Gold & Silver Trading Alert: Gold Stocks Refuse to Rally

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Briefly: In our opinion speculative short positions (full) are currently justified from the risk/reward point of view.

One of the ways to detect a top in the precious metals market is to see new highs in gold and no new highs in gold stocks – and that’s exactly what we saw on Friday and yesterday. Is the situation really as bearish?

In short, yes. We saw a repeat of the same signal that we discussed in yesterday’s alert and the implications are bearish. Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold moved higher once again, but there was no real breakout above the March high. In yesterday’s alert, we wrote the following:

Gold moved above the 61.8% Fibonacci retracement, but the way in which it moved higher (with a decline in miners and given low volume) suggests that the outlook didn’t change and that it remains bearish. Gold moved to $1,287 today, which is very close to the March high. Not only is it a resistance level, but a decline from here would create a bearish head-and-shoulders pattern with the March high being the left shoulder and the current top being the right shoulder (the May high being the head).

The above remains up-to-date as gold didn’t move higher. The volume was bigger yesterday, but it still wasn’t huge and the gold stocks’ underperformance seems to be a much more important factor.

GDX - Market Vectors Gold Miners - Gold mining stocks

The GDX ETF moved a bit lower yesterday and we can say the same about the HUI Index. The move by itself is small, but it is significant because there was no breakout in the HUI Index despite a move higher in gold and that’s a clear bearish sign. We also see a small sell sign in the Stochastic indicator, but that’s not very significant yet – the weekly version of this indicator is much more reliable than the short-term (daily) one.

Did both gold and gold stocks have a good reason to move higher?

Short-term US Dollar price chart - USD

Yes, because the USD Index took a breather yesterday and corrected part of the recent upswing. Still, even though it was a reason for both gold and miners to move higher, only the former did.

As far as the USD Index itself is concerned, the outlook remains bullish.

Summing up, mining stocks refused to really and break above the previous high despite a move higher in gold and that’s a repeat of Friday’s bearish signal. All in all, the outlook remains bearish.

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

To summarize:

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

Gold: initial target price: $1,006; stop-loss: $1,317, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $43.71
Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $27.47, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.50

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: $41.73
JDST ETF: initial target price: $61.74; stop-loss: $9.87

Long-term capital (our opinion): No positions

Insurance capital (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 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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