Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective. We are moving the stop-loss levels for gold and mining stocks.
The precious metals market moved higher this week and not only did silver and mining stocks move visibly higher, but we also saw the same thing in gold. The 61.8% Fibonacci retracement based on the entire 2016 upswing was broken earlier today and the implications are quite important. Let’s take a look at the charts for details (charts courtesy of http://stockcharts.com).
On Friday, we wrote the following:
The gold chart shows that the volume that accompanied the upswing was not huge, but it was not tiny either, which has little implications, overall. What’s important is that the next resistance that would likely stop gold is at the previously broken 61.8% Fibonacci retracement level – at about $1,172.5. This means that gold could move another $15 higher or so before it reverses.
Shortly after gold moved above the 61.8% Fibonacci retracement, gold reversed and moved back below it (being at $1,171 at the moment of writing these words). Consequently, the entire rally might already be over as it seems that targets for gold, silver and mining stocks have now been reached.
Please note that the Stochastic indicator is a bit above the 80 level so once gold reverses, it will likely provide us with a sell signal from the overbought levels. This is likely to make the following decline quite significant.
Silver moved a bit higher yesterday, but from the long-term point of view, the corrective upswing that we see now and what we saw in 2013 are still almost identical. The implications remain bearish.
Speaking of the analogy to the 2013 decline, let’s discuss the time factor. If we use weekly closing prices as the starting point for both declines, then we are in the 26th week of the decline. The analogous top in the 2012-2013 decline was the week that started on September 10, 2012 and ended on September 15. If we add 26 weeks to that week, we get the week that started on March 11, 2013. That was in the middle of the topping pattern. The intra-week high was $29.35 and higher prices have not been seen since that time. The implications are very bearish.
Gold stocks moved once again to the declining resistance line – there was no breakout and the Stochastic indicator is about to flash a sell signal confirming the bearish outlook. In other words, this correction appears to be over or about to be over.
Summing up, it may seem that a lot changed based on today’s pre-market upswing (especially in gold), but it didn’t. The precious metals are making headlines, the volume in juniors relative to other stocks moved to extreme highs and silver outperformed on a short-term basis – these are all signs of massive participation of the general public, which marks important tops. The analogy to 2013 remains in place and the trend remains to be down. The targets for gold, silver and mining stocks were reached and it seems that the decline will continue sooner rather than later.
On a technical note, we are moving the stop-loss level for gold and mining stocks a bit higher, so that – in light of the bearish confirmations listed above – we are not forced out of our position in case of a very short-term, random upswing.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the 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 / profit-take orders:
- Gold: exit-profit-take level: $1,063; stop-loss: $1,204; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $53.36
- Silver: initial target price: $13.12; stop-loss: $17.53; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $24.86
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $23.62; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $31.99
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: $37.72
- JDST ETF: initial target price: $104.26; stop-loss: $18.88
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)
Insurance capital (core part of the portfolio; our opinion): Full position
Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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