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

Gold stocks soared finally yesterday and the size of their rally made the session one of the most important sessions of this year. How much did HUI’s invalidation change and is THE final bottom in precious metals in?

In short, not much changed and the following charts will show you why. Let’s start with gold (charts courtesy of http://stockcharts.com).

Gold moved a bit higher and that’s a bearish development, because there was a good fundamental reason for gold to rally – Greeks said “no” in the referendum and the Greek finance minister resigned, which means that the situation became even more tense and one would expect the safe-haven demand for gold to kick-in. Gold didn’t do much, though and the corresponding volume levels were rather small.

The situation in the silver market didn’t change – it’s been bearish and it still is. Silver once again moved a bit (less than 1%) higher, but the move didn’t take it visibly above the declining resistance line. The tiny move above it was canceled and silver closed more or less at this line, thus nothing changed. The move higher was accompanied by low volume, which has bearish implications.

There are no changes on the long-term silver chart either – the trend remains down.

Before moving to the mining stocks, let’s take a look at one additional short-term silver chart.

Silver’s important turning point is approaching. In all 4 previous cases these turning points were followed by declines, so the implications of silver reaching the turning point are bearish. In the previous cases, silver was after a sizable rally and at this time it is only a very short-term and small rally that it’s after, so the implications are not as clear and not as bearish as they were in the previous cases, but still, they are more bearish than not – especially for the following weeks (not necessarily days).

If we see a “breakout” in silver – a sharp move higher, please note that this action will not have bullish implications, but rather bearish ones – especially in light of the turning point. The majority of previous breakouts in silver was invalidated.

The action in mining stocks is so important right now because they have previously moved below their 2008 lows. Both the XAU and HUI indices closed below their respective 2008 lows for 3 consecutive trading days. This means that the breakdowns were technically confirmed and the odds for another big slide increased.

Miners moved higher yesterday, so the key question is if this rally invalidated the above.

There is no single reply, because there is no single way to define “breakdown”, and especially a “confirmed breakdown”. The breakdown below the 2008 intra-day low was invalidated. The breakdown in terms of daily closing prices was not invalidated. Yesterday, the HUI Index closed at 151.41 and the 2008 low in terms of daily closing prices was 151.57. There was not invalidated in terms of the weekly closing prices either as this week is far from being over.

In case of the XAU Index, there was no invalidation of the breakdown even in intra-day low terms. The lowest daily close of 2008 in the XAU Index was 64.36, so XAU is relatively far from this level.

So, was the breakdown invalidated or not? The reply is much closer to “no” than “yes”, but that’s not a complete “no”.

What about the short-term outlook?

It shows that miners could move a bit higher (to $18.25 or so) before they slide once again. More importantly, the above chart shows that the short-term trend remains down.

The head-and-shoulder-based target that we described about a month ago was reached, but given the recent breakdowns in the HUI an XAU indices, it seems that staying on the short side of the market is a good idea, as the above-mentioned breakdowns suggest that the next major move is going to be down (and we don’t want to risk missing it).

Finally, let’s check if miners’ strength is bullish in light of gold’s back-and-forth movement.

It’s not – at least not yet. We have previously seen this kind of performance (a short-term rally with the RSI indicator moving back above the 30 level) this year and the precious metals sector didn’t rally shortly thereafter – it continued to decline after a quick bounce. The short-term downtrend was not broken, so even the short-term trend remains down.

Summing up, the situation improved just a little based on yesterday’s rally. It had deteriorated in the previous days, but we remained conservative in our judgment and we didn’t increase the size of the short position. Consequently, we don’t have to adjust it now – it reflected the “increased caution” even before yesterday’s rally, so it’s appropriate also today. Gold’s weak reply to the main events in Greece continue to suggest that the next big move in the sector will be to the downside. We will likely increase the size of the current short position, but only after seeing additional bearish confirmations. Of course, we are on the lookout for bullish signs as well, and will react if we see any significant strength.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short position (half) 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: $17.33, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $41.17
• 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 (we do not suggest doing so – we think senior mining stocks are more predictable in case of short-term trades – we 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: $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.

=====

Latest Free Trading Alerts:

The stock market in China has tumbled almost 30 percent since mid-June. Is it the beginning of the global financial crisis? How could it affect the gold market?

China’s Stock Market Bubble Bursts

Greeks overwhelmingly rejected the latest bailout package from European creditors in Sunday's referendum. What does it mean for the Greek debt-crisis and the gold market?

Greece Says ‘No’ to Bailout Deal

=====

Hand-picked precious-metals-related links:

Gold price: Hedge funds have NEVER been this bearish

China Rapidly Changing International Gold Market

=====

In other news:

Tsipras Begins Brussels Campaign to Keep Greece Inside the Euro

Chinese Trading Suspensions Freeze $1.4 Trillion of Shares Amid Rout

=====

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts