Gold & Silver Trading Alert: Declines or Reversals?

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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 at the moment of publishing this alert.

The precious metals market moved lower yesterday, which appears bearish, but at the same time gold and silver also reversed in a profound way before the end of the session, erasing a large part of the daily declines. Shouldn’t such a reversal be viewed as a strongly bullish phenomenon?

In short, it depends on the context. The context here is that the political tensions regarding France decreased this week and the precious metals’ gleam has thus diminished. The situation also made the euro appear more attractive than it had in the previous weeks, which in turn caused the USD Index to decline. Did it change the major trends? No. The USD Index is still likely to move up in the coming months (the rates are still likely going higher in the U.S., while QEs and low interest rates are still likely in Japan and in the Eurozone).

So, how can gold’s and silver’s performance be viewed? Both metals declined yesterday and then they moved back somewhat as the USD Index declined substantially. The strength of the reaction is the thing that appears to be most important and it doesn’t have bullish implications. A bullish reaction would be for gold and silver to rally strongly given the USD’s daily weakness, and the lack of any movement would be viewed as a weak reaction. However, there was no lack of reaction – gold and silver declined and the only sign of “strength” was a correction of a part of the decline. That’s very far from being a bullish signal. Consequently, we don’t think that the reversal should be accepted at its face value at this time. The market seems to agree with our view as both gold and silver are trading lower in today’s pre-market trading.

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

Short-term Gold price chart - Gold spot price

Short-term Silver price chart - Silver spot price

Both reversals have one thing in common and that is that the sessions ended below important support/resistance levels. In the case of gold, it’s the 61.8% Fibonacci retracement of the entire 2016 decline and in the case of silver, it’s the 50-day moving average and the previous April low. More specifically, it was the second day that silver closed below these levels, but it doesn’t change the bearish implications. Silver didn’t invalidate the breakdown and since it’s moving lower also today, it seems that the breakdown will be confirmed.

GDX - Market Vectors Gold Miners - Gold mining stocks

Speaking of breakdowns below the 50-day moving averages, mining stocks broke below their own MA as well. This breakdown took place on relatively big volume and after a confirmed breakdown below the rising support line. The implications are clearly bearish.

HUI Index chart - Gold Bugs, Mining stocks

If we zoom out a bit and focus on gold stocks, we’ll see that they also closed below the declining support/resistance line based on the previous major tops (the 2016 top and the 2017 top). The line is based on the daily closing prices and the breakdown also took place in these terms, so it appears to be important. It’s not confirmed yet, so the implications are not clearly bearish, but still, they are present.

Summing up, the declines in the precious metals despite the USD’s daily decline appear to be much more important than the shape of the intra-day price movement and the final implications of yesterday’s session are bearish. The above view is supported by the breakdowns in gold, silver and mining stocks below their respective support/resistance levels. This, plus other factors discussed previously support the expectation of lower precious metals prices in the coming weeks.

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: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
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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