Gold & Silver Trading Alert: How Much Did Last Week’s Rally Really Change?

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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, silver and mining stocks moved higher last week and the size of the move was quite significant, especially in gold. Should we be preparing for a local top or an even bigger upswing in the coming days and weeks?

In our opinion, the first is much more likely as far as the medium term is concerned (the few weeks), but the situation is rather unclear in terms of the next few days. That’s likely not surprising given what we wrote on Friday, as markets closed more or less where they had been when we published our previous alert and our previous comments are up-to-date, but we think it’s appropriate to review the charts after seeing the weekly closes. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

In Friday’s alert we wrote the following:

Gold moved higher and it broke above the declining medium-term resistance line. This might seem to be a bullish development, but it was already invalidated. At the moment of writing these words gold is after a $11 decline to $1,143, so it’s visibly back below the declining resistance line.

Invalidations of breakouts tend to be even more important than breakouts themselves, so at this time the implications of yesterday’s session and what we’re seeing today is not bullish, but insignificantly bearish. It will be significantly bearish if gold closes the day (and the week) below the declining resistance line.

Gold moved a bit higher in the following part of the session, but it finally closed the day and the week below the mentioned resistance line. Consequently, the breakout was invalidated and the implications are bearish.

Long-term Gold price chart - Gold spot price

As far as the medium and long terms are concerned, nothing changed on Friday and our previous comments remain up-to-date:

(…) gold could (which is not likely, but it’s possible) move higher and still (!) remain in a medium-term downtrend. Consequently, if we see a confirmed breakout above the declining resistance line seen on the first chart of today’s alert it will likely not mean the end of the medium-term decline, but rather a good possibility of rally to the declining medium-term resistance line and the 60-week moving average, which are at about $1,185 - $1,195. The odds are when the breakout was confirmed, gold would already be at about $1,175-$1,180 or so. If gold was at that price, in light of a likely major top just $10-$15 higher, exiting short positions would not really be justified from the risk/reward perspective – entering them would be (if one didn’t have one that is).

At the same time gold could reverse and spike lower any day – perhaps today or on Monday, without a move to the above-mentioned resistance levels.

That’s why we believed that focusing on the medium-term move and not on the short-term price swings is justified. This was the case when we had opened the current short position and it remains to be the case right now.

Gold from the non-USD perspective - GOLD:UDN

Gold seen from the non-USD perspective moved higher last week and it moved above the lower of the declining resistance lines, however, it remained below the upper one and the 38.2% Fibonacci retracement level based on the entire 2012 – 2013 decline. Plus, the rally took place on very low volume (to be precise: the volume on which gold moved higher was tiny relative to the volume on which the UDN ETF was trading), which is a weak (but still) bearish sign.

Short-term Silver price chart - Silver spot price

Silver didn’t do much on Friday, so what we wrote in Friday’s alert remains up-to-date:

Silver moved higher, but the way it’s been performing recently is to a great extent a repeat of the topping patterns that we saw in March / April and in August. Consequently, we don’t view silver’s yesterday’s rally as something bullish.

What about gold stocks?

HUI Index chart - Gold Bugs, Mining stocks

The above long-term chart shows that they are declining in tune with the previous decline – yesterday’s rally changed nothing. The outlook remains bearish.

GDX - Market Vectors Gold Miners - Gold mining stocks

From the short-term perspective we see that miners moved a little lower on low volume, which looks like a correction after a rally – the move is not bearish (at least not yet). Miners are on the border of our target area, so it wouldn’t surprise us if they rallied a bit more only to slide shortly thereafter.

All in all, since not much changed on Friday (except gold’s invalidation of a breakout), we can summarize today’s alert in a way similar to what we did on Friday:

Summing up, while last week’s session might appear to be a game changer, we don’t think that it is. In fact, when we opened the current short position, we described a move to even higher levels as possible and as one that would not invalidate the bearish outlook. The situation on the silver and mining stock charts didn’t change. The only change was seen in gold (small breakout on Thursday), but this breakout was already invalidated on Friday. It seems that the profits from our short position will increase significantly in the coming weeks, but not necessarily days. Moreover, in our opinion, it continues to be justified from the risk/reward point of view to keep the current short position intact.

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: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54

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: initial target price: $16.27; stop-loss: $24.33
JDST: initial target price: $16.98; stop-loss: $3.42

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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