Gold & Silver Trading Alert: Gold Stocks Erase Almost Entire Decline

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 on Monday, but were back up on Tuesday after almost the entire decline was erased. What can we infer from this seemingly profound reversal?

Not much happened in the case of gold and silver yesterday, so let’s move right to the analysis of the HUI Index chart (charts courtesy of http://stockcharts.com).

HUI Index chart - Gold Bugs, Mining stocks

Before commenting on yesterday’s upswing and its implications, let’s quote our yesterday’s comments:

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.

In light of the above, whether yesterday’s session had bullish or bearish implications depends on whether the mentioned breakdown was invalidated or is being confirmed. It doesn’t matter if the decline was almost erased or not, because the decline itself was not the important fact – the breakdown was.

The breakdown was not invalidated. Mining stocks (HUI, XAU, and GDX all performed similarly yesterday) moved higher, but closed below the previously broken, rising support line, which is now turning into resistance. One additional daily close below the line will confirm the breakdown and the short-term implications will be bearish.

Summing up, based on Monday’s breakdowns in proxies for the mining stocks sector and lack of the breakdown’s invalidation (despite a daily move higher) yesterday, 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 month, the Bank for International Settlements published its annual report. What can we learn from the report?

86th BIS Annual Report and Gold

We once again didn’t see much action. Does this mean that there’s no volatility ahead? We present our take in this alert.

Bitcoin Trading Alert: $650 Still in Play

Yesterday, the greenback moved sharply higher against its Canadian counterpart as the price of crude oil slipped to the lowest level since late Apr, weighing on the Canadian currency. Thanks to these circumstances, USD/CAD broke above important resistance zone and closed the day above it. Will we see further rally in the coming days?

Forex Trading Alert: USD/CAD – Third Time Lucky

=====

Hand-picked precious-metals-related links:

Gold Declines Before Federal Reserve’s Decision as Dollar Rises

LAWRIE WILLIAMS: GFMS ups gold price forecast but fundamentals could be seen as gloomy

Global ETFs buy more gold than India, China

China gold imports fall in June on higher prices, inventories

Britain's mint is making big money from gold rush

=====

In other news:

Abe Plans Stimulus Package of More Than 28 Trillion Yen

Abe’s Unusual Stimulus Announcement May Be Directed at the BOJ