Briefly: In our opinion, small (100% of the regular size of the position) speculative long positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
Gold has been moving higher for a few days but the volume is getting weaker. This is quite often a sign that the buying power is drying up. That’s what heralded the October top in gold. Will this time be any different?
It could, but not entirely. It could be the case that the rally is getting close to its end, but that it has not yet ended. Let’s take a look at gold’s chart for details (chart courtesy of http://stockcharts.com).
The October pre-top action is not the only similar period to what we see right now. We saw similar developments in March and April and we marked all of them with declining dashed lines on volume levels. The vertical red dashed line emphasizes the follow-up action.
In April, a big top followed and in March a rally followed.
Moving back to the October top, it did not form at the end of four sessions of declining volume (i.e. on the fourth day). The intraday top formed 2 days later.
Overall, we have 3 similar situations:
- 1 resulted in an immediate top
- 1 was followed by a short-term rally
- 1 was followed by a top (after additional 2 trading days).
What are the implications for the current situation? They are rather unclear as there were only 3 similar cases, but overall it seems that we should prepare ourselves for a top in the next few days. Again, that’s far from being a clear sell signal – rather a subtle “watch out” signal.
Silver’s not different as far as the recent volume action is concerned. It is different when it comes to analogies:
- In March, silver continued to rally.
- In May, silver continued to rally.
- In late July silver moved higher only briefly and topped in 2 days.
The implications here are bullish on average, which invalidates the already weak bearish implications of the decline in gold’s volume.
The interesting fact is that 2 cases are similar in that they point to an intraday top in 2 days (meaning tomorrow as the charts are based on yesterday’s prices). These are not the same cases (October for gold and July for silver), which makes it even more interesting. Is it a 100% clear signal? No, but it’s something that we’ll keep in mind. For instance, if silver soars tomorrow and outperforms gold while miners lag, the bearish implications will be even stronger given the mentioned analogies.
The volume in mining stocks was also a bit lower, but overall it was still high so we don’t have anything meaningful to report here.
The target area for mining stocks remains unchanged – between the 50-day moving average and the rising resistance lines. The latter seems to be a more likely target as its reinforced by the 200-day moving average.
The February, April, June, and July tops were characterized by the same pattern – the HUI Index broke through the 50-day moving average and reversed right at or in close proximity to the 200-day MA. This analogy makes the 194 or so the most likely target for the short term.
It’s worth noting that yesterday’s upswing in metals and miners took place without the USD’s help. The U.S. currency moved back and forth without a meaningful change yesterday, so the precious metals sector moved higher on its own. The implications are bullish for the short term.
Summing up, the medium-term outlook for the precious metals market didn’t change based on last and this week’s developments and it remains bearish, but the short-term outlook is bullish. The declining volume in gold might indicate that the top is going to be seen relatively soon, but it doesn’t seem that it has been formed yet. During yesterday’ session, gold, silver and mining stocks managed to move higher without the USD’s help, which supports the bullish case for the following days.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Long positions (100% 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 targets:
- Gold: initial target level: $1,279; stop-loss: $1,236; initial target level for the UGLD ETN: $10.58; stop-loss for the UGLD ETN $9.38
- Silver: initial target level: $16.48; stop-loss: $15.58; initial target level for the USLV ETN: $11.18; stop-loss for the USLV ETN $8.88
- Mining stocks (price levels for the GDX ETF): initial target level: $22.97; stop-loss: $21.08; initial target level for the NUGT ETF: $30.18; stop-loss for the NUGT ETF $23.78
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 exit prices:
- GDXJ ETF: initial target level: $33.48; stop-loss: $29.78
- JNUG ETF: initial target level: $17.38; stop-loss: $11.78
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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