Briefly: In our opinion, no speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold soared yesterday and so did silver and mining stocks. The last two moved only a little higher, but the yellow metal rallied in a profound way and the corresponding volume was huge. Is gold leading other metals and miners higher?
Let’s take a closer look, starting with gold (charts courtesy of http://stockcharts.com).
Gold rallied through the 50-day moving average and the lower of the rising resistance lines. The move took place on huge volume, which makes it quite believable (without the need of further confirmation). However, gold remains below the 38.2% Fibonacci resistance level and the rising resistance line based on the daily closing prices, so not everything became bullish.
Based on the above chart the outlook is moderately bullish for the short term, but there are no implications as far as the medium term is concerned.
The next strong resistance level is at about $1,225, where we have the previous high, the 50% Fibonacci retracement level and the medium-term declining resistance line (not visible on the above chart).
As far as silver is concerned, still nothing changed from the long- and short-term perspectives. The main trend is down as you can see on the long-term chart and on the short-term chart you can see that silver remains below the rising and declining resistance lines as well as its 50-day moving average.
Silver moved to the latter yesterday but reversed shortly thereafter and finally closed only $0.07 higher.
The critical thing here to keep in mind is silver’s “fakeout reputation”. By that we mean that silver tends to “break out” which serves as a major sell signal instead of a buy one. The majority of breakouts in silver, especially the sharp and “exciting” ones is invalidated and followed by declines. We would not be surprised to see something like that in the following days – if it happens, please keep the above in mind.
Yesterday’s intra-day reversal can be viewed as a silver’s fakeout, but it’s rather unclear. We don’t think there are strong bearish implications thereof just yet.
The overall implications of the above 2 charts are that silver is likely to move much lower in the following months, but the situation – though bearish – is not as clear as far as the short term is concerned.
Having said that, let’s take a look at the mining stocks.
From the long-term perspective, yesterday’s rally once again didn’t change anything. The trend remains down and gold stocks have just verified the breakdown below the neck level of the bearish head-and-shoulders pattern and are likely to move much lower in the coming weeks.
From the short-term point of view, however, we saw a move back above the neck level of the head-and-shoulders formation and the declining resistance line. The breakout is quite visible and the accompanying volume was not low. These facts are bullish, but the size of the miners’ move compared to the rally in gold and in stocks is rather bearish – miners “should have” rallied higher given the sizes of the rallies in the related markets.
Overall, the above short-term chart has bullish implications for the short term, but not strongly bullish. The medium-term signs continue to have bearish implications (we discussed them in yesterday’s alert, so if you haven’t had the chance to read it yet, we suggest that you do so today). If miners manage to move higher, it doesn’t seem that the HUI index would move much above the 175 level (the GDX ETF above $20 - $21) as that’s where we have the strong, medium-term resistance.
Summing up, the medium-term outlook for the precious metals sector remains unchanged and bearish, but – based on yesterday’s and Wednesday’s price/volume actions – it seems that we could see some more strength in the short term. The short-term outlook is only somewhat bullish, it’s not bullish enough to justify opening long positions in our view, especially that such positions would be against the medium-term trend (which remains down). It seems that we will see another shorting opportunity relatively soon – stay tuned.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): No positions
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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