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.
The decline in gold, silver and mining stocks continued yesterday, further increasing your profits on the current extra-large short position. But, since gold is already in the $1,260s, and our target area is $1,250 - $1,260, one should prepare for a nearby reversal.
Indeed, one should be prepared, but it doesn’t mean placing an exit order just yet. Apart from the price moving closer to our target of $1,250 - $1,260, we haven’t seen significant bullish confirmations that would invalidate the bearish case. Keeping in mind that the outlook for the medium term is very bearish, we don’t want to risk missing the big decline without a good reason. Gold moving close to its price and time target is still not enough. Mining stocks are showing some strength in general, as they didn’t move close to their previous 2018 low, even though gold is moving to new yearly lows almost on a daily basis, but, we haven’t seen the miners’ strength on a very short-term basis.
Based on the triangle-apex-based reversals that we discussed previously, it could have been the case that miners formed their bottom yesterday and today will be the reversal day for gold while miners show strength. If they do, we’ll have a bullish confirmation and we might adjust or even switch the position, but it’s too early to do so now.
Let’s take a look at the charts for details (charts courtesy of http://stockcharts.com/).
Gold’s Decline and Downside Targets
The decline in gold simply continues and the intraday chart shows that the decline is actually bigger than what you can see on the Stockcharts’ chart. Gold is now very close to the upper border of our target area and the odds of a corrective upswing have increased.
Again, just because the price targets are close, it doesn’t mean that it’s worth closing a short position – the corrective upswing could be small and/or very brief and trying to time it may do more harm than good.
Seeing a confirmation, however, could push the odds in favor of taking advantage of such a move.
The time is definitely right – today is the reversal day and the preceding move was definitely a decline, so the implications are clearly bullish. Still, based on the long- and medium-term signals, the decline is likely to be much bigger, so not missing it is more important than catching all the small, short-term upswings. Thus, we’re waiting to see a confirmation and we’re prepared for both: taking action and not taking action depending on what we see.
Silver’s Decline Continues
In yesterday’s alert, we wrote the following:
Silver moved lower on average volume, which is normal during a decline. The decline in volatility is a way of the market taking a breather, but unlike in case of gold, there was not enough strength among the silver bulls to prevent the daily decline.
Given the regularity in the recent bottoms, the silver bulls may be planning to take advantage of a move to $16.10 or so. That’s why we may see a temporary bounce from this level, but we don’t expect it to be anything major.
The above remains up-to-date, and we don’t have much to add to it today. Silver’s decline simply continues. At the moment of writing these words, silver is at $16.20, so it’s very close to the mentioned target. Just like it’s the case with gold, it seems that waiting for confirmations before taking action will be beneficial from the risk to reward point of view.
Follow-up to Gold Stocks’ Breakdown
The key technical development of the week happened in gold stocks and it continues to have important implications for the following weeks. Naturally, we’re talking about the confirmed (!) breakdown below the rising medium-term support line in the HUI Index. The HUI closed below this line for 4 subsequent trading days, so the move is more than confirmed.
Still, at the same time, we have to note that gold miners are quite far from their 2018 lows, while gold is well below analogous levels. Strength and weakness in gold miners relative to the underlying metal often indicate price moves in the entire sector, so the above may seem like a bullish factor for the medium term. But is it?
Not really. The HUI to gold ratio is after a major breakdown and it seems to have verified the breakdown by moving back to the previously broken level. That’s a textbook example of a verification of a breakdown. Consequently, while it may seem bullish on a day-to-day basis, it’s actually something normal from the medium-term point of view.
Having said that, let’s take a look at the forex chart.
Forex
The above chart doesn’t feature any changes, but in the last several hours of trading, the USD Index moved to 95.49 (the USDX value at the moment of writing these words), which means that we saw a breakout above the May highs. What’s next? The next upside targets are provided by the 50% and 61.8% Fibonacci retracement levels based on the 2017 – 2018 decline.
This means that the USD Index is likely to rally to about 96 before taking the next breather. This level’s strength is additionally supported by the November 2016 low, which adds to its credibility.
In yesterday’s alert, we discussed the situation in the Japanese yen. We wrote that the daily upswing was not a bullish phenomenon:
The black candlestick means that the currency opened the session higher but then declined on an intraday basis. We saw similar developments quite often this year and it usually meant that one should expect a decline in the following days. There were a few exceptions from this rule, but overall, the shape of yesterday’s session was followed by lower, not higher prices in the near term.
Consequently, it doesn’t seem that adjusting our short position at this time is justified.
In short, the above remains up-to-date and you can see how yesterday’s black candlestick was followed by a daily decline. The outlook for the Japanese yen remains bearish as the long-term analogy in its price movement remains in place.
The current pause after the decline is very similar to the previous patterns that we saw after the initial parts of major moves. The implications are bearish for the index visible on the above chart, and bullish for both: the USD Index and the USD/JPY currency pair.
Similarly, in the case of the euro, the currency behaves just like it did in the second half of 2014. Just like it was the case back then, the corrective upswing was seen after a sizable downswing, took about 2 weeks to complete and erased a bit more than 23.6% of the previous decline. In both cases, the euro move back above the previous price extremes. If the analogy is to continue (which seems likely), then the most volatile part of the decline is starting. It may be slow at first, but the middle of the move and its final days are likely to be very volatile.
As a reminder, we view the following positions as justified from the risk to reward point of view: short in the case of the EUR/USD with the stop-loss level at 1.186 and the initial target price at 1.1203, and long in the case of the USD/JPY with the stop-loss level at 107.78 and the initial target price at 113.88.
On an administrative note, this week’s alerts include more forex details than usually. For the next several days (most likely until June the 22nd), your Editor will be providing the crude oil and forex analysis and we thought that it would be a pleasant surprise to include the latter right into our Gold & Silver Trading Alerts. So, while we’re not going to include forex trading positions into the normal summary of positions for this type of alert as it might be confusing for some subscribers, we are going to provide additional information regarding any positions in the forex sections, just like we did today.
Summary
Summing up, the decline in the precious metals market seems to continue and as gold and silver approach our target levels, it seems necessary to pay extra attention to what the market is doing, and then act accordingly. The medium-term outlook remains bearish, but the short-term outlook may become bullish shortly. It may or may not be worth to adjust the current profitable short position depending on what we see in today’s session.
As always, we’ll 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: $1,251; stop-loss: $1,382; initial target price for the DGLD ETN: $48.88; stop-loss for the DGLD ETN $37.48
- Silver: initial target price: $15.73; stop-loss: $18.06; initial target price for the DSLV ETN: $27.58; stop-loss for the DSLV ETN $19.17
- Mining stocks (price levels for the GDX ETF): initial target price: $21.03; stop-loss: $23.54; initial target price for the DUST ETF: $28.88; stop-loss for the DUST ETF $21.16
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 – but 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: $30.62; stop-loss: $36.14
- JDST ETF: initial target price: $59.68 stop-loss: $40.86
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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