Gold & Silver Trading Alert: Breakdowns

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Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are keeping the stop-loss levels at their current levels, which means that we are effectively keeping some gains locked and at the same time we’re allowing the profits to increase. Moreover, we are exiting the remaining half of the precious metals and mining stocks long-term investments.

Gold moved initially higher last week only to end it even lower. The same was the case with silver and mining stocks. More importantly, however, they moved below the key support lines. What are the implications?

Let’s take a look at the chart (charts courtesy of http://stockcharts.com).

Long-term Gold price chart - Gold spot price

Here’s what we wrote previously about gold:

Gold moved below the declining support line. The breakdown is not confirmed, but it is definitely a bearish development. Did the situation become much more bearish based on the above chart? No. More bearish, yes, but not much more bearish.

Gold moved higher on Wednesday, but it did not move back above the declining resistance line. Consequently, the move back below it is almost confirmed (we think it’s best to wait for 3 closes above/below a certain level for a given breakout or breakdown to be confirmed). Therefore, if we focus on the closing prices, the outlook actually deteriorated based on what happened yesterday.

The breakdown is now confirmed by 3 consecutive closes below the declining support/resistance line and a weekly close would confirm it even further. The outlook remains bearish.

The breakdown below the declining red dashed support / resistance line was confirmed also by the weekly close. The situation deteriorated further, especially for the medium term.

Let’s keep in mind that we have recently seen a major sell signal from the Stochastic indicator.

What about the short-term chart?

Short-term Gold price chart - Gold spot price

The situation deteriorated here as well. The breakdown below the rising support line (based on the daily closing prices) was confirmed and we saw also another breakdown – below the line based on the daily lows. The final short-term support (the 61.8% Fibonacci retracement) remains in place, but the above-mentioned breakdowns and the fact that we already saw a pause after gold moved to this interim target area make the overall outlook bearish.

What about silver?

Long-term Silver price chart - Silver spot price

We previously wrote the following:

What’s important on the above chart is that we saw a visible breakdown below the rising support line. This is a major bearish signal for the coming weeks regardless of the possibility of a small bounce in the next few days.

Even if we see a small move higher here, it will not change anything.

We indeed saw an intra-week move higher but it was followed by further declines and a weekly close well below the rising support line. The confirmed breakdown is likely to lead to even lower prices in the coming weeks.

HUI Index chart - Gold Bugs, Mining stocks

Gold stocks closed the week below their 2013 lows, which is a bearish signal for the medium term.

Generally, the breakdowns in the HUI Index are not to be taken lightly. In early 2013 the HUI moved below the 2012 low and plunged shortly thereafter without a bigger correction before that. In early 2012 the HUI moved below the 2011 lows and plunged shortly thereafter without a bigger correction before that. It’s early 2015 and HUI just closed below the 2013 lows – the implications are bearish.

Let’s keep in mind that – just like in the case of gold - we have recently seen a major sell signal from the Stochastic indicator.

Summing up, the situation was and still is bearish for the short run, but, based on the weekly closing prices, it just deteriorated further for the medium term. Consequently, it seems that exiting one’s long-term investments in the precious metals sector is justified at this time.

By keeping our full speculative position intact, we aim (and it seems that we are likely to) increase our profits on it and by exiting the long-term investment capital in the precious metals market we are likely to continue to outperform the simple buy-and-hold approach.

As always, we’ll keep you – our subscribers – informed.

To summarize:

Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks with the following stop-loss orders and initial (!) target prices:

Gold: initial target level: $1,180; stop-loss: $1,254, initial target level for the DGLD ETN: $75.23; stop loss for the DGLD ETN $63.16
Silver: initial target level: $15.70 ; stop-loss: $17.63, initial target level for the DSLV ETN: $66.25 ; stop loss for DSLV ETN $45.40
Mining stocks (price levels for the GDX ETN): initial target level: $18.40; stop-loss: $22.17, initial target level for the DUST ETN: $18.99 ; stop loss for the DUST ETN $11.32

In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:

GDXJ: initial target level: $23.37; stop-loss: $28.37
JDST: initial target level: $12.30 ; stop-loss: $7.00

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

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 automated tools (SP Indicators and the upcoming self-similarity-based tool).

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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