Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in silver is justified from the risk/reward perspective at the moment of publishing this Alert. We are providing details for possible new positions in gold and mining stocks.
Gold declined by 1.49%, silver by 2.32%, and GDX by 1.63%. We wrote that silver’s declines are likely to be bigger than the ones that we see in gold and that was certainly the case. Silver declined more than mining stocks as well. Gold’s daily decline may not be enough, to change the entire short-term outlook, though. After all, even though gold declined significantly, it didn’t close below the January highs. Since the breakouts were not invalidated, it seems that nothing changed, and gold might still rally higher in the short run. Is this really the case?
The Many Angles to View Gold’s Outlook
In short, the jury is still out with regard to gold’s short-term outlook, whereas it continues to be likely that gold will decline profoundly in the following months. Let’s take a look at the details.
In yesterday’s Alert, we wrote the following:
The GLD, SLV, and GDX ETFs have all moved higher initially only to give away all (gold), or almost all (silver and miners) of what they had gained during the day. At the same time, the USD Index reversed and ended the session higher. The above kind of reaction shows that the PMs are currently very vulnerable to such moves and – in particular – breakouts and breakdowns in the USD Index.
Silver stopped and reversed after reaching its previous high – there was no breakout in this market, even though gold and miners moved above their previous highs. That’s normal given the uptrend in the gold to silver ratio. The implications of the reversal combined with the resistance being reached are bearish.
Gold reversed on an intraday basis, which might be seen as a sign of reversal. On a stand-alone basis, yesterday’s session was bearish. However, putting the decline in context of the previous days and months, we see that nothing material really changed based on this decline. No breakout was invalidated. Consequently, it didn’t really add much clarity to gold’s outlook for the next few days.
Mining stocks reversed as well, which is bearish at first sight, but we also have to note that miners showed significant strength yesterday, by closing above the previous days’ closing price. Yesterday, we wrote that the miners will shortly decide the way in which they would reflect their 2016 performance. Yesterday’s session didn’t add much clarity, because on one hand, the reversal confirms the analogy to the fake moves in the final parts of a given move, and on the other hand, the daily outperformance confirms the bullish case. The daily outperformance of miners, however, combined with gold’s technical ability to climb to the 2018 highs before the next strong resistance is reached is too bullish combination for us to continue to hold the short position in the gold part of the precious metals market right now. We will likely resume the short positions in miners and in gold, but at a more favorable risk to reward ratio.
The USD Index reversed as well after reaching its mid-January high. It might be the case that the decline to this level was the end of the decline that was technically likely after the USDX failed to move above the declining red resistance line. This scenario is definitely supported by the situation in the euro that we discussed yesterday.
In general, the above remains up-to-date. The mining stocks continued to show strength by not multiplying gold’s decline. They remain visibly above their January highs, while gold is only a bit above them. Silver is much below its analogical price level.
Miners’ strength continues to be a bullish factor and the fact that gold didn’t close below the January highs is also quite bullish. A lot happened yesterday, but not much changed so far. Still, it doesn’t mean that we have really nothing new to report. To the contrary.
The thing that we need to take into account right now is this week as a whole. The week is about to be over, and right now it appears to be creating a big weekly reversal.
At the moment of writing these words, gold futures are trading at about $1,325 – practically at the January highs. This means that gold is only up by a few dollars this week despite the sizable intraweek move higher. The weekly RSI is above 70 and combining that with the weekly reversal on relatively big volume will have very bearish implications. The volume is very similar to what we saw last week, but that’s based on only the last four trading days. After today’s session, the volume will be higher. If it’s big volume at the close, the implications will be very bearish (unless gold rallies strongly today, of course), and if the volume is just average, the implications will be bearish nonetheless. Low volume would have neutral implications as it would nullify the implications of the bearish weekly shooting star reversal. Low volume, however, is impossible to happen at this time, as we already have volume reaching a relatively average level, and there’s still one session ahead before the week is over.
Consequently, the implications for the next week heavily depend on today’s closing price of gold.
Silver and Its Resistance
Silver’s very long-term chart features an almost complete weekly reversal as well. The white metal is only up by 6 cents this week. We emphasized that any move above the powerful resistance line is likely to be very brief and that was indeed the case.
