Gold & Silver Trading Alert: Breakdowns

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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.

Mining stocks broke below their rising support line about a month ago, but we didn’t see the breakouts in gold and silver until this week. Is the outlook really as bearish as it appears based on the breakdowns?

In short, yes. Let’s take a closer look (charts courtesy of http://stockcharts.com).

Short-term Silver price chart - Silver spot price

We previously wrote about silver’s breakdown below the line based on the daily closing prices – in particular, we wrote that it was more important than the lack of breakdown below the line based on the intra-day lows. Well, we didn’t have to wait too long for the latter. At the moment of writing these words, silver is trading at $17.60, which means that it finally moved below the rising red line. That’s bearish, but what’s more bearish is the fact that the breakdown below the line based on the daily closing prices, was confirmed yesterday – silver closed below it for the third consecutive day. The outlook remains bearish.

Short-term Gold price chart - Gold spot price

Gold also confirmed its breakdown below the rising support line based on the closing prices and is very close to confirming the breakdown below the line based on the intra-day lows. The implications are bearish – it appears that gold’s 2017 rally is already over.

GDX - Market Vectors Gold Miners - Gold mining stocks

As mentioned above, mining stocks are after their own breakdown below the rising support line. They are also after a breakdown below the 50-day moving average which serves as another bearish sign. The RSI indicator is practically at the 30 level, which suggests that a pause or correction should not surprise us, but it doesn’t seem that such a move is worth trading – please note that an analogous signal in November generated only a small upswing. Back then miners were after a much sharper drop than is the case currently, so a corrective upswing was likely to be sharp as well. Consequently, even if we are to see a correction in mining stocks here, it could be so small that it’s not worth adjusting the positions for it (it might be difficult to re-enter at better prices than the current ones).

What’s particularly bearish about the declines and breakdowns that we saw yesterday? That they took place along with rather weak action in the USD Index. The latter moved higher by just 0.10. If the precious metals market is able to decline on its own, the decline is likely to accelerate once the rally in the USD Index really resumes.

Before summarizing, we would like to draw your attention to one more thing.

Investing.com Gold Index

The gold sentiment index from investing.com (the number displayed in the economic calendar is the percentage of traders who hold long positions for that specific instrument) just reached a new high. Extreme optimism is something that accompanies tops, not bottoms, so it appears that even though gold already declined this month, it still has a long way to go.

Summing up, the breakdowns in metals and miners have bearish implications and the same goes for the current excessive optimism among gold traders. This, plus the other factors discussed in the previous alerts imply that the outlook for the precious metals market 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: $1,273; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.17
Silver: initial target price: $13.12; stop-loss: $18.67; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $19.87
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37

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: $45.31
JDST ETF: initial target price: $104.26; stop-loss: $10.78

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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