Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks (GDXJ) are justified from the risk/reward point of view at the moment of publishing this Alert.
Some might consider an additional (short) position in the FCX.
In my Friday’s intraday Alert, I wrote that the post nonfarm-payroll rally wasn’t here to stay. It didn’t.
As it’s always the case, it’s a good idea to check for previous analogous situations before claiming that “this move” is real or fake. This time, it was the above-expected employment numbers that caught market’s attention, and I marked the cases, when the market was positively surprised in the past with vertical, dashed lines. On Friday, right after the market moved higher, I wrote the following:
“In May, June, and early September those [marked moments] were clear tops. There was some immediate-term strength, and it was a fake move that was then followed by bigger declines.
The October case was followed by a rally, and the December case was followed first by a decline, and then by a rally.
Overall, the implications are either neutral, or a bit bearish. In other words, like I wrote above, it’s a non-event.
The GDXJ moved back to its rising, orange resistance line, further verifying it as resistance – the breakdown was not invalidated, and the bearish implications thereof remain intact.
Silver moved higher, but it also moved higher in perfect tune with what I prepared you for earlier today.
The white metal moved back to the previously broken neck level of the head-and-shoulders pattern, which is a completely normal phenomenon. It’s not bullish, it’s a common thing to see at this point.
As the pattern gets verified, the bearish case gets stronger.
The enormous opportunity in the precious metals sector remains intact.”
After Friday’s close, and given today’s pre-market move higher, it became obvious that silver price has indeed verified its breakdown below the head-and-shoulders pattern. The implications are very bearish, as silver’s decline from the neckline is likely to be at least as big as the size of the pattern’s head. This implies a decline to at least the October lows.
Please move your attention once again to the first chart from today’s analysis.
While silver verified a breakdown below its head and shoulders pattern, the junior mining stocks verified their breakdown below the rising, short-term support line, which has now turned into resistance.
That’s not all as far as indications from Friday’s session are concerned.
If you look at how far silver rallied and compare it to the performance of gold and mining stocks, you get a very interesting indication.
Gold rallied a bit, miners were pretty much flat (in fact, the GDXJ ended the day slightly lower), while silver moved visibly higher.
Silver’s short-term outperformance of gold is a bearish sign.
Miners’ short-term underperformance of gold is a bearish sign.
We just saw both.
What does it mean? It means that today’s pre-market downswing is not accidental. It’s not a quick, one-time event, either. It’s a continuation of a much bigger decline.
The rising support line was broken, and the breakdown was verified.
On Friday, gold moved back and forth, hesitating what to do. Today, it’s clear that it made up its mind. And – unsurprisingly (at least if you’ve been following my analyses) – gold is moving lower once again.
As a very, very quick reminder, gold is after a powerful weekly reversal that was then followed by yet another, smaller weekly reversal. This is an extremely bearish combination for the following weeks and what we see now is one of the results. More of them are likely to follow, and it’s possible to reap rewards based on those moves.
One might think that the stock market would be rallying based on positive news from the jobs report…
But it didn’t.
If one paid attention to the technical side of the S&P 500 Index futures market, it would be obvious to them that the next move will be to the downside based on the clear invalidation of the breakout to new all-time highs.
Invalidations are immediate sell signals, so it’s no wonder that we’re seeing decline’s continuation (and that Paul took profits when the year started). The declines are also on the horizon for many commodity stocks. This is important for the precious metals sector, especially for silver and junior mining stocks as they are particularly connected with the general stock market.
So, yes, silver and miners fell decisively this year, and it took just a relatively small decline in the stock market to fuel those declines. When stocks really fall, the impact on both markets is likely to be really significant.
This upcoming slide can be profitable on its own (through profiting on the price declines), but also if one is simply waiting to buy silver or mining stocks (or gold) at lower prices. After all, in order to make money on any market, one needs to buy low and sell high (some choose to buy high and sell higher, but that’s an exception rather than rule). This upcoming decline is likely to provide multiple opportunities – don’t miss them, don’t let yourself be harmed by them. And, ideally, profit from them.
