Gold & Silver Trading Alert: Gold Breaks Above and Back Below $1,100

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

Gold moved visibly higher yesterday, and this time mining stocks and silver followed. What are the implications? Let’s move right to charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

At the moment of writing these words gold is trading at about $1,097, so the above chart does not show the “full story”. Yesterday’s breakout above the 38.2% Fibonacci retracement was already invalidated, so there are no bullish implications thereof.

In yesterday’s alert we wrote the following:

Now, $1,100 is a round number and a 38.2% Fibonacci retracement level, so we still can’t rule out a move to this level, or even to the 50% retracement – on a temporary basis. Such a move would not change much from the medium-term perspective.

Let’s consider the similarities – for several weeks the above chart has been featuring the similarity between the December 2015 bottom and the October 2014 bottom. Continuing with this analogy, we see that gold moved close to its 50-day moving average and even a bit above it and the RSI indicator moved very close to the 60 level. Back in 2014 these circumstances meant that a local top was in. In fact, in many other cases (we marked these situations with ellipses on the RSI indicator) gold ended local rallies when the RSI approached the 60 level. The implications are bearish.

One more thing – technically, until gold moves above $1,135 or so – the 61.8% Fibonacci retracement level – the rally will likely be just a rebound after the October 2015 – December 2015 decline. Consequently, moving above $1,100 or even a bit higher, would not automatically make the picture bullish – many additional factors need to become bullish for this to be the case – and for now we simply see gold’s reaction to unforeseen geopolitical events, not a change in the trend.

The above remains up-to-date. The move higher that we saw yesterday was significant, but likely temporary and it didn’t change the medium-term trend.

Short-term Silver price chart - Silver spot price

Silver finally outperformed yesterday and… It’s back to the $14 level (at the moment of writing these words). There are implications of yesterday’s session, though, because in the recent months it was very often the case that declines were preceded by a short-term upswing in silver. Consequently, even though it might seem counter-intuitive, silver’s move higher yesterday was actually a bearish development.

HUI Index chart - Gold Bugs, Mining stocks

Gold stocks moved a bit above the December 2015 high and we finally saw some strength relative to gold. Are the implications very bullish? Not yet – if this outperformance persists, then it will be bullish sign, but for now, it’s too early to say so – especially that based on gold’s pre-market decline we expect gold stocks to mover lower today.

The HUI Index moved to its declining medium-term resistance line and closed very close to the 50% Fibonacci retracement level. There was no breakout above the 61.8% retracement, so the November – yesterday rally is technically a correction of the October – November downswing.

Summing up, even though it seems that a lot happened yesterday, not much changed. Yesterday’s move higher was almost entirely erased in today’s pre-market action and the medium-term trend remains down. Yesterday’s move higher in mining stocks is a bullish development but quick and very temporary move higher in silver is a bearish development. Overall, we think that not much changed yesterday and we think that keeping our current position intact is justified from the risk/reward point of view. This approach may seem odd given the recent price increase but will likely prove very valuable when gold declines even more in overnight trading in the coming days or weeks. We’ll know more after today’s session – when we have the weekly closing prices and weekly volume data.

Naturally, we would prefer to see gold decline immediately after a position is initiated – just like stocks declined recently right after we opened the short position (Dec. 30, the S&P opened at 2077) and just like crude oil plunged shortly after we opened a short position in it (Dec. 28, crude oil opened at $38) or even like the action in the EUR/USD pair which moved lower a few days after we opened a short position in it (Dec. 23, EUR/USD was at about 1.0944) – but there are some things, like geopolitical events, that can’t be predicted and at times it takes longer for a position to be profitable than it seemed to be the case when the position had been opened. Still, the current short position remains to be justified in our view and it’s likely that it will become profitable in the next several days or weeks.

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

To summarize:

Trading capital (our opinion): Short positions (full) 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: $1,143, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $74.28
Silver: initial target price: $12.13; stop-loss: $14.83, initial target price for the DSLV ETN: $101.84; stop-loss for DSLV ETN $57.49
Mining stocks (price levels for the GDX ETF): initial target price: $10.23; stop-loss: $15.47, initial target price for the DUST ETF: $31.90; stop-loss for the DUST ETF $10.61

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: $15.23; stop-loss: $21.13
JDST ETF: initial target price: $52.99; stop-loss: $21.59

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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