Gold & Silver Trading Alert: Breakouts

tools spotlight

Briefly: In our opinion speculative short positions (full) are currently justified from the risk/reward point of view.

Metals and miners moved higher yesterday and gold even broke above its 61.8% Fibonacci retracement level. Is the outlook really bullish?

Not necessarily. Gold was already back below $1,266 in today’s pre-market trading and it could be viewed as an invalidation of the breakout with bearish implications. At this time gold is trading once again above this level, so overall, we don’t view the implications as bearish or bullish.

Let’s take a look at what happened in other markets (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The USD moved higher but there was no visible breakout back above the early April lows. As we wrote yesterday, gold tends to react to breakouts and breakdowns more than to other moves in the USD. So, as the breakdown below the April lows is invalidated, gold’s rally is also likely to be invalidated. For now we haven’t seen strength in the USD Index, so the lack of decline in gold is not that surprising.

Short-term Gold price chart - Gold spot price

Gold actually moved higher yesterday despite a move higher in the USD Index, which by itself is a bullish sign, however, since the USD didn’t break back above the April lows and the volume accompanying gold’s strength was relatively low, the supposedly bullish sign is not as bullish. In fact, since at this time gold is very close to the 61.8% Fibonacci retracement level (after a move back below it just an hour ago), it seems that we should treat the breakout as nonexistent at this time. Quite a lot will depend on what happens today as the weekly closing prices are more important than the daily closes.

Short-term Silver price chart - Silver spot price

Silver once again outperformed gold (on rather significant volume) which is yet another bearish sign as that is something that preceded many local tops.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks moved a bit higher and GDX managed to once again close above its previous high, but – also once again - only a little above it. The volume that accompanied this tiny breakout was even lower than what we had seen yesterday, so the breakout is not confirmed. In fact, in the case of both the XAU Index there was no breakout and there was a very tiny breakout in case of the HUI Index, so the breakout in the GDX still appears to be more of an accidental move. We expect it to be invalidated shortly.

Summing up, the rally in the precious metals market appears to be ending and the decline is likely to resume this or the next week. Gold showed strength relative to the USD Index, but this “strength” was not accompanied by significant volume (it was accompanied by the miners’ underperformance, though) and it was not accompanied by a breakout in the USD, so it was not that meaningful. The breakout in mining stocks appears to be weak and such breakouts tend to be invalidated and followed by declines.

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

To summarize:

Trading capital (our opinion): Short positions (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: $1,006; stop-loss: $1,317, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $43.71
Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $27.17, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.67

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: $41.33
JDST ETF: initial target price: $61.74; stop-loss: $10.31

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.

=====

Latest Free Trading Alerts:

On Tuesday, the World Gold Council (WGC) released a new edition of Gold Investor, its publication on gold demand trends. What can we learn from the report?

WGC’s June Gold Investor: King about Gold

=====

Hand-picked precious-metals-related links:

Hedge Fund Citrine Bets on Gold as Economic Woes Weigh on Copper

Gold is sending a warning signal: Bouroudjian

Fed caution, Brexit risk boosting gold price, with $1,400 a possibility, says ANZ

=====

In other news:

The Federal Reserve has good news for Hillary Clinton

ECB Doesn’t Need New Stimulus to Reach Goal, Council Member Says

Korea’s Surprise Rate Cut Prompts Forecasts of More to Come

BOJ seen standing pat in June, but easing further in July to meet price goal: Poll