Gold & Silver Trading Alert: Downtrend Remains in Place

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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.

Today’s alert is going to be short, as gold didn’t do anything new and we can say the same about silver and mining stocks. The precious metals sector moved lower yesterday and that’s quite bearish given the bullish implications of the Fed minutes and a move lower in the USD Index.

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

Short-term Gold price chart - Gold spot price

Since the short-term resistance line held on Tuesday, nothing really changed and yesterday’s move lower is not surprising.

What we would like to comment on is today’s pre-market move higher to about $1,240. This is a bit above the mentioned declining short-term resistance line, but it’s not a visible breakout above the 38.2% Fibonacci retracement level. Consequently, at this time, we are not making much of it – especially that the session hasn’t even started yet, not to mention the lack of a daily close above the declining resistance line.

All in all, the outlook remains bearish.

Long-term Silver price chart - Silver spot price

As far as silver is concerned, not much changed this week, and the most important signal is based on last week’s closing prices. We saw the decline’s continuation and, most importantly, we saw a breakdown below both the 10-week and 50-week moving averages (this week silver moved close to, but not back above them). This is so important, because the last 2 times when we saw such breakdowns and both of them were close to each other, silver declined $12 and $6, respectively. Naturally, the implications are bearish - it appears that silver is about to move much lower in the coming weeks.

Short-term Silver price chart - Silver spot price

The short-term chart features one additional thing – a skewed head-and-shoulders pattern that was already completed. Naturally, the implications are bearish.

GDX - Market Vectors Gold Miners - Gold mining stocks

As far as mining stocks are concerned, well, once again nothing changed based on what happened yesterday. Miners are not above the short-term resistance line, they are below the previous rising line and continue to form a head-and-shoulders top pattern. This pattern – if completed – would likely mark the start of the acceleration in the decline. Once we see a confirmed breakdown below the neck level (either a big move below the neck level on significant volume or 3 consecutive closes below this level), the bearish outlook for miners would become even more bearish.

One thing that’s particularly important, is the tiny volume – that’s a bearish sign. So, why did mining stocks rally at all? Likely because the general stock market rallied significantly yesterday. Consequently, it’s not a sign of “strength” in the precious metals sector.

Summing up, there are many signs that the precious metals market is going to move lower in the coming weeks. The ones discussed above, plus those that we commented on in the previous days and weeks, make it very likely that the next big move in the precious metals sector will be to the downside. In other words, we expect that the best buying opportunity for long-term investments in the precious metals is still ahead. Moreover, it appears very likely that the profits on the current short trade will become much bigger before this trade is over.

Today’s move higher in gold doesn’t seem to change much, and since we recently moved the “stop-loss” levels (reaching them would close the trade at a profit, not a loss) closer to the current price, we are somewhat protected against an unlikely move much higher and at the same time we remain positioned to profit from lower prices.

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: $1,251, initial target price for the DGLD ETN: $90.29; stop-loss for the DGLD ETN $54.19
Silver: initial target price: $12.13; stop-loss: $15.42, initial target price for the DSLV ETN: $71.92; stop-loss for DSLV ETN $45.16
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $21.03, initial target price for the DUST ETF: $7.60; stop-loss for the DUST ETF $2.63

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: $29.32
JDST ETF: initial target price: $14.14; stop-loss: $4.70

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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