Briefly: In our opinion, a speculative short position (half) in gold, silver and mining stocks is justified from the risk/reward point of view.
In short, the points that we made in the March 30 Gold & Silver Trading Alert remain up-to-date. The precious metals sector declined and miners are once again underperforming metals, which seems to confirm the bearish outlook. Let’s take a look at the details (charts courtesy of http://stockcharts.com).
Gold moved lower yesterday, but the volume was not huge and the yellow metal didn’t move back below the 2013 low. Consequently, the implications of the above chart remain bearish, but are not extremely bearish.
The situation deteriorated a bit, though, because of the sell signal from the Stochastic indicator.
From the long-term perspective, silver once again didn’t do much on its own. The breakdown below the rising long-term support/resistance line wasn’t invalidated and silver didn’t move above the declining dashed red resistance line. The medium-term outlook simply remains bearish.
On a short-term basis, we see that silver declined right after reaching its turning point, just as we had expected.
Our previous comments on the above chart remain up-to-date:
Some might say that silver broke out above the declining short-term resistance line. Our comment is that it’s irrelevant in light of the numerous “fake-outs” in the past. Silver’s breakouts have simply lost the traditional bullish implications that breakouts tend to have. Is there anything other that we can say about the above chart? Yes, and it’s bearish as well. The November – today action could be viewed as a head-and-shoulders pattern. If silver breaks below the March low (which seems likely), the next head-and-shoulders-based target will be at about $12.50. This target is based the above technique, which says that the move below the “neck” level is likely to be equal to the size of the “head”.
That’s not the most bearish signal though. Here is the most bearish indication:
Even though it doesn’t feature any changes, we are including the above chart due to its importance and the efficiency of the signal.
Note the red arrows that mark the sell signals and what happened with the silver to gold ratio and gold in the past years.
Some would say that silver is leading gold higher. Others would say that “whites lead yellow” suggesting that silver’s (or platinum’s) outperformance is a very bullish sign. Here’s our take:
Wrong.
Very wrong.
OK, there are no sure bets in any market, but the odds are that the most recent outperformance of silver is just a sign preceding a major top. Just take a look what happened in the past YEARS. EACH TIME (yes, each time) the RSI indicator based on the silver to gold ratio moved above 70 and then moved back below it (the times when silver outperformed gold for some time, but then it moved back down again), a major top was formed. That’s a signal that’s been 100% effective for 4 years. If this was the case for a year and there were 3 such cases, we would not be that excited, but it’s a signal that has been in place for 4 years and we saw 6 signals that were followed by 6 declines, which makes this signal something that should definitely not be ignored. The implications, of course, are bearish.
While gold is quite visibly above its 2015 low, gold stocks are not. The HUI Index is almost at its 2015 low and also close to the 2008 and 2014 lows. Mining stocks are once again underperforming gold and it has bearish implications.
The short-term picture also provides us with bearish implications. The GDX ETF moved once again below the rising support / resistance line. The volume that has accompanied the decline is not huge, but it’s not low either and the implications are moderately bearish.
Our target $16-$17 target area is now described as an “interim target” and the reason is that we have already seen a more prominent correction from similar levels in the second half of March. Since a correction has already taken place, the decline can now continue without a bigger pause.
Summing up, even though we saw some additional bearish signs yesterday, actually little changed. The situation and the outlook for the precious metals market remain bearish, but not extremely bearish. Once we see even more strong bearish signs, we will likely double the size of the short position, just like we did in the early days of the previous decline – about 2 months ago.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (our opinion): Short (half 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: $1,231, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $66.10
- Silver: initial target price: $15.10; stop-loss: $17.63, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $45.01
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $20.17, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $13.75
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: $26.28
- JDST: initial target price: $14.35; stop-loss: $7.21
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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