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. This position was originally featured on Jan. 12, 2017 at 3:49PM.
The USD Index declined quite profoundly yesterday, but it also reversed profoundly – thus forming a reversal hammer candlestick. The bullish implications are strengthened by the fact that the USD moved to its December 2016 low and slightly below the 38.2% Fibonacci retracement, before reversing. This means that a very important support was reached and that a tiny breakdown (below the retracement) was invalidated almost instantly.
Let’s take a look at the chart for details (charts courtesy of http://stockcharts.com).
The implications for the precious metals market are bearish, especially that gold and miners recently refused to follow in the USD’s footsteps (the latter kept on declining but gold and miners didn’t move to new highs).
Gold indeed moved to new intra-day highs yesterday, but it’s back below the previous highs at this time ($1,214 at the moment of writing these words). Also, please note that despite an intra-day move above $1,220, gold closed the session practically at the 38.2% Fibonacci retracement, without a visible breakout.
Nothing really changed in the case of silver – the white metal also reversed and moved lower (declining once again in today’s pre-market trading – being at $17.33 at the moment of writing these words). Our previous comments regarding silver’s self-similar pattern remain up-to-date:
The 2 red rectangles marked on the above chart are identical – except for the slightly higher closing price, the 2017 rally in silver is just like what we saw in October – November 2016 in terms of both: price and time. The shape of both moves is also similar – we saw an initial top shortly after silver moved above the 50-day moving average (blue line), then about a $0.70 corrective downswing and then a few days of strength during which silver moved a bit above the previous high. That’s what happened back in 2016 and this year.
What followed in November 2016? Silver plunged, erasing practically the entire rally during just one session. What are the implications? Naturally they are bearish – we can expect a similar action to be seen shortly. Seems impossible? It was just as “impossible” in November (after all, silver was after over a month of daily rallies and just after a sharp upswing at the beginning of November), but yet, it plunged.
Gold stocks moved to new highs and closed above the 38.2% Fibonacci retracement, but – just like it was the case over a week ago – the breakout is not confirmed. Based on gold’s move lower today and – most of all – based on the USD Index’s reversal at an important price level, it seems that this breakout in gold miners will be quickly invalidated as well.
Summing up, it appears that the USD Index has just formed an important bottom and that higher USD values should be expected, which is bearish news for the precious metals market. The latter indeed moved higher yesterday, but gold and silver reversed before the end of the session and the tiny breakout in gold was already invalidated. The breakout in gold stocks is not confirmed and it appears that it will be invalidated shortly (likely today). Overall, the outlook remains bearish.
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: exit-profit-take level: $1,063; stop-loss: $1,243; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.78
- Silver: initial target price: $13.12; stop-loss: $18.07; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $22.24
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.23; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.87
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: $41.31
- JDST ETF: initial target price: $104.26; stop-loss: $14.78
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
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 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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