes similar follow-up action. Back in November, GLD started a decline that took it $14 lower (about $140 in case of gold), so the implications here are very bearish.
We saw the same kind of reversal in case of silver and as you can see on the above chart (marked with black arrows), the implications are definitely bearish – the big intra-day reversal preceded declines many times in the past and the efficiency of this signal was very high.
Please note that if a sizable decline materializes here, and SLV breaks below the declining support line (currently at about $14.7), it will complete a bearish head-and-shoulders pattern and the next target for SLV will be based on it – the size of the head of the pattern is about $2, and applying it to the price of the breakdown (possibly $14.6) would provide us with a target of $12.6. In other words, SLV could quite quickly move to its 2015 low.
Sounds unrealistic? Please remember that SLV plunged from above $19 to below $9 rather quickly back in 2008.
But wait – there’s more.
From the short-term point of view, we see yet another bearish sign – silver just rallied and formed the major reversal right before its turning point – that makes the turning point a bearish factor instead of being a bullish one. Additionally, yesterday’s intra-day rally took SLV to the 50-day moving average after which it declined once again – in other words SLV just verified its breakdown below this moving average.
Mining Stocks’ Confirmation
Mining stocks broke below the previous lows, the 50-day moving average, flashed yet another sell signal in case of the Stochastic indicator and it all happened on huge volume. Moreover, they once again underperformed gold. The short-term outlook was already very bearish based on what we’ve seen in gold and silver, but the above makes it even more bearish.
Summing up, the outlook for the precious metals market was very bearish and yesterday’s session provided us with multiple additional confirmations. If the size of our short position wasn’t 150% of the regular short position already, we would have increased it based on what happened yesterday.
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: exit-profit-take 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
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 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, Gold & Silver Fund Manager
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