Gold & Silver Trading Alert: Final Breather Before the Big Move

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Briefly: Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective.

Gold, silver and mining stocks didn’t do much yesterday after rallying (and then declining) strongly on Friday and it seems that the precious metals market is now building a base for another powerful move. What’s next?

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

Short-term US Dollar price chart - USD

In yesterday’s alert, we wrote the following:

The USD Index has clearly soared on Friday after a small attempt to move below the rising support line. The tiny breakdown was quickly invalidated and the US dollar soared, even moving above the declining resistance line. The breakout above it was quite clear and significant and the consequences thereof are bullish. The implications for the precious metals market are bearish.

The above remains up-to-date, but let’s keep in mind that no market moves in a straight line and periodical corrections are normal. In case of the breakout in the USD and the sharp rally that we saw on Friday, it would not be surprising to see a move back to the previously broken blue support line (currently at about 94.8). Such a move could trigger a small move higher in metals and miners, but it would likely not change the trend – which is likely to remain down.

Short-term Gold price chart - Gold spot price

In case of gold, we saw a daily reversal yesterday, but since it materialized on relatively low volume, we don’t view it as bullish. We thoroughly discussed the importance of volume as confirmation in case of reversals last Tuesday, so if you haven’t had the chance to read it previously, we encourage you to do so today – the discussion is up-to-date in light of yesterday’s price-volume action. On a side note, please note that the reversal that we discussed on Tuesday was indeed followed by lower gold prices instead of higher ones.

There’s not much to say about silver – it moved 11 cents higher yesterday and it’s down 17 cents today at the moment of writing these words – overall nothing changed in case of the white metal. Consequently, let’s move to the mining stocks.

GDX - Market Vectors Gold Miners - Gold mining stocks

In yesterday’s alert, we wrote the following:

In case of mining stocks, we saw a daily and – most importantly – weekly decline (confirmed by weekly closing prices) that took miners below the rising short-term support line and both 2014 highs. The implications are bearish, especially that Friday’s reversal and decline took place on relatively strong volume.

Both levels (rising short-term support / resistance line and both 2014 highs) were not broken to the upside despite yesterday’s small move higher and the volume was low relative to what we’ve seen in the previous few days.

The above-mentioned price/volume action suggests that what we saw was just another breather after a big decline that prepares investors and traders for another slide. Moreover, that was the fourth subsequent close below the above-mentioned resistance levels – the breakdown was confirmed, which makes the outlook for the following weeks even more bearish.

Summing up, it appears that metals and miners have simply paused within a bigger downtrend and with the breakdown in mining stocks being confirmed it appears that the decline can now resume. Still, based on the sharpness of the recent daily rally in the USD Index, we wouldn’t be surprised to see a small corrective downswing, which could translate into a few additional days of consolidation in case of the precious metals sector (it doesn’t seem that it will be anything radical, though).

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 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: $74.37; stop-loss for the DGLD ETN $34.91
Silver: initial target price: $13.12; stop-loss: $21.63, initial target price for the DSLV ETN: $39.78; stop-loss for the DSLV ETN $14.34
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $33.17, initial target price for the DUST ETF: $297; stop-loss for the DUST ETF $18.80 (we have adjusted the prices for the DUST ETF based on the 5 for 1 split)

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: $54.29
JDST ETF: initial target price: $245; stop-loss: $15.80

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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