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.
Two interesting things happened yesterday in the precious metals market: gold declined and mining stocks held up strong. The former appears bearish, but the latter seems bullish – what are the implications?
In short, in our opinion the outlook remains bearish and yesterday’s session didn’t change much if anything – just like Friday’s session. Since nothing really happened in other markets and ratios, in today’s alert we focus on gold and mining stocks. Let’s start with the former (charts courtesy of http://stockcharts.com).
We previously wrote the following:
Gold continued to move lower also on Friday, responding to the bearish move in the USD Index (a move higher in the USD Index is generally bearish for gold). Moreover, gold invalidated the previous intra-day breakout above the 61.8% Fibonacci retracement level based on the early February – March rally, which is a small bearish confirmation.
The volume during Friday’s decline was not high, but that doesn’t change anything – there were many times when gold declined on relatively low volume in the initial part of the decline, so the fact that it was low on Friday is in tune with this bearish pattern.
Consequently, it seems that the top was formed a little below $1,290 (note the huge volume during the reversal) and last week’s rally was the final move up before the plunge (note the low volume during last week’s upswing).
The above remains up-to-date. Gold moved about $12 lower yesterday and it was not accompanied by huge volume, which – as was the case with Friday’s move – is rather inconsequential.
The important thing is that gold hasn’t broken below the rising support line yet, which could be the reason for which mining stocks paused yesterday instead of declining. Many traders appear to simply view this decline as yet another temporary pause within a rally (we don’t agree) and they don’t react to the downswing in gold by selling mining stocks. We think that miners will catch up once gold drops even lower.
Moreover, please note that the volume that accompanied yesterday’s pause was very low and we saw a very similar session in late October 2015, right before the start of a decline. Consequently, just because mining stocks didn’t decline yesterday, is not a bullish sign – there is even an analogy that suggests that a decline will follow shortly.
All in all, since nothing changed based on yesterday’s price moves, we’ll summarize today’s alert just as we summarized yesterday’s issue:
Summing up, the situation in the precious metals sector was very bearish based on Wednesday’s session and based on Thursday’s session it became even more bearish. Gold didn’t react to USD’s slide by rallying, silver outperformed on a short-term basis and miners formed a daily reversal on big volume after reaching an important resistance (May 2015 top). This is a very bearish combination and since there have been many medium-term bearish signals present, even before Thursday, we think that the outlook is now more bearish that it’s been in many months.
Friday’s and yesterday’s sessions were rather inconsequential in our opinion – the signals from Thursday’s session remain in place.
While it’s usually the case that we can get at best a 75%-80% probability of a given move taking place (which means that about a fifth of the very probable moves will not happen), in our opinion it seems that the odds for the decline have now increased even higher – to 85% or so. Consequently, we think that a speculative short position is currently justified from the risk to reward point of view.
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: $1,304, initial target price for the DGLD ETN: $90.29; stop-loss for the DGLD ETN $48.27
- Silver: initial target price: $12.13; stop-loss: $16.62, initial target price for the DSLV ETN: $71.92; stop-loss for DSLV ETN $36.89
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $22.57, initial target price for the DUST ETF7.60: $; stop-loss for the DUST ETF $2.16
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: $31.23
- JDST ETF: initial target price: $14.14; stop-loss: $4.05
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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