Briefly: In our opinion, speculative short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward point of view.
The precious metals declined yesterday and mining stocks declined along with them. Friday’s “reversal” seems to have been just an unsustainable small general-stock-market-based rally – it was invalidated almost entirely. However, gold rallied sharply in today’s pre-market trading. What’s next?
In the following part of the alert we’re going to feature some of the factors that are currently present and that are likely to impact the precious metals market in the coming days and weeks and discuss what has happened so far today. Let’s start with the long-term gold chart (charts courtesy of http://stockcharts.com).
To be honest, once again little changed from this perspective and what we wrote previously about the above chart remains up-to-date:
(…) the outlook remains just as it was before this week began – it remains bearish.
The sell signal from the Stochastic indicator remains clearly visible and gold remains within the declining trend channel.
Gold moved $6.50 higher last week, but this move higher was too small to change anything on the above chart – the sell signal from the Stochastic indicator clearly remains in place.
Not only is the sell signal in place, but gold is also clearly back into the declining trend channel, and the invalidation of the previous small breakout is a bearish sign.
Although this year’s rally might seem big, gold actually didn’t even manage to move to the 38.2% Fibonacci retracement based on the 2012 – 2015 decline. Consequently, this year’s rally seems to be nothing more than just a correction within a bigger downtrend.
As far as the short term is concerned, we previously wrote the following:
(…), the trend remains down as well. Gold declined and practically erased Tuesday’s rally. The market participants seem to have realized that actually nothing changed based on Yellen’s recent comments and things are returning to normal after some very short-term volatility. Speaking of volatility, we could see some more of it on Friday before and right after the employment numbers are released. This is not likely to change the current trend, which remains down.
We have indeed seen increased volatility on Friday, but overall not that much changed – there was no breakdown below the previous March low and there was no breakout above the declining short-term support line and the lowest (38.2%) of the Fibonacci retracement levels. Consequently, the previous downtrend remains in place.
Why a downtrend? Most importantly, because a downtrend is visible on the long-term gold chart, but also because the rising black short-term support line was clearly broken and this breakdown was more than verified.
Now, let’s move to what’s happening today so far. At the moment of writing these words, gold is trading at about $1,233 after a quick move to about $1,235. This level is important because that’s where we have the declining red resistance line and the 38.2% Fibonacci retracement level. Without a breakout above this level, nothing has changed from the technical perspective, so today’s rally still appears to be nothing more than a correction within a downtrend.
In yesterday’s Gold Trading Alert, we wrote about gold seen from the non-USD perspective and about its performance relative to the stock market. In today’s issue, we would like to once again discuss the gold price in terms of the Japanese yen.
The above chart has clearly bearish implications for the medium term and the reason is that we now see a very clear invalidation of a few small breakouts. Most importantly, gold invalidated the breakout above the rising long-term support / resistance line (the one based on the 2005 and 2008 bottoms). These are clear bearish signs with medium-term implications.
As far as silver is concerned, not much changed yesterday, and the most important signal is based on last week’s closing prices. We saw the decline’s continuation and, most importantly, we saw a breakdown below both the 10-week and 50-week moving averages. This is so important, because the last 2 times when we saw such breakdowns and both of them were close to each other, silver declined $12 and $6, respectively. Naturally, the implications are bearish - it appears that silver is about to move much lower in the coming weeks.
In yesterday’s alert we commented on the above chart in the following way:
Mining stocks formed a daily reversal on Friday, which seems to be bullish at the first sight, but it actually isn’t. There are 2 reasons: the action in the main stock indices and the volume. The general stock market reversed very visibly and closed the week above the previous highs. It is likely that the miners’ “strength” is simply a reaction to this rally. The size of the volume confirms it – it was low, which is something that is not seen during important reversals, but during pauses. Consequently, we don’t view the action in miners as bullish.
Mining stocks declined yesterday, which seems to confirm the earlier assumptions – the rally was nothing to call home about and it was not a true reversal.
What’s particularly interesting on the above chart is the formation of the head-and-shoulders pattern, which – if completed – would likely mark the start of the acceleration in the decline. Once we see a confirmed breakdown below the neck level (either a big move below the neck level on significant volume or 3 consecutive closes below this level), the bearish outlook for miners would become even more bearish.
Summing up, there are signs that the precious metals market is going to move lower in the coming weeks. The ones discussed above, plus those that we commented on in the previous days and weeks, make it very likely that the next big move in the precious metals sector will be to the downside. In other words, we expect that the best buying opportunity for long-term investments in the precious metals is still ahead.
However, based on the risk of a short-term breakout and a bigger corrective upswing in the very near future, we are moving the stop-loss levels much lower. Triggering them will be effectively securing gains on the current big short positions (in gold and silver; thus the name “stop-loss” could be misleading). Still, they don’t have to be reached and it’s more likely that they won’t be reached.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (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:
- Gold: initial target price: $973; stop-loss: $1,251, initial target price for the DGLD ETN: $90.29; stop-loss for the DGLD ETN $54.19
- Silver: initial target price: $12.13; stop-loss: $15.42, initial target price for the DSLV ETN: $71.92; stop-loss for DSLV ETN $45.16
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $21.03, initial target price for the DUST ETF: $7.60; stop-loss for the DUST ETF $2.63
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: $29.32
- JDST ETF: initial target price: $14.14; stop-loss: $4.70
Long-term capital (our opinion): No positions
Insurance capital (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 sings 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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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