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.
Last week was full of very important and coherent signs – if one knows what signs to monitor, that is. Let’s discuss them and see what’s likely to happen next.
Let’s start with the USD Index (charts courtesy of http://stockcharts.com).
We previously commented on the above chart in the following way:
(…) the question is what is the next level that could trigger a bounce or a rally.
The February 2016 low and the lower border of the declining trend channel are both good candidates. Since they are relatively close to each other it’s quite likely that either USD will reverse either right at one of them or somewhere in between. This is where the USD Index is right now (slightly above 95).
The USD Index finally closed at the lower border of the declining trend channel, which is in tune with the above. The local bottom is likely in.
(…)
There is one additional important factor that should be considered here – the cyclical turning point. Yesterday’s decline took place right at it and today’s move lower is still very close to it. In almost all recent cases, the turning points in the USD Index were followed by rallies and since the most recent move was definitely to the downside it appears likely that the USD Index will move higher relatively soon (perhaps even this week).
All in all, the technical picture for the USD Index is bullish.
Now, how does the announcement regarding the interest rates impact the above? The impacts of all important announcements should be discussed along with discussing the previous expectations. Remember when the Fed lowered rates by 0.75 and the stock market plunged? It was because people were expecting an even bigger cut. It didn’t matter that the rates were lowered dramatically – it only mattered that they were lowered less than market had expected.
What did the market expect of yesterday’s announcement? Pretty much what the Fed delivered. As we are writing in today’s Gold News Monitor, the investors are expecting only one rate hike this year. Consequently, since yesterday’s comments more or less confirmed investors’ expectations, did anything change? On “nominal” level – yes, the Fed said something else than it’s been saying previously, however, on “real” level – how this is likely to impact the markets – not much changed, if anything.
Consequently, yesterday’s news is not likely to have a major impact on the markets, including the USD Index, except for a short-term impact – and this short-term impact (based on yesterday’s and today’s declines) could be already over.
(…)
The medium-term implications remain unchanged for the precious metals sector and they are bearish. The thing that changed was the very short-term outlook in which some investors “discovered” what most investors were expecting all along – no changes in interest rates now and then just one increase in 2016. (…)
The USD Index declined, but the cyclical turning point and the combination of 2 support lines make the short-term outlook bullish, not bearish.
There’s one more thing that we would like to discuss. The RSI indicator just hit 30 and in all previous situations when this was the case close to the turning point, a big rally followed in the USD and a big decline followed in the precious metals sector.
In short, the above remains up-to-date. The USD Index moved to the lower border of the declining trend channel very close to the turning point and seems to have bottomed. We even saw a small move higher on Friday, and a decline in gold and silver. The implications remain bearish.
Speaking of gold, we previously wrote the following:
Gold corrected to the 61.8% Fibonacci retracement level (based on the March decline) yesterday and it moved a bit above it in today’s pre-market trading.
There are 2 things that we would like to discuss here. The first thing is the size of the volume – it was low, which is a bearish sign compared to the size of the rally. The second thing is the size of the move. It appears to be huge, but… The USD Index moved below its previous March low and gold didn’t respond similarly.
What’s even more important, the USD Index declined much further in today’s pre-market trading (almost a full index point) and gold rallied a mere $6. Gold appears unwilling to really respond to the bullish signals from the USD Index and since the latter is quite likely to reverse, gold could slide quite far.
(…)
The latter was particularly important and bearish, and based on the entire session we know that the strength of the mentioned signal (gold’s underperformance) got even bigger – the USD finally declined some more (and closed more than a full index point lower) while gold reversed and closed about $5 lower. That’s major underperformance and a very strong bearish sign.
Gold continued to move lower also on Friday, responding to the bearish move in the USD Index (a move higher in the USD Index is generally bearish for gold). Moreover, gold invalidated the previous intra-day breakout above the 61.8% Fibonacci retracement level based on the early February – March rally, which is a small bearish confirmation.
The volume during Friday’s decline was not high, but that doesn’t change anything – there were many times when gold declined on relatively low volume in the initial part of the decline, so the fact that it was low on Friday is in tune with this bearish pattern.
