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

Gold moved higher yesterday and the corresponding volume was quite high – have we just seen a sign of strength that can take precious metals higher in the coming weeks?

Not likely. The volume was higher than on the previous trading day, but not very high, so we don’t think it’s a significant bullish signal on its own and it’s more important that this move didn’t manage to trigger a rally in mining stocks. Plus, let’s keep in mind what’s going on behind the charts – the turmoil regarding Greece “should” cause gold to rally – but it doesn’t. It shows the weakness of the precious metals market. Once the Greek deal is sealed (in one way or another, but the point is that the tensions will likely decrease), gold is quite likely to resume its downtrend.

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

As you can see on the above chart, gold’s rally didn’t even take it to the previously broken rising resistance line, so gold was not even close to a breakout.

Moreover, please note that gold’s 50-day moving average is relatively close to yesterday’s high, so even if gold moves temporarily above it, it’s not likely to move much higher – the 50-day moving average served as resistance quite a few times in the past.

In the case of gold stocks, the fact that they didn’t rally is significant not only because it’s another day of the miners’ underperformance. It’s also significant, because it’s another day when miners remain below the neck level of the bearish head-and-shoulders formation and the rising medium-term support/resistance line. Our previous comments remain up-to-date:

The HUI Index didn’t close much below the 2014 low, but still, it happened. The breakdown is not yet verified – it’s not significant (the HUI didn’t close the week much below the lowest weekly close of 2014) and it was not confirmed in terms of time. Moreover, we have yet to see a breakdown in terms of daily closing prices and intra-day lows. Consequently, the weekly breakdown doesn’t have very (!) bearish implications just yet, but it does indicate that the odds for a continuation of the decline have further increased.

What’s more significantly bearish, is the completion of the head and shoulders pattern and the analogy seen in the Stochastic indicator.

The head and shoulder pattern that took about 6 months to complete is something that could trigger another major slide in the precious metals sector. The target based on this formation is at about the 120 level for the HUI Index, which is the upper border of our target area. The targets based on the H&S pattern tend to work on an “at least” basis, so it seems that our target area is even more likely to be reached.

The important thing is that the HUI moved below the neck level of the pattern, and based on the short-term H&S, it’s likely that the move below the neck level of the bigger H&S will be clearly visible and thus much more meaningful.

As far as the Stochastic indicator is concerned, please compare the current situation with the 2 previous periods when we saw similar performance – we marked these cases with green rectangles. In both cases big declines followed. Consequently, there is another factor pointing to lower mining stock prices (which is in tune with the medium-term trend).

The short-term chart featuring the GDX ETF shows that the short-term trend for mining stocks remains down as well. The declining resistance line is keeping any small rallies in check. Moreover, the head-and-shoulder’s formation implications remain in place – miners are likely to decline at least to below $17.50 or so.

Not much happened in silver yesterday, so we will not describe this market once again in greater detail (however, comments from our previous Gold & Silver Trading Alerts remain up-to-date).

Overall, little changed based on yesterday’s session and we can summarize today’s alert just like summarized yesterday’s one:

Summing up, more and more signs seem to confirm our outlook for the precious metals sector – it seems that the final bottom is still ahead of us. The current short positions in the precious metals sector are already profitable but it’s likely that they will become much more profitable in the future, so we are keeping them intact.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short (full position) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:

• Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
• Silver: initial target price: $15.10; stop-loss: $18.13, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $38.44
• Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $10.37

In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:

• GDXJ: initial target price: $21.17; stop-loss: $28.68
• JDST: initial target price: $14.35; stop-loss: $5.65

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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In the previous week, crude oil gained 1.80%, while oil stocks remained almost unchanged (they lost 0.02%), which means that negative correlation between the XOI and WTI has been in place. What does it mean for crude oil? Before we know the answer to this question let’s take a closer look at interesting ratios and find out what are they saying about the light crude’s future moves.

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Hand-picked precious-metals-related links:

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In other news:

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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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