Gold & Silver Trading Alert: Decline or Upswing – Which One Is Over?

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Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are currently justified from the risk/reward point of view.

The precious metals market moved higher yesterday and gold practically erased Wednesday’s declines. Still, the breakout in the USD Index and the previous declines in silver and mining stocks were not erased. What’s next? Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

In this week’s alerts we covered the breakout above the triangle pattern in the USD Index and the bullish implications that a confirmation of this breakout would have. Based on yesterday’s closing price (i.e. with 3 consecutive closes above the resistance), the breakout was confirmed. Interestingly, the USD Index initially moved back to the previously broken resistance, verifying it as support. That’s a quite common occurrence after a breakout, which makes it “even more confirmed”.

The short-term outlook for the USD Index improved and at the same time the implications for the precious metals became even more bearish.

Short-term Gold price chart - Gold spot price

Gold more or less erased Wednesday’s decline and the volume was a bit bigger than during Wednesday’s decline, but it seems rather normal in light of the above-described verification in the USD Index and given that a support line was just reached in the case of the yellow metal.

Short-term Silver price chart - Silver spot price

As far as the silver market is concerned, we wrote the following yesterday:

As far as silver is concerned, the white metal also moved lower on higher volume, but the more important volume reading was seen at the beginning of the month, when silver soared on an intra-day basis, only to slide later on. Then silver had an additional short-term run-up and it’s now declining, moving to its 20-day moving average. The situation is very similar to what happened in late April and in the first half of May. Back then silver also had a huge-volume reversal, followed by a short-term run-up and subsequent decline. What can we infer from this similarity? That silver could spend a few days moving close to the 20-day moving average, just like it did in mid-May. The decline is likely to continue either after such a small consolidation or right away.

Silver indeed bounced somewhat after moving to its 20-day moving average and – as described yesterday – that’s in tune with what had happened previously. Back in May, after several days of back and forth trading, silver’s decline continued. This outcome remains likely also in light of yesterday’s move higher.

GDX - Market Vectors Gold Miners - Gold mining stocks

In yesterday’s alert we wrote the following:

Similarly to what happened in the USD Index, the mining stocks broke below one support level, but hasn’t broken below the lower one yet. However, the size of the volume was huge, which is an important bearish factor. What’s also bearish is the fact that miners moved decisively below the most recent trading range – in the case of the previous huge-volume declines that we saw earlier this year miners remained within the trading range after the huge-volume slide (for instance in late March and in mid-May). Consequently, we can speak of a specific breakdown that has already happened.

The above remains up-to-date. Miners moved higher yesterday, but the move was not accompanied by relatively high volume (lower than what we saw on Wednesday) and the move took miners only to the previously broken red line – not back above it. Consequently, the breakdown was not invalidated and the implications remain bearish.

Summing up, yesterday’s move higher in gold, silver and mining stocks doesn’t seem to have changed anything as far as the outlook is concerned and it remains bearish. The breakout above the triangle pattern in the USD Index was just confirmed, which made the situation more bearish for the precious metals market. Miners didn’t invalidate their previous breakdown and silver’s move higher is in tune with the previous price pattern that preceded a bigger decline. Since the outlook deteriorated and at the same time, we have more favorable entry prices for silver, it seems that doubling the size of the current short position in silver (moving from half of the regular position to full) is now justified from the risk to reward point of view.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,423, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $34.86
Silver: initial target price: $12.13; stop-loss: $20.83, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $16.76
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $32.27, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $4.67

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: $54.43
JDST ETF: initial target price: $61.74; stop-loss: $3.73

Long-term capital (core part of the portfolio; our opinion): No positions

Insurance capital (core part of the portfolio; 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 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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