We also emphasized silver’s bearish signal coming from the volume levels. Rallies on huge volume appear bullish but the opposite is actually true. Quoting what we wrote two days ago:
We saw a daily rally on huge volume. This is profound, because it’s a major indication of the sharply increased interest in the white metal – something that takes place at the local tops. That’s a confirmation of the very short-term outperformance of silver that we’ve been discussing many times before. The above chart shows how it usually works.
The vertical lines represent days when silver moved up on huge volume. It is more important that the volume is huge on a relative basis (compared to the previous several days) than its absolute value, but it is usually significant also in absolute terms.
The red lines are the cases, when such occurrences were good shorting opportunities, the blue line was the case, when it was a good opportunity to go long, and the black lines are the cases, when the implications were unclear. Out of the 11 cases, we had only one blue line (buying opportunity), which is less than 10%. On the other hand, 8 cases were the great shorting opportunities, which is about 73%. Consequently, yesterday’s session for silver was actually bearish in its implications.
Euro’s Breakdown Confirmation
Meanwhile, the euro seems to have confirmed its breakdown.
The European currency moved back to the rising line and verified it as resistance. In our Forex Trading Alerts, we recently profited on EUR/USD’s decline, closed the position and now we have just opened the short position once again. The outlook is bearish not only from the short-term point of view, though. The big picture doesn’t look rosy for euro bulls either. This has bullish implications for the USD Index and therefore bearish ones for the precious metals sector.
Trading Implications
Now comes the question. What are the trading implications of all the above? At this time, nothing really changed, and the same combination of open positions (and lack thereof) appears appropriate, as it was the case yesterday. However, we also wrote that a lot will depend on where gold closes today. If it closes visibly below the January highs then at the same time, it will both: invalidate its recent breakout, and form a clear bearish weekly reversal candlestick. If gold moves a bit higher, the technical implications of this entire week will be different.
Consequently, while we are not changing the position right now, we do think that it’s a good idea to already prepare for reentering the short position in gold. Namely, if gold futures (as shown on finance.yahoo.com website) is at or below $1,320 an hour before the end of today’s session, it seems that reentering the full short position in gold will be automatically justified. If the above is the case, then we also think that reentering short positions in mining stocks will be justified. Such a powerful reversal and invalidation in gold (confirmed by silver’s weekly reversal) would almost certainly have huge impact on mining stocks as well.
We will send you a quick note as a confirmation around that time (or a note saying that no changes in positions appear justified).
Summary
Summing up, the precious metals sector seems to have reversed its course, but it’s too early to say that this is definitely the case right now. A lot will depend on gold’s closing price of this week, and if it happens that gold invalidates the recent breakout above the January highs and at the same time forms a bearish shooting star candlestick, the risk to reward ratio will very strongly favor the short positions in gold and miners once again. We will send you another Alert later today (close to the end of the session) with the final “go” or “hold on” note.
Please note that since the medium-term trend remains unaffected by the recent developments and the downside target remains intact (about $890 for gold), the precious metals market is likely to erase everything that it had gained in the last several days, weeks, and months, before THE bottom is in.
As always, we’ll keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (250% of the full position) in silver are justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: no position, but be prepared to enter the following position: profit-take exit price: $1,062; stop-loss: $1,357; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $39.87
- Silver: profit-take exit price: $12.32; stop-loss: $16.44; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $23.68
- Mining stocks (price levels for the GDX ETF): no position, but be prepared to enter the following position: profit-take exit price: $13.12; stop-loss: $24.17; initial target price for the DUST ETF: $76.87; stop-loss for the DUST ETF $15.47
Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find a more detailed explanation in our August 1st Alert. 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: $17.52; stop-loss: $35.67
- JDST ETF: initial target price: $143.87 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
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.
=====
Latest Free Trading Alerts:
It’s unimaginable what great progress China made in the last forty years. The rise of such economic power triggered many fears (or hopes) about the future international order. We invite you to read our today’s article about the rivalry between China and the US and find whether the Red Dragon will replace America as a global hegemon. And what would such a shift mean for the gold market.
=====
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
