Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are moving the stop-loss levels lower, which means that we are effectively locking in even bigger profits and at the same time we’re allowing them to increase.
Today’s alert will be rather short as far as the description of charts is concerned, because nothing changed during yesterday’s session and basically the entire yesterday’s alert remains up-to-date. We will, however, discuss the outlook for the next week.
Let’s start by taking a quick look at gold (charts courtesy of http://stockcharts.com/).
Gold’s move higher is still barely visible on the long-term chart. As we wrote yesterday, this alone signals that what happened was probably of little significance. Our yesterday’s comments remain up-to-date:
The target area visible on the above chart is quite close to where gold is now, so there is a possibility that gold will bottom in the coming weeks. However, let’s keep in mind that gold reaching a specific price level is not the only thing that we want to see as the bottom’s confirmation. We want to see gold being hated in the mass media and much lower “popular” target prices (say, $500 or so). We want to see silver underperform gold in an extreme way. We want to see the HUI to gold and HUI to S&P 500 decline to major support levels along with gold moving to it’s own major support. These things remain to be seen and it doesn’t seem that we will see them right away. If gold moves to our target area but the corresponding mentioned events won’t take place, we could see gold move even lower – say to $900 – before the final bottom is reached (we don’t think that gold will stay below $1,000 for long, though).
Gold has been declining for over a month and moved over $150 lower without a more visible upswing, so it’s quite likely that it will correct sooner rather than later. If it were to move to a significant support, the odds for a within-a-downtrend rebound would be quite high.
Gold didn’t move above the upper border of the declining trend channel. Since it remains within it, it’s still likely to move lower - below this month’s lows. Our interim target area and previous comments remain up-to-date:
From the short-term point of view, gold is about to reach important support levels. The 2014 low is slightly above $1,130, and declining support lines based on 2013 and 2014 lows are at $1,120 and $1,110. The corrective upswing could start once one of these levels is reached. It’s a tough call to say which of them is most likely to be reached. It seems most likely that the interim bottom would form at $1,120, which is just $10 lower than the highest of the support levels.
At the moment of writing these words gold is trading at $1,150, which is about $20 above the support. Given the recent pause in the decline and the fact that the lower border of the declining trend channel is at or slightly below $1,130 at this time, it seems likely that we will see gold at $1,130 soon – likely this week.
Consequently, we think that preparing for closing the current speculative short position and taking the huge profits off the table is a good idea. The distance to the target levels is not significant (especially in the context of the size of this $150+ trade), and since the odds of gold reaching $1,130 before moving visibly higher are higher than the odds of gold reaching $1,120 or $1,110 before moving higher, it seems better from the risk/reward point of view to exit the trade close to the $1,130 level.
What do we mean by a “more visible rally” that could be seen? Something similar to what we saw in October 2014 – approximately a $50 move higher (to $1,180).
What about silver?
We actually saw a breakout in silver, but it’s not really bullish – most breakouts in the white metal are followed by sharp declines – not rallies.
Please note that silver’s cyclical turning point is just around the corner and at this time the most recent short-term move is up. Consequently, the turning point has bearish implications.
Our previous comments remain up-to-date:
The white metal has declined about $3 in the past weeks and is also likely to correct. In this case, it seems that silver could move to its November 2014 low, slightly above the $15 level.
What about mining stocks?
Again, nothing really changed. The HUI Index is currently about 5 index points higher than it was at the beginning of this week – that’s just a little and it doesn’t seem that the trend has changed.
Having said that, let’s discuss what’s likely to happen next week.
First of all, there’s one thing that we think that will not take place – we will very likely not see the final bottom next week. There are quite a few things that we expect to see as the bottom’s confirmation (already described below the long-term gold chart) and we are not close to seeing them. It’s unlikely that we will see one of them next week, not to mention seeing more of them. Consequently, if we see a rally next week, it will likely be a counter-trend move, not a beginning of another major upswing.
Can we see a counter-trend rally next week? We can, but it’s not likely. Gold didn’t move above the declining trend channel, so it’s likely to decline even more before correcting in a more visible way.
Moreover, March is usually a weak month for gold. The True Seasonals patterns for gold suggest a move lower and then a corrective upswing.
