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. We are moving the stop-loss levels for mining stocks.
The precious metals market moved higher yesterday and based on numerous factors, the sentiment among gold traders reached an extreme reading. What are the implications?
Naturally, the implications are bearish. When everyone is on the same side of the boat, it’s a good idea to be on the other side. In other words, when everyone interested or considering purchasing, has already bought the asset, the price can only move down. The above situation is accompanied by extreme bullishness (after all, when people are very bullish, they buy). This is how tops are formed. Let’s check what supports the above:
- Gold and silver (!) are making headlines. Finance.yahoo.com still features the article entitled “Silver to Outperform Gold in 2017” on their homepage and precious metals are being mentioned in other featured articles as well.
- Silver outperformed on a very short-term basis.
- The juniors’ volume compared to the volume of other stocks reached extreme levels.
- Bloomberg reports that gold traders are most bullish since 2015
We are also receiving correspondence, which is similar to the correspondence that we received many times at or very close to major tops.
The above alone should make one consider opening a speculative short position in the precious metals market – not a long one. Keeping the above in mind, let’s take a look at the charts for details (charts courtesy of http://stockcharts.com).
Let’s start with gold long-term chart. Gold declined substantially, moving from $1,350 to levels below $1,150 and is now taking a breather. In late 2012 gold was above $1,800 and it declined over $200 (below $1,600) before the final small corrective upswing was seen. Both situations continue to be similar. Back in 2013 gold moved initially to $1,554 and it then rallied to $1,616 within 4 weeks. So, it rallied about $62 in about 4 weeks.
The recent low was $1,124 and it was about 4 weeks ago. If we add the $62 to it, we get $1,186 as an analogous target price. What was yesterday’s intra-day high? Exactly $1,185.90.
Is gold breaking out of the similarity between 2013 decline and the current move? Absolutely not – it remains in place in terms of both price and time. Did the pattern have to repeat to the letter? No – we could have seen a sharp decline without a corrective upswing this time and the risk to reward ratio favored staying in the speculative short position (especially considering many other bearish indications). The point is that the rally that we just saw doesn’t invalidate (at all) the bearish implications of the big similarity to the 2013 decline.
What about silver? Did it invalidate the 2013 analogy that has profound bearish implications? No. At the moment of writing these words, silver is trading at $16.43 (almost $0.80 below the entry price of the current short position) – after moving to $16.76, it’s back below the price target based on the analogy to 2013. How much does yesterday’s move above $16.50 change? Pretty much as much as it changes on the above chart at the first sight – nothing.
Our yesterday’s comments on the above chart remain up-to-date:
Silver moved a bit higher yesterday, but from the long-term point of view, the corrective upswing that we see now and what we saw in 2013 are still almost identical. The implications remain bearish.
Speaking of the analogy to the 2013 decline, let’s discuss the time factor. If we use weekly closing prices as the starting point for both declines, then we are in the 26th week of the decline. The analogous top in the 2012-2013 decline was the week that started on September 10, 2012 and ended on September 15. If we add 26 weeks to that week, we get the week that started on March 11, 2013. That was in the middle of the topping pattern. The intra-week high was $29.35 and higher prices have not been seen since that time. The implications are very bearish.
Let’s move back to gold and more specifically, the Dow to gold ratio.
The Dow to gold ratio has recently broken above its key resistance level – the late 2015 high. After important breakouts, it is natural to expect a correction back to the broken level. It seems that we’ve seen exactly that. Gold’s decline and the ratio’s decline seem to be a pause, not a game-changer.
What about the correlation between stocks and gold? We were asked about it a few weeks ago and we provided the following chart in reply:
A few months ago we wrote that the high and declining correlation between gold and stocks has bearish implications – that was indeed the case. What’s the current status? The correlation declined from above 0.5 to below -0.75. The last time that happened, was… That’s right – during the final corrective upswing in 2013. That’s yet another factor pointing to the 2013 – now analogy and its bearish implications.
Having discussed the major, long-term charts, the key trend and having described the sentiment, let’s move to less important (if signals from long- and short-term charts are contradictory, the former are generally more important) things, meaning the short-term charts. On a side note, the reason that we discuss short-term charts more often than the long-term charts is not that the former are more important, but that they change more often.
The next resistance for gold is created by the declining red resistance line (based on the previous lows and the November high) and just above this line there is the 38.2% Fibonacci retracement. We based both on the closing prices instead of the intra-day high, as it seems that the U.S. presidential election spike is a rather artificial level and the previous rally is more meaningful. The resistance is at about $1,190 and $1,200.
Gold stocks broke above the declining resistance line and moved above the previous lows. Does it change a lot? It certainly appears bullish at the first sight. However, let’s consider the declining red resistance line – back in November it was this line that was the key resistance line and it was broken before the declines started. So, should we trust this breakout yet? If it wasn’t for the implications that the sentiment readings and the long-term charts have, it would be a bullish development, but in light of the above, it seems that waiting for a confirmation of this breakout is appropriate before taking any action based on it.
For now, we only saw a single close above the resistance levels and we generally want to see three consecutive closes to view a breakout as confirmed.
Silver broke a little above its declining resistance line, but small breakouts in silver are quite common before reversals, so it’s not a big deal.
The situation in the USD Index also appears less bearish at the second sight than at first glance. It broke below the rising support line, but it stopped at the 50% Fibonacci retracement, the upper border of the previous trading channel and – in a way – the previous highs.
“In a way” means that the USD Index closed above all 2016 highs (in terms of closing prices) except for one and not much below the latter. In fact it moved back to it in today’s trading.
What does it all mean? That the USD Index may be ready to move higher shortly, without additional declines. If the declines are seen, then the 61.8% Fibonacci retracement level should be able to stop them.
Summing up, the key charts and developments continue to point to much lower precious metals’ and mining stocks’ prices in the following weeks and the extremely positive sentiment toward gold among traders confirms it. The analogy to 2013 seems to be perfectly in place and the current upswings in gold and silver are nothing extraordinary compared to what happened in 2013. In fact, based on the price levels that were reached back then, it seems that this rally is over or about to be over. In light of the strong bearish case confirmed by the above, very important bullish signals would be needed to change the outlook. So far we have only seen an unconfirmed move in mining stocks, which doesn’t seem to be enough, especially that PMs started making the headlines, which serves as an additional bearish sign. It seems that the current significant profits in silver will soon be accompanied by profits from gold and mining stocks.
On a technical note, we are moving the stop-loss level for mining stocks a bit higher, so that – in light of the bearish confirmations listed above – we are not forced out of our position in case of a very short-term, random upswing. Please note that stop-loss is not a “target” that we expect to be reached – it is a price level that should take out of the position regardless of what happens in other markets, ratios, currencies etc.
As always, we will keep you – our subscribers – updated.
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: $1,204; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $53.36
- Silver: initial target price: $13.12; stop-loss: $17.53; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $24.86
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $24.63; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $27.97
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: $40.12
- JDST ETF: initial target price: $104.26; stop-loss: $18.88
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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