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

Gold soared in late Friday trading and so did the rest of the precious metals sector, along with the profits of those who were long at that time. . The key questions that we reply to in today’s alert are: “Is the final bottom already in?” and “How high can gold rally?”

Let’s jump right into the charts (charts courtesy of http://stockcharts.com).

In Friday’s alert we wrote the following:

The above remains up-to-date. Gold moved very close to the mentioned combination of support levels ($1,045.40), reversed, and rallied back above $1,060. The volume that accompanied this reversal and rally was significant, which has bullish implications. The RSI indicator is above 35 and if the analogy between now and October 2014 remains in place, then this serves as a confirmation that the corrective rally has just started.

The rally has indeed started and the question is if it’s over. Similar patterns usually breed similar results and the previous similar patterns (note the blue and green lines on the above chart) resulted in a move to the 50% and 61.8% Fibonacci retracement levels and moves to / a bit above the 50-day moving average. Applying the above to the current situation provides us with a target at about $1,117 – higher than we initially expected this rally to take gold.

From the long-term point of view, the medium-term trend remains down, but we need to take into account the buy signal from the Stochastic indicator – it’s weekly version is quite reliable, so a bigger move higher (bigger than what we’ve seen so far) seems quite probable.

From the non-USD perspective, gold plunged on Thursday (touching the medium-term rising support line) but rallied back up on Friday, finally creating a bullish reversal candlestick. Consequently, the local bottom is likely in. The above chart doesn’t provide us with meaningful target prices, though.

In Friday’s alert we wrote the following regarding silver:

Silver didn’t slide $0.50 before turning up, but it did move almost $0.20 lower initially and the reversal (along with the fake breakdown) was clearly visible. We would like to see the opposite of such developments as a confirmation that a downswing is beginning, so at this time, the implications are bullish.

Silver moved indeed higher and the invalidation of the previous breakdown is clearly visible. The move was accompanied by significant volume, so the implications are bullish. How high can silver rally? Based on the short-term chart, it seems that it could move to about $14.79 - $15.20 before heading lower once again. The above is based on the rising short-term resistance line and the 50% Fibonacci retracement level.

The long-term silver chart is not as bullish. The white metal is already after a weekly breakdown and its confirmation and this breakdown was not invalidated last week. Silver closed the week 1 cent below the previous weekly low. Is this significantly bearish? Not really, because the previous 2 cases when major declines followed the weekly breakdown appear to be rather different from what we’re seeing right now. In the past the weekly breakdowns were not quickly followed by a weekly reversal. Consequently, the situation is not as analogous to the previous cases as it was just a week ago and thus the implications are not strongly bearish anymore.

Another important observation is that silver moved to the declining red resistance line.

Is silver likely to reverse and decline based on the above chart? Yes, but it’s only a little more likely than not because the declining resistance line (marked in red) was broken for the previous 2 rallies. Consequently, it may not be able to hold the rally this time either, and we may see a move above it before the decline resumes.

The above SLV ETF chart shows us that the turning point worked once again – this may not have immediate implications as a significant rally is already behind us, but it suggests that this technique should definitely be taken into account during the next cycle. Please note that the cyclical point suggests that the short-term trend will reverse, while the absence of the turning point has no implications (i.e. it doesn’t imply that there will be no turnaround at all).

The situation in gold stocks is currently analogous to 2 situations from the past, at least based on the short-term decline and bounce and as described by the Stochastic indicator (which has been quite effective). In the past cases, gold stocks moved higher than what we’ve seen so far during this rally (on a relative basis), but the moves weren’t very big. In past cases gold miners moved close to the 61.8% Fibonacci retracement level, which is currently at 125. If the history is any guide here, then we can expect the HUI Index not to exceed the 130 level (at least not in a meaningful way).

In Friday’s alert we wrote about the above chart in the following way:

Mining stocks moved higher yesterday, but not strongly higher. Was it bullish or bearish? Gold didn’t move much higher either, so it’s no wonder that miners didn’t soar. The general stock market (which quite often impacts the performance of mining stocks) declined significantly, and despite this move miners still managed to close over 2% higher. Consequently, overall, we view the mining stocks’ performance as bullish.

Miners indeed rallied and the volume that accompanied this rally was big – the implications are bullish. In fact, miners rallied until the end of the session and this kind of intra-day performance is usually followed by more strength. How high can the GDX ETF go? We marked our estimate of the target with a red circle. In short, the most of the rally is likely already behind us, but the odds are that we will see another sizable upswing before the rally is completely over – a move a bit above $16 is not out of the question.

The situation in the USD Index didn’t change much since we discussed in on Friday and our previous description of the above chart remain up-to-date:

The situation evolved just as we had predicted – the USD Index plunged and it managed to decline below the 38.2% Fibonacci retracement in just one session. Consequently, it seems that the decline is not over just yet. Our target for this decline is at about 96.30, where we have the 61.8% Fibonacci retracement and the declining support line (plus the 200-day moving average). The implications for the precious metals market remain bullish.

Summing up, the outlook for the precious metals market was bullish before Friday’s rally and based on the latter it became even more bullish for the short term. Consequently, we think that doubling the size of the current long position is justified from the risk / reward point of view (it seems that the profits on this position that we entered on Thursday will become even bigger; perhaps not as big as the profits on the previous short position, but still bigger than they are today).

To be clear – we think that what we saw is an interim bottom and not the final bottom for this medium-term decline in the precious metals sector, and we think that after a corrective upswing another big (probably final) slide lower will take place. The main reason for the above is that we have not seen a major plunge in silver relative to gold and other important confirmations.

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

To summarize:

Trading capital (our opinion): Long 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: $1,114; stop-loss: $1,028, initial target price for the UGLD ETN: $8.59; stop-loss for the UGLD ETN $6.70
• Silver: initial target price: $14.96; stop-loss: $13.26, initial target price for the USLV ETN: $12.62; stop-loss for USLV ETN $8.54
• Mining stocks (price levels for the GDX ETF): initial target price: $15.37; stop-loss: $12.57, initial target price for the NUGT ETF: $34.59; stop-loss for the NUGT ETF $18.91

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: $20.68; stop-loss: $17.76
• JNUG ETF: initial target price: $38.97; stop-loss: $24.83

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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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Sunshine Profits - Founder, Editor-in-chief
Sunshine Capital Management, LLC
Sunshine Gold Investment Fund, LP

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