Briefly: In our opinion, full (200% 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 the previous analyses, we emphasized that the situation in the Euro Index was very tense as it was sitting on an important, medium-term support line. We wrote that a breakdown below this line, could trigger the decline in the precious metals sector. We saw the breakdown in the Euro Index yesterday, but instead of a decline, we saw a bullish reversal in mining stocks. Which sign should one trust? What trading position is justified in light of both developments?
Let’s take a closer look at both charts and see what details we can infer from them (chart courtesy of http://stockcharts.com).
The EUR/USD Breakdown
In yesterday’s alert we wrote that the situation in the EUR/USD currency pair remained tense and we wrote that the pair was likely to break below its rising medium-term support line sooner rather than later. We wrote the following:
This support is what’s keeping the currency pair in check, which in turns keeps the USD Index in check. But, i.a. based on the triple-top formation it seems that we’ll see a big breakdown in the euro relatively soon. The implications are bullish for the USD Index and bearish for the precious metals sector.
(…) the thing that we would like to add today is that despite the increased trade conflict tensions the USD’s value didn’t really decrease, which can be a sign that it really wants to move higher, not lower. That’s in perfect tune with our technical analysis of the USDX and also a factor supporting the scenario in which the EUR/USD pair breaks lower shortly.
The breakdown is now a fact – it’s clearly visible even from the long-term perspective. In this case, why didn’t traders react to this development in a more meaningful way? Most likely, because it was just one daily close below the support line. The breakdown is not confirmed yet. There are different ways to approach a confirmation of a breakdown. In the case of the precious metals market, it’s usually best to wait for three consecutive closes before viewing a breakdown or breakout as confirmed. In other markets, a two-day rule is more appropriate. Consequently, if we see the euro below the rising support line at today’s close, it will be make the outlook more bearish, and seeing it below it on Monday as well will fully confirm the breakdown and make the outlook very bearish.
Since the breakdown has not been confirmed yet, it’s no wonder that precious metals traders haven’t fully reacted to it. It doesn’t change the fact that the implications of the breakdown are already bearish.
Miners’… Reversal?
If the outlook is so bearish, then why mining stocks rallied, reversing its early-session decline?
The above question is a bit tricky as it assumes that mining stocks have actually rallied. They did close 10 cents above the previous closing price, but that was less than 0.5%, so it was more of a pause than a rally. The above doesn’t explain the bullish reversal, though.
The key thing is that reversals should be accompanied by huge volume (or at least volume that’s relatively big). Exactly the opposite was the case yesterday – mining stocks reversed on volume that was the lowest in days. This suggests that the reversal was not the result of a fierce battle between bulls and bears that ended in the victory of the former. It means that not much happened during that session and its final price was not very informative. Consequently, there are actually no bullish implications of yesterday’s reversal.
Gold’s Regular Decline
As far as the gold market is concerned, there’s little to comment on as the price of the yellow metal declines in perfect tune with its past patterns marked with blue lines. Our yesterday’s comments remain up-to-date:
Technically speaking, gold reversed on significant volume, which is a classic sell signal. The implications are even greater than based on just the above, because we also have supporting analogies. Namely, this is the kind of reversal that we saw quite a few times before big slides, but after tops in terms of daily closing prices. We marked those cases with red arrows.
The most prominent example is early November 2016 and we can see the remaining ones (that are actually more similar to the current situation) in June 2017, on Dec. 1, 2017 and in late February 2018. They were all followed by declines practically right away and it seems that today’s pre-market decline proves that history is repeating itself.
Silver Tests the Water
During yesterday’s trading, silver moved to this year’s lows, but wasn’t ready to pierce through them yet. It doesn’t mean that the outlook improved, though. The volume on which silver reversed was relatively low and in today’s pre-market trading the white metal is once again at about $16.25, so it’s like yesterday’s session never happened. Consequently, our comments from yesterday’s alert remain up-to-date:
This week’s early strength is now fully invalidated. Actually, in today’s pre-market trading, silver even moved below the late-March low. In the previous alerts, we warned you not to trust the silver upswing and it was indeed followed by lower prices practically immediately.
Please note that for more than a week, silver’s daily declines have been accompanied by volume that’s higher than what we have seen during daily upswings. The implications are bearish.
In terms of the analogy to the pattern that we saw from September 2017 to early December 2017, we are now likely in a situation similar to Nov. 28, 2017 – right before the decline.
Summary
Summing up, the fact that gold reversed its Wednesday’s news-based rally and closed below the pre-news price level, is a very bearish sign for the following days and it suggests that the prolonged consolidation is over. Meanwhile, the next reversal dates are looming – it’s today / on Monday in the case of gold, on Monday in the case of gold stocks, and on April 12th in the case of silver. When there is a clear trend before the reversal date, it’s very easy to interpret it. Unfortunately, in light of the recent news-based back-and-forth movement, it’s currently not straightforward.
The reversal in gold might have already been seen on Wednesday and the yellow metal could decline from here based on the reversal and the decline could take several days (in tune with the blue lines plotted on the gold chart). However, it could also be the case that gold declines sharply today and / or on Monday and bottoms then (or perhaps on Tuesday). At this time, it’s unclear which of these scenarios is more likely, but the final implications are bearish anyway and short positions seem to be well justified. The thing that the above emphasizes is that one should be alert for new developments and act accordingly.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (200% 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: $1,382; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $37.68
- Silver: initial target price: $14.63; stop-loss: $17.33; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $21.48
- Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $23.54; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $21.46
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: $36.14
- JDST ETF: initial target price: $94.88 stop-loss: $41.86
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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