Gold & Silver Trading Alert: Almost There

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Briefly: Short positions (full position) in gold, silver and mining stocks are justified from the risk/reward perspective.

Gold appears to be on a verge of a major move and it seems that we will get the final confirmation any day now – perhaps even today.

Naturally, the mentioned move is the decline we’ve been writing about recently. In yesterday’s second alert, we wrote the following:

Mining stocks declined over 3% even though the moves in gold and the USD Index are not that significant. This makes the short-term outlook even more bearish and at this time we are considering (but nothing more than that so far) increasing the size of the speculative short positions in gold, silver and mining stocks. The weak reaction in miners is not a one-time or one-day event - we discussed that already in the alert, but the size of this phenomenon is increasing, which adds clarity and decreases the risk associated with the short position.

As you may recall, in today’s first alert, we wrote that the USD Index could move a little lower (to about 94 - 94.2) before it reverses and starts rallying again. If we see this move and the precious metals sector once again replies by flashing more sell signals, we’ll most likely increase the size of the short position further. Such a move in the USD Index, would make a reversal and the subsequent rally in the USD much more likely and this accompanied by yet another sell signal in PMs and miners would make the short-term outlook extremely bearish.

Again, that’s just something that may happen and doesn’t have to happen at all, but we wanted to give you an early heads-up.

The above remains mostly (the USD’s support level changed) up-to-date and another small move lower in the USD Index before the real moves start could still happen. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

In short, our yesterday’s comments on the above chart remain mostly up-to-date:

(…) The outlook for the USD Index will remain bullish for the following weeks unless we see a confirmed breakdown below the lowest of the classic retracement – the 61.8% one. This level coincides with the rising support line and is currently at about 94 – 94.2 (depending on when it would be reached). So, to make a long story short, without a big breakdown below 94, the short-term outlook for the USD Index will remain bullish. Still, we could see another temporary move lower. The turning point suggests that the reversal will be seen shortly (or that it was seen yesterday) and that higher prices will follow.

Today, the rising support line is at about 94.25 and today’s low (so far) for the USD Index has been 94.32. The line was almost reached and thus we could see another upswing shortly. We could also see another move lower, but it’s likely to be very small.

Short-term Gold price chart - Gold spot price

Gold moved back and forth after the unsurprising Fed minutes were released. The important thing is that the breakdown was not invalidated. Another thing is that the closing prices from Stockcharts are once again in tune with other sources.

All in all, the outlook based on the above chart was and still is bearish.

GDX - Market Vectors Gold Miners - Gold mining stocks

At the first sight, it appears that yesterday’s session was very bullish as we saw a clear reversal on relatively big volume. The implications are indeed bullish, but only for the very short term – we could see higher prices today or tomorrow. However, let’s not forget that miners still ended the session almost 1.5% lower without an analogous decline in gold (the one seen on the gold chart is due to the Stockcharts’ data adjustment) and despite a move lower in the USD Index. The overall implications for the following weeks remain bearish.

Summing up, the analogy to the 1983 decline remains in place and so do many bearish signals discussed last week and on Monday and yesterday’s session provided us with yet another confirmation of the bearish outlook for the short- and medium term, but the very-short-term outlook (for today and perhaps tomorrow) became somewhat bullish based on the reversal seen in mining stocks. It’s likely that the move higher based on it (if it materializes at all) will be small. If it is accompanied by very low volume, it would serve as a final bearish confirmation and we might further increase the size of our short positions based on it. We are locking in profits in the case of the trades in the currency markets, but it seems a bit too early to further increase the sizes of the positions in the precious metals market.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,423, initial target price for the DGLD ETN: $74.37; stop-loss for the DGLD ETN $34.91
Silver: initial target price: $13.12; stop-loss: $21.63, initial target price for the DSLV ETN: $39.78; stop-loss for the DSLV ETN $14.34
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $33.17, initial target price for the DUST ETF: $16.38; stop-loss for the DUST ETF $3.77

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: $54.29
JDST ETF: initial target price: $14.39; stop-loss: $3.22

Long-term capital (core part of the portfolio; our opinion): No positions

Insurance capital (core part of the portfolio; our opinion): Full position

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 always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.

The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.

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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