Gold’s Key Sessions’ Follow-up Action

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Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

Friday’s powerful reversal was followed by a rally, instead of a decline. How much does it change regarding the implications of the former, especially that the USD Index just broke below its flag pattern?

Sometimes things are not what they seem at the first sight and this appears to have been the case yesterday. First of all, the USD Index did indeed break below its flag pattern – you’ll find the details on the chart below (chart courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The breakdown was small, but visible. What are its implications? There are none, because the breakdown was already invalidated in today’s pre-market trading. At the moment of writing these words, the USD Index is trading at about 93.5, while the lower border of the flag pattern is at about 93.48. An invalidation of a breakdown is a bullish sign.

We previously wrote that the traders had most likely not believed that the USD would move higher as the downtrend was quite evident, looking back, and since the flag pattern was also quite visible, everyone seems to have been betting on a breakdown from here. That’s how the precious metals market used to react – whenever the USD moved closer to the lower border of the flag, PMs soared intraday… Until Friday. On this day, the sellers beat the buyers even though the USD was once again flirting with the lower border of the flag.

How did gold and silver react when the USD finally declined below the flag? They moved higher, but not significantly so. Besides, they both more or less already gave up the entire rally in today’s pre-market trading. Why didn’t PMs rally higher yesterday despite the breakdown in the USD? Because the buyers were already overwhelmed on Friday and the buying power dried up to a considerable extent. The precious metals sector doesn’t seem to be willing to move higher before declining significantly.

Long-term US Dollar price chart - USD

Before moving further, let’s keep in mind that the USD Index reached a very powerful support on a weekly basis, so it has a lot room to rally in the coming weeks.

Short-term Gold price chart - Gold spot price

In yesterday’s alert, we wrote the following:

On Friday, gold showed strength initially rising above the April and June highs only to reverse the entire move and close the entire session lower. The size of the intra-day move was not small – it was a$15+ rally that was erased and it was accompanied by high volume. In fact, it was the highest volume reading that we’ve seen since November 2016 and one can say that because of that it was the most important session of this year.

There can be various reasons for a price to move back down despite an initial upswing, for instance that it’s simply taking a breather, however, the very high volume means that in all likelihood the reason for the move back down was that sellers had more strength than buyers. Why is the reason behind a move lower important? Because of the implications for the following days (and – in this case - weeks). If it had been a breather, a rally would be likely to follow as that was the previous short-term trend. However, it was a major reversal and it seems that the buyers don’t have enough strength to keep pushing the price of the yellow metal higher – despite a move lower in the USD and despite the nuclear tensions regarding North Korea.

This is a very strong sign that lower prices are very likely to be seen in the near future and possibly also in the following weeks and months. Did the highest-volume session mark the start of the final slide in gold? That’s quite possible.

Gold moved higher yesterday and erased the rally today, but the important thing here is that the volume on which gold rallied yesterday was well below the level on which gold reversed on Friday. In other words, gold almost “had to” rally based on the USD’s downswing (as it made gold cheaper in non-USD currencies), but it didn’t trigger a substantial amount of buying power.

Short-term Silver price chart - Silver spot price

The action in silver was even weaker – the white metal didn’t manage to rally at all and the pause was seen on relatively low volume. The bearish implications of Friday’s reversal session remain in place.

Summing up, Friday’s session in gold seems to be the most important session of 2017 as confirmed by the volume and since this volume accompanied a clear and significant reversal, the implications are very bearish for the short and medium term. The weak comeback that we saw yesterday that was accompanied by relatively low volume only confirms the bearish implications and we can say the same about today’s comeback in the USD. All in all, short positions in the precious metals sector seem to be well justified at this time. It’s likely that we won’t have to wait much longer for the final downswing and THE bottom.

As always, we will keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% 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 / profit-take orders:

Gold: initial target price level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $41.88
Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37

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: $14.13; stop-loss: $45.31
JDST ETF: initial target price: $417.04; stop-loss: $43.12

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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