As a reminder, True Seasonal patterns are regular seasonality plus the effect that the expirations of futures, options and stock options usually have on the market.
However, unlikely doesn’t mean impossible so the question remains if the short positions should be exited if we see more strength in the market. The reply is that it depends on how strong the market is. We are moving the stop-loss orders lower, which takes the above into account. Please note that even if they are triggered, exiting the position would mean exiting and realizing profits of over $100 in the case of gold (we opened these short positions when gold was at about $1,300).
What if we see a decline next week? Then it still seems best to exit the current short positions once we see metals and miners at our target levels.
What if we see more sideways trading? It’s possible that because of the market’s overreaction to the FOMC statement the corrective upswing started prematurely. If this is the case, then the potential for an additional move higher here is rather limited and it seems best to just wait it out. If the PM sector doesn’t move much higher and it doesn’t move much lower, the continuation of the decline without an additional bigger rebound from $1,110 - $1,130 will become likely. In this case we will remove the exit levels for this trade and keep it intact until even lower levels are reached.
Overall, we can summarize the situation just like we did yesterday:
Summing up, while it seems that the final bottom in the precious metals market is still weeks or months away (and it seems that staying out of the precious metals market is a good idea in case of the long-term investment capital), it seems that we could see a visible ($50 or so) corrective upswing in gold and the rest of the precious metals sector relatively soon.
Consequently, it seems that taking profits off the table by placing orders to exit the current short positions at prices that are a bit lower than the current prices is justified from the risk/reward perspective.
Therefore, we are changing the “initial target prices” into “exit levels”, which means that we think it’s a good idea to exit the speculative short positions as soon as gold, silver, and mining stocks get to their respective targets (it might be a good idea to place an exit order on one’s trading platform at these levels). Moreover, if gold reaches its exit level - $1,135 – we think that it will be justified from the risk/reward perspective to exit the short positions in silver and mining stocks regardless of the prices that they have at that time.
If we see substantial bullish signals, we might consider opening small long positions. If we see substantial bearish signals, we will likely re-enter short positions. At this time, however, it seems most likely that the situation will be a bit unclear in the following days and / or the next week, as the gold price moves to its 2014 low and (very likely) bounces. It will be unclear whether the bounce is just a pause or a beginning of a more visible upswing and it seems quite likely that the situation will be too unclear to open any position initially. Once things clarify, we will open the next trade.
The next Gold & Silver Trading Alert is scheduled for Monday, March 30, 2015.
To summarize:
Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks with the following stop-loss orders and exit levels (!):
- Gold: exit level: $1,135; stop-loss: $1,193, exit level for the DGLD ETN: $85.48; stop loss for the DGLD ETN $73.03
- Silver: exit level: $15.10; stop-loss: $16.83, exit level for the DSLV ETN: $74.05; stop loss for DSLV ETN $52.12. If gold reaches its stop-loss, in our opinion exiting the position in silver regardless of its price will also be justified.
- Mining stocks (price levels for the GDX ETN): exit level: $17.13; stop-loss: $20.33, exit level for the DUST ETN: $23.49; stop loss for the DUST ETN $13.42. If gold reaches its stop-loss, in our opinion exiting the position in mining stocks regardless of their prices will also be justified.
In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:
- GDXJ: exit level: $20.93; stop-loss: $25.38
- JDST: exit level: $17.38; stop-loss: $9.60
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 automated tools (SP Indicators and the upcoming self-similarity-based tool).
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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On an administrative note, your Editor will be taking some time off next week (there’s been no weekly break for more than a year) in order to rejuvenate and prepare for the increased volatility in the following weeks and - quite likely - the final bottom in the precious metals sector. At this time the markets are moving more or less sideways or lower, and there have been no significant (or none at all) changes in the medium-term picture for many days, so it seems like a good time to take some rest. I’m going skiing, but I will take my laptop with me, so if things get very hot in the markets, I might still be able to write an alert (but I can’t promise that I will be able to write it right away). The alerts will be posted normally the week after (beginning Monday, March 30), and shortly after I come back we will have a pleasant surprise for you.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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