Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks is justified from the risk/reward perspective at the moment of publishing this Alert.

Gold, silver, and miners rallied, while the USD declined - that's how the last week ended. This may appear to be a bullish sign... Until you consider the closing prices. Did gold invalidate its recent head-and-shoulders pattern? Did miners? Did silver break above its declining resistance line? And - most of all - did the USD Index invalidate the breakout above the previous highs? None of the above took place. So, how much trust can gold investors and traders place in Friday's upswing?

Very little. The above-mentioned resistance lines and how the markets performed relative to them is the key takeaway from Friday's performance. And it doesn't look bullish at all. It looks rather normal and the previous signals remain intact.

Let's take a closer look, starting with gold.

This Is That Bullish Gold Upswing?

The yellow metal moved higher, but it only reached the neck level of the previously broken head-and-shoulders pattern. It didn't break above it. And that's the neck level that we get by connecting the previous intraday lows, not the - more meaningful - ones based on the closing prices. Consequently, nothing really changed, and gold is still likely to slide shortly. Let's keep in mind that the target based on the H&S pattern is at about $1,220, so our $1,240 target is actually relatively conservative.

Let's also keep in mind how gold declined in the analogous part of the decline in 2012.

Right now, gold is trading close to the 38.2% Fibonacci retracement level and we expect it to decline to the 61.8% retracement - at about $1,240.

In December 2012, when gold was trading close to the 38.2% Fibonacci retracement it moved to about $1,640 (very close to the 61.8% retracement) relatively quickly. In fact, it took place during a single week.

We previously mentioned that gold is quite likely to slide and perhaps bottom this week. This perfectly fits the analogy to 2012 and Friday's upswing doesn't make it any less likely.

What About Silver?

As far as silver is concerned, we haven't seen anything new from the technical point of view. Silver remains in a rather steep downtrend and it simply once again moved to the declining resistance line. This means that it's just as likely to decline as it was likely to before Friday's upswing. In fact, silver is now even more likely to decline, precisely because of the resistance that has been reached. The latter limits how far silver could move up before declining once again. This is not a sure bet, though. Silver sometimes fakes out instead of breaking out just to fool inexperienced precious metals traders. Consequently, even if silver moved higher today or tomorrow, and gold didn't invalidate the head-and-shoulders pattern, the silver outlook would still remain bearish.

Perhaps Gold Miners?

The HUI Index move is quite similar to what we have already discussed within the gold and silver sections above. Gold miners moved higher, but not high enough to change anything from the technical point of view. The previous support in the form of March bottoms just proved to be a meaningful resistance as miners failed to rally above it. The breakdown below these lows was just verified.

No market can move up or down in straight line and periodic corrections are normal - it seems that we just saw one in the precious metals sector. Since nothing changed technically, the outlook remains strongly bearish.

Finally, the USD Index

The USD Index moved a bit lower on Friday, but it is not the direction that really matters - it's the closing price. And the USDX managed to close the week above the previously broken resistance line. This was also the third consecutive daily close above it. This means that the breakout has been confirmed.

There's something even more interesting. We saw the same thing in last April. The third session after the breakdown was a small daily decline and gold moved a bit higher during it. USD's rally and gold's decline resumed shortly thereafter.

Even though the USD was down on Friday, its outlook has just improved because of the breakout's verification. We informed you in advance that this attempt to break higher really is different and Friday's session just confirmed it. Higher USDX values seem to be at hand. The implications for the precious metals sector are very bearish.

Summary

Summing up, the breakdown in gold is confirmed from multiple angles and the breakout in the USD Index is now confirmed as well, which is a very bearish combination for the PMs. With gold and mining stocks verifying their breakouts and silver at its short-term resistance line, the outlook is clearly bearish. There will likely come a time later this year when we will get in the back-up-the-truck territory with regard to precious metals, but we are not even close to these discounted price levels. However, it looks like the final slide towards them has already started. Based on the likelihood of seeing a temporary turnaround this week, we might have a good chance of exiting the current short position or even switching to a long one at that time.

As always, we'll keep you - our subscribers - informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:

• Gold: profit-take exit price: $1,241; stop-loss: $1,357; initial target price for the DGLD ETN: $51.87; stop-loss for the DGLD ETN $39.87
• Silver: profit-take exit price: $14.03; stop-loss: $15.72; initial target price for the DSLV ETN: $37.47; stop-loss for the DSLV ETN $26.97
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $18.41; stop-loss: $24.17; initial target price for the DUST ETF: $34.28; stop-loss for the DUST ETF $15.47

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 target prices:

• GDXJ ETF: profit-take exit price: $26.42; stop-loss: $35.67
• JDST ETF: profit-take exit price: $78.21 stop-loss: $30.97

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 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:

Stocks slightly extended their short-term uptrend on Friday, as investors reacted to the quarterly corporate earnings, better-than-expected economic data releases. The S&P 500 got very close to the September 21st record high again. Will it reach the new all-time high today?

S&P 500 at Last Year's Record High, Will Stocks Break Higher?

=====

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager