Gold & Silver Trading Alert: Gold’s Pre-market Rally

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Briefly: In our opinion, full (100% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective. This position was originally featured on Jan. 12, 2017 at 3:49PM.

Before discussing the charts let’s answer to the question that you might be asking yourself right now – why did gold and silver move higher in today’s pre-market trading and what does it imply for the future? The only answer to the “why” question is that “it’s impossible to tell” because ultimately it happened because there were more buyers than sellers and it's not possible to interview each one of them. We can, however, discuss what the likely reason as to why the market moved is and it seems that the most likely reason is the rising tensions before Theresa May’s speech, in which she is expected to discuss the Brexit.

The key issue is that nothing new is likely to happen and the market is getting excited about something that is unlikely to change anything. In other words, once the speech is over, the uncertainty is likely to be lower, but nothing is likely to change materially. The implications are likely to be bearish as the above is likely to result in a reversal that would in turn make many traders consider exiting their long positions, thus creating a top.

Besides, do you recall when the European QE was announced and many people thought that gold would rally to the moon? Instead, gold plunged in the weeks following the announcement. It is not the news itself that is most important for the short and medium term – it is the reaction of the market to the news that can tell us a lot about the market’s outlook. Having said that, let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The USD Index is almost right at the cyclical turning point and at the moment of writing these words it moved to 100.66. The most recent move is definitely down, so the turning point definitely has bullish implications. The support is provided by the December 2015 high – 100.60, very close to the current levels.

Short-term Silver price chart - SLV ETF - iShares Silver Trust

The turning point in silver confirms the above – the implications for the USD Index are bullish, but the implications of the cyclical tendencies for silver (and thus for the rest of the precious metals market) are bearish. The Stochastic indicator didn’t flash a sell signal in case of the SLV ETF, but it was the case with silver itself, so the situation deteriorated.

Silver moved higher in today’s pre-market trading, but in light of the turning point, the implications of the rally are not really bullish.

ZAR:USD - South African Rand to USD Index ratio

Additionally, the South African rand’s ratio to the USD Index once again moved to its long-term declining resistance line. This is significant because the ratio and silver are closely related and very often top at the same time. The strong resistance in the ratio suggests a turnaround in both the ratio itself and silver.

Long-term Gold price chart - Gold spot price

Gold moved to $1,219 today, so the 50% Fibonacci retracement was reached and that was almost the case with the declining red resistance line. In light of the turning points and the support being reached in the USD Index, it seems likely that today’s session is the final reversal (or extremely close to it) – perhaps today’s session or the following one will be just like the session after the U.S. presidential election – with gold sliding quickly right after the uncertainty has peaked.

HUI Index chart - Gold Bugs, Mining stocks

Since gold moved higher, gold miners are also likely to move a little higher, but the 38.2% Fibonacci retracement will likely keep the rally in check. Miners have been underperforming gold for several days and the implications are bearish. The sell signal from the Stochastic indicator remains in place as well.

Summing up, the bearish medium-term outlook remains in place and it seems that today’s pre-market upswing is temporary as it’s likely based on increased uncertainty that’s likely to disappear very soon. Turning points in the USD Index and silver suggest that lower, not higher, prices of precious metals are just around the corner. Once we see additional bearish confirmations, we might increase the size of the position further, but it seems that it’s too early to do so now.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (100% 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: $1,243; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.78
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: $24.63; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $27.97

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: $40.12
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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