Consequently, it seems that the top was formed a little below $1,290 (note the huge volume during the reversal) and last week’s rally was the final move up before the plunge (note the low volume during last week’s upswing).
From the long-term perspective, there were little changes except for the Stochastic indicator – it just slightly invalidated the previous sell signal by moving higher (back above is moving average), but we don’t view this as really bearish – the move above the average was very tiny and based on short-term signals. It seems that gold will move lower shortly, which would result in another major sell signal from the Stochastic indicator.
As a reminder – please note how big the volume was in the past few weeks – that’s something we saw only a few times in the past and each time that was at a major top and before a volatile drop (in mid-2008 and at the 2011 top).
From the non-USD perspective (the average of gold prices in terms of currencies other than the U.S. dollar) gold has invalidated the previous breakout above the 2015 high. The invalidation of a breakout is a sell signal.
Speaking of sell signals, the one generated by the Stochastic indicator in the case of the gold to S&P 500 ratio remains in place. The implications are bearish, but we would like to point out that this sell signal and the previous position of the RSI indicator (above 70) make this situation similar to the 2011 top.
In the previous alerts we wrote the following:
The long-term silver chart continues to have bearish implications – the trend remains down from this perspective. Please note that the major resistance line (green line) based on the 2011 and late-2012 tops is right very close to the current price. It’s more or less at the $16 level and silver moved to $15.84 earlier today. It’s quite likely that we will see a reversal close to the current price levels.
The above remains up-to-date. In fact, silver closed the week at $15.82, after an attempt to break above $16 (thus the small breakout was invalidated). The outlook remains bearish.
The most bearish thing about silver that we saw last week is that it… rallied. Silver tends to outperform gold on a very short-term basis right at the tops and that’s exactly what we saw last week when silver moved above its February high while gold didn’t. The outlook is bearish, especially that silver has already invalidated the breakout.
Mining stocks moved a bit higher on Friday, but the move was far from spectacular – it was a less-than-1% move higher after a major reversal and this move higher took place on relatively low volume. Consequently, it seems to have been nothing more than just a pause – the implications of the Thursday reversal on big volume remain in place and they are bearish.
There are also bearish implications in the case of the gold stocks to the general stock market ratio. The ratio just reached a long-term declining resistance line, and thus it’s likely to decline. The implications for the precious metals sector are, naturally, bearish.
Comparing the prices of junior mining stocks to other stocks also provides us with bearish implications. We commented on the above last week and these comments remain up-to-date:
The medium-term outlook is clearly bearish based on the juniors to general stock market ratio. The sell signal from the Stochastic indicator is clearly visible in this case and the value of the Rate of Change indicator confirms the sell signal. Still, the implications are of medium-term nature, so we could still see a move higher in the very short term.
Summing up, the situation in the precious metals sector was very bearish based on Wednesday’s session and based on Thursday’s session it became even more bearish. Gold didn’t react to USD’s slide by rallying, silver outperformed on a short-term basis and miners formed a daily reversal on big volume after reaching an important resistance (May 2015 top). This is a very bearish combination and since there have been many medium-term bearish signals present, even before Thursday, we think that the outlook is now more bearish that it’s been in many months.
Friday’s session was rather inconsequential in our opinion – the signals from Thursday’s session remain in place.
While it’s usually the case that we can get at best a 75%-80% probability of a given move taking place (which means that about a fifth of the very probable moves will not happen), in our opinion it seems that the odds for the decline have now increased even higher – to 85% or so. Consequently, we think that a speculative short position is currently justified from the risk to reward point of view.
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: $1,304, initial target price for the DGLD ETN: $90.29; stop-loss for the DGLD ETN $48.27
- Silver: initial target price: $12.13; stop-loss: $16.62, initial target price for the DSLV ETN: $71.92; stop-loss for DSLV ETN $36.89
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $22.57, initial target price for the DUST ETF7.60: $; stop-loss for the DUST ETF $2.16
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: $31.23
- JDST ETF: initial target price: $14.14; stop-loss: $4.05
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
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