Gold & Silver Trading Alert: Gold Verifies the Breakdown

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

Gold declined once again yesterday and the profits on our short positions once again increased. With gold below the previous 2015 lows, the odds for a continuation of the decline seem to have increased. The performance of mining stocks, however, might indicate that the worst is over and that a turnaround is very close. Just how low can gold go?

In short, it still seems likely that gold will move toward $1,000 before the bottom is reached. This could change based on some bullish confirmations, but so far we think that the number of bearish ones and their importance are much bigger.

Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Gold chart

The situation on the long-term chart hasn’t changed since yesterday, so in today’s alert we focus on the short-term one. On a short-term basis, we once again see more or less a confirmation of our previous comments. Gold has not only broken below previous lows in weekly terms, but also in daily terms. Again, the implications are bearish.

Today we would like to draw your attention to the fact that gold broke below the previous 2015 low, then moved back to this low and now it’s declining once again. In other words, gold verified the breakdown as the previous 2015 low is now an important resistance level.

Silver chart

Silver formed a daily bullish reversal candlestick (called a “hammer”), but this signal is not confirmed by what we saw in gold, so we don’t view the signal as reliable. It is usually the case that if silver’s signals are not confirmed by gold, that particular signal shouldn’t be trusted. It could be the case that silver reverses here, but it’s not likely.

We already saw a major weekly breakdown and that’s the most important thing to keep in mind. Silver moved below the previous 2015 intra-day low, but it didn’t manage to stay below this level for long. Perhaps another attempt will be successful.

Mining stocks chart

Mining stocks moved only a bit lower and the volume that accompanied was very small. Is this bullish? Not necessarily – it is bearish when miners rally on low volume, but the opposite is rather meaningless in terms of a strong directional signal. What it does indicate is that we are likely on a verge of a bigger move. The above chart doesn’t tell us in which way the miners will move, but the situation in gold and all the bearish factors discussed yesterday suggest that the next big move will be to the downside.

Other than the above, there’s not much new that we can say about the precious metals market. Our yesterday’s comments remain up-to-date, so with an unchanged outlook, we will summarize today’s alert in the same way, as we summarized yesterday’s issue:

Summing up, the outlook for the precious metals market deteriorated last week because of major breakdowns in gold and silver and also because of the move lower in the copper market. The intra-week move higher in mining stocks was invalidated on Friday and based on today’s decline it seems that it will shortly be erased entirely.

While we can’t rule out another corrective upswing in the coming days (based on what we have seen this week, it seems that there approximately is a 25% probability of seeing a corrective upswing shortly), but if we see it, it seems unlikely that gold would move above $1,100 or so. It’s more likely that the profits from the current short position will become even bigger in the coming days and weeks.

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

To summarize:

Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:

Gold: initial target price: $1,012; stop-loss: $1,103, initial target price for the DGLD ETN: $109.27; stop loss for the DGLD ETN $85.51
Silver: initial target price: $12.60; stop-loss: $14.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $61.00
Mining stocks (price levels for the GDX ETF): initial target price: $11.57; stop-loss: $14.73, initial target price for the DUST ETF: $26.61; stop loss for the DUST ETF $15.49

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: $16.27; stop-loss: $20.73
JDST ETF: initial target price: $46.47; stop-loss: $26.04

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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