Gold & Silver Trading Alert: Gold Stocks Break Below Key Support

tools spotlight

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

The HUI Index and the XAU Index both broke below their key support lines, but gold didn’t – are miners leading gold lower or will miners soar after yesterday’s pause?

In short, the former is much more likely. The breakdown below the key support line right after the breakdown below the more short-term line is a very bearish indication, especially that there was no major bearish action in the main stock indices and no major bullish action (at least yesterday) in the USD Index. Since there was no meaningful reason for miners to slide significantly and they still plunged and broke below the important support line, the odds are that the yesterday’s move was not accidental and that miners really showed their weakness. The implications are very bearish as that’s yet another piece of the puzzle that fits into a big bearish picture for the precious metals sector for the following weeks. Let’s take a look (charts courtesy of http://stockcharts.com).

HUI Index chart - Gold Bugs, Mining stocks

The HUI Index moved visibly below the rising support line and that’s the first visible breakdown below it. The decline that we saw last week was substantial, but it stopped at the support line and was followed by a small corrective upswing. However, based on yesterday’s decline, we saw a breakdown and based on it, the situation deteriorated further (silver had already outperformed and we saw other bearish signs in the previous days and weeks as well).

We saw analogous breakdowns in other proxies for the precious metals mining stocks – the XAU Index and the GDX ETF – the breakdown is somewhat confirmed. “Somewhat”, because we would need to see 2 more daily closes below the broken line or a bigger move lower to view the breakdown as confirmed. Consequently, the situation deteriorated a bit, but not substantially yet (it was bearish enough to justify opening speculative short positions in the previous days anyway).

If it had been the case that gold broke below its rising support line, but miners didn’t, the implications would not be as bearish, as it would imply relative strength of the miners, which would be a bullish indication. However, we saw the opposite – miners broke first, which suggests that gold will follow shortly.

Silver moved below its 20-day moving average, but the size of the move was not significant, so – again – the situation deteriorated only a little based on this.

Summing up, based on yesterday’s breakdowns in proxies for the mining stocks sector and the move lower in silver, the outlook for the precious metals market deteriorated further and it remains bearish.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,423, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $34.86
Silver: initial target price: $12.13; stop-loss: $20.83, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $16.76
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $32.27, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $4.67

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: $54.43
JDST ETF: initial target price: $61.74; stop-loss: $3.73

Long-term capital (core part of the portfolio; our opinion): No positions

Insurance capital (core part of the portfolio; 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 signs 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.

=====

Latest Free Trading Alerts:

Last week, Donald Trump won the GOP presidential nomination. What does it imply for the gold market?

Trump’s Nomination and Gold

On Friday, crude oil extended losses as a combination of news about rising Iraq's oil exports and report by BMI Research and Baker Hughes affected negatively investors’ sentiment. Thanks to these circumstances light crude lost 1.25% and slipped under the lower border of the consolidation. Will this event accelerate declines in the coming days?

Oil Trading Alert: Breakthrough in Crude Oil

=====

Hand-picked precious-metals-related links:

As Warnings Flash in Venezuela, Gold Holdings Sink Yet Again

Gold climbs as dollar retreats ahead of Fed meeting

India's gold trade is imploding

Gold market surplus shrinks as fund inflows offset weak Asian buying -GFMS

TOCOM’s physical market for gold launched today

=====

In other news:

Fed seen holding rates steady as inflation watch continues

Early 2017 could be best time to trigger Article 50: UK trade minister