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 lower initially yesterday, but managed to close higher than it did on Monday. This seems bullish, unless one takes into account that miners refused to move higher yesterday. So, what exactly are the implications of yesterday’s session?
In our opinion, they don’t change anything – the outlook for metals and miners remains bearish and what we wrote yesterday remains up-to-date. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).
Gold moved even closer to its August high than what we reported yesterday, but much more importantly, it moved even closer, or practically to the declining long-term red resistance line. The strength of this resistance is huge.
Please note that the Stochastic indicator is very close to the 80 level (at 78.96) and sell signals from this indicator around this level were very often associated with important medium-term tops. It seems likely that we will see one soon.
Speaking of bearish signals…
Our yesterday’s comments on silver remain up-to-date:
Silver’s cyclical turning point is just around the corner and in the recent past silver always either declined or truly plunged after these turning points. The implications are clearly bearish. The sell signal from the Stochastic indicator and RSI touching the 70 level make the outlook even more bearish.
Additionally, even though silver rallied early in the session, the overall volume for that day was relatively low, which also doesn’t bode well for the precious metals sector.
The sell signal from the GDX to GLD ratio remains up-to-date as well, but let’s take a closer look at a different ratio, the mining stocks’ performance relative to other stocks:
The trend in this ratio remains down. Mining stocks continue to underperform other stocks and the recent change in the trend seems to be – based on the medium-term trend line – nothing more than a correction within a decline.
What about mining stocks themselves? They invalidated their breakout above the August high, and yesterday’s session didn’t result in a daily close back above it (at least based on the daily closes of the HUI Index).
Consequently, the bearish implications that we discussed yesterday remain up-to-date:
Another bearish signal comes from the HUI Index. The index closed below its August 2015 high, so the breakout above it was invalidated. In our yesterday’s second alert, we wrote the following:
The breakouts above the August highs in case of GDX and HUI Index were not invalidated and that’s why we are only re-opening the position using half of the capital that would normally be used to do it.
Since these breakouts were invalidated after all and we saw additional bearish signs, it seems that a full short position is once again justified from the risk/reward perspective.
Overall, not much changed for the precious metals market yesterday and the summary of yesterday’s alert remains up-to-date:
Summing up, we have recently seen an invalidation of the breakout above the August 2015 high in the case of mining stocks and we have seen additional bearish signals from the metals and related ratios. Consequently, it seems that a full short position is now justified from the risk/reward perspective. Naturally, the medium-term trend remains down as well.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:
- Gold: initial target price: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
- Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
- Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $26.61; stop loss for the DUST ETN $10.42
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: initial target price: $16.27; stop-loss: $24.33
- JDST: initial target price: $46.47; stop-loss: $17.14
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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