Briefly: In our opinion, a speculative short position (full) in gold, silver and mining stocks is justified from the risk/reward point of view.
Gold moved higher yesterday, but mining stocks refused to follow (to a considerable extent) once again. This time, however, gold moved more visibly higher. Did yesterday’s move change anything this time?
Not likely. Basically, we saw a repeat of what happened on Tuesday (something that we described as quite possible) and the fact that gold moved higher a bit more visibly, doesn’t change anything (everything that we’ve written this week remains up-to-date). In short, the USD Index declined, gold’s reaction was weak (which is bearish for gold) and the miner’s reaction to both of the above was even weaker (which is even more bearish, especially given a sharp move higher in the stock market). Let’s take a look at the details (charts courtesy of http://stockcharts.com).
Our yesterday’s comment on silver remain up-to-date:
Silver once again stayed below the rising medium-term support line and the 61.8% Fibonacci retracement level and the breakdowns below them are more than confirmed.
Silver’s previous attempt to move below this line was invalidated and followed by a visible rally, however this time, we have a confirmation of a breakdown, which makes another decline very likely in the following weeks.
What about gold?
Gold moved higher on volume that was higher than what we saw on Tuesday, but overall the volume that has accompanied this counter-trend upswing is smaller than what we saw during the preceding decline. Consequently, the price-volume action has bearish implications.
Moreover, gold didn’t invalidate any of the previous breakdowns. In fact gold moved to the lower of the previously broken (the breakdowns were confirmed) support line and verified it as resistance by moving back down shortly thereafter. Again, there are no bullish implications of yesterday’s rally in our opinion.
As far as the situation in gold stocks is concerned, our yesterday’s comments remain up-to-date as well:
(…) gold stocks have broken below a certain support level. This level is created by the rising line based on the 2014 low and the March 2015 low.
With another daily close below it, we are closer to a confirmation of the breakdown (you will find more about waiting for confirmations in our list of gold trading tips) – the situation is now more bearish, but it will be much more bearish if the breakdown is indeed confirmed.
The HUI Index closed below the rising support line for the fourth consecutive trading day, so we can say that the breakdown is even more than confirmed.
Please note that gold stocks had all the reasons to invalidate the breakdown – rising gold, rising stock market and the declining USD – and yet they failed to move above the previously broken line. This shows market’s weakness and naturally has bearish implications going forward.
In the previous alerts we wrote the following regarding the above chart:
On a short-term basis we see that miners moved a bit higher and the move took place on relatively big volume. We could see some more short-term strength in the next few days, but we don’t expect to see anything significant. The declining red resistance line is relatively close and it seems that it would be able to stop the resulting rally, especially that miners have been underperforming gold for a few weeks now.
The GDX ETF indeed moved to the declining red resistance line and then declined once again. This is particularly bearish given the fact that there was no big slide in the general stock market and gold moved higher on that day. The miners’ underperformance is a bearish sign.
Miners moved indeed higher yesterday but the size of the move was very small given gold’s and stocks’ rallies and – just like we wrote below the HUI Index chart – the implications are bearish.
Overall little changed yesterday and we can summarize today’s alert in a very similar way to what we wrote yesterday:
Summing up, the outlook for the precious metals market has been bearish for many weeks and – based on yesterday’s session – that remains the case. It seems that the final bottom is still ahead of us. The current short positions in the precious metals sector are already profitable but it seems that they will become much more profitable in the future, so we are keeping them intact. If we see another decline, we will quite likely adjust the stop-loss levels and effectively lock-in some gains while keeping the chance of increasing them even further.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short (full position) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:
- Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $18.13, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $38.44
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $10.37
In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:
- GDXJ: initial target price: $21.17; stop-loss: $28.68
- JDST: initial target price: $14.35; stop-loss: $5.65
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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