Again, as always, I’ll keep you – my subscribers – updated.
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Overview of the Upcoming Part of the Decline
- It seems that the recent – and probably final – corrective upswing in the precious metals sector is over.
- If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400 and GDXJ close to $15 . This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
- The above is based on the information available today, and it might change in the following days/weeks.
You will find my general overview of the outlook for gold on the chart below:
Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
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Summary
To summarize, the declines across the precious metals sector that we saw this week are most likely just a small beginning of a much bigger move lower.
The key thing about the precious metals market is still gold’s extremely important weekly reversal that we saw over three weeks ago, which puts the following rallies in the proper context. Last week’s weekly reversal confirms the bearish nature of those price moves.
The invalidation of breakouts above previous highs as well as the clear relative weakness of mining stocks compared to gold as well as silver’s breakdown below its head-and-shoulders pattern confirm the bearish outlook.
Additionally, the peak in interest in “how to buy gold” searches makes the current situation even more bearish, as this has been a very accurate detector of massive, medium-term tops.
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To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:
Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $28.12; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding exit level for the JDST: $10.54; stop-loss for the JDST: none.
For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway.):
Silver futures downside exit price: $20.22 (stop-loss: none)
SLV exit price: $18.62 (stop-loss: none)
ZSL exit price: $24.98 (stop-loss: none)
Gold futures downside exit price: $1,812 (stop-loss: none)
Spot gold downside exit price: $1,792 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the exit price: $8.43 (stop-loss: none)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the exit price: $19.49 (stop-loss: none)
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Optional / additional trade idea that I think is justified from the risk to reward point of view:
Short position in the FCX with $27.13 as the short-term profit-take level.
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
Whether you’ve 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 we describe the situation for the day that the alert is posted in the trading section. In other words, if 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 to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).
Additionally, 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 (as 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: UGL, GLL, AGQ, ZSL, 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" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) 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 daily 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. Furthermore, 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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On a side note, while commenting on analyses, please keep the Pillars of the Community in mind. It’s great to provide points that help others be more objective. However, it’s important to focus on the facts and discuss them in a dignified manner. There is not much of the latter in personal attacks. As more and more people join our community, it is important to keep it friendly. Being yourself, even to the point of swearing, is great, but the point is not to belittle other people or put them in a position of “shame” (whether it works or not). Everyone can make mistakes, and everyone does, in fact, make mistakes. We all here have the same goal: to have a greater understanding of the markets and pick better risk-to-reward situations for our trades. We are on the same side.
On another – and final – side note, the number of messages, comments etc. that I’m receiving is enormous, and while I’m grateful for such engagement and feedback, I’m also starting to realize that there’s no way in which I’m going to be able to provide replies to everyone that I would like to, while keeping any sort of work-life balance and sanity ;) Not to mention peace of mind and calmness required to approach the markets with maximum objectivity and to provide you with the service of the highest quality – and best of my abilities.
Consequently, please keep in mind that I will not be able to react / reply to all messages. It will be my priority to reply to messages/comments that adhere to the Pillars of the Community (I wrote them, by the way) and are based on kindness, compassion and on helping others grow themselves and their capital in the most objective manner possible (and to messages that are supportive in general). I noticed that whatever one puts their attention to – grows, and that’s what I think all communities need more of.
Sometimes, Golden Meadow’s support team forwards me a message from someone, who assumed that I might not be able to see a message on Golden Meadow, but that I would notice it in my e-mail account. However, since it’s the point here to create a supportive community, I will specifically not be providing any replies over email, and I will be providing them over here (to the extent time permits). Everyone’s best option is to communicate here, on Golden Meadow, ideally not in private messages (there are exceptions, of course!) but in specific spaces or below articles, because even if I’m not able to reply, the odds are that there will be someone else with insights on a given matter that might provide helpful details. And since we are all on the same side (aiming to grow ourselves and our capital), a ton of value can be created through this kind of collaboration :).
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
