Briefly: In our opinion, no speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Last week was finally “interesting” for precious metals investors and traders as gold rallied sharply after days and weeks of back-and-forth movement. The most interesting thing about that week is that silver rallied only temporarily and mining stocks actually managed to slide on Friday.
Let’s examine the implications, starting with gold (charts courtesy of http://stockcharts.com).
Gold didn’t do much on Friday - it paused after Thursday’s strong-volume rally. This kind of small decline is not bearish - it’s something quite natural for a market to do after a significant upswing. All it does is it “says” that the signals from the previous day remain up-to-date. Consequently, comments from our previous alert are up-to-date as well:
Gold rallied through the 50-day moving average and the lower of the rising resistance lines. The move took place on huge volume, which makes it quite believable (without the need of further confirmation). However, gold remains below the 38.2% Fibonacci resistance level and the rising resistance line based on the daily closing prices, so not everything became bullish.
Based on the above chart the outlook is moderately bullish for the short term, but there are no implications as far as the medium term is concerned.
The next strong resistance level is at about $1,225, where we have the previous high, the 50% Fibonacci retracement level and the medium-term declining resistance line (not visible on the above chart).
The later is visible on the chart below:
The long-term gold chart shows that last week’s rally didn’t change anything as far as the medium-term trend is concerned (it remains down) and our target areas remain up-to-date. The sell signal from the Stochastic indicator remains in place as well.
Nothing changed from the long-term perspective – silver moved only $0.12 higher last week and there was no breakout / breakdown. The medium-term trend remains down and so does the short-term one. Silver remains below the 50-day moving average as well. The particularly interesting thing was silver’s sharp rally on Thursday that was cancelled in the following hours.
The critical thing here to keep in mind is silver’s “fakeout reputation”. By that we mean that silver tends to “break out” which serves as a major sell signal instead of a buy one. The majority of breakouts in silver, especially the sharp and “exciting” ones, are invalidated and followed by declines. We would not be surprised to see something like that in the following days – if it happens, please keep the above in mind.
Thursday’s intra-day reversal can be viewed as a silver’s fakeout, but it’s rather unclear. We don’t think there are strong bearish implications thereof just yet.
The overall implications of the above 2 charts are that silver is likely to move much lower in the following months, but the situation – though bearish – is not as clear as far as the short term is concerned.
Having said that, let’s take a look at the mining stocks.
From the long-term perspective, nothing changed last week. The HUI Index moved back to the previously broken neck level of the bearish head-and-shoulders pattern and decline once again, verifying the breakdown. Gold stocks are likely to move much lower in the coming weeks.
From the short-term point of view, however, we saw a move back above the declining resistance line. Miners declined on Friday once again, but they didn’t move back below the resistance line, which now serves as support. If we see an additional daily close above this line, the breakout will be confirmed and the short-term implications will be bullish (much more bullish than they are right now).
Overall, the above short-term chart has bullish implications for the short term, but not strongly bullish. The medium-term signs continue to have bearish implications (we discussed them in Thursday’s alert, so if you haven’t had the chance to read it yet, we suggest that you do so today). If miners manage to move higher, it doesn’t seem that the HUI index would move much above the 175 level (the GDX ETF above $20 - $21) as that’s where we have the strong, medium-term resistance.
Since not much changed on Friday, we can summarize today’s alert just as we summarized the previous one:
Summing up, the medium-term outlook for the precious metals sector remains unchanged and bearish, but it seems that we could see some more strength in the short term. The short-term outlook is only somewhat bullish, it’s not bullish enough to justify opening long positions in our view, especially that such positions would be against the medium-term trend (which remains down). It seems that we will see another shorting opportunity relatively soon – stay tuned. We would like to see silver’s fake breakout as a bearish confirmation, but it’s not clear if we have seen it yet as Thursday’s price action in silver was rather unclear.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): No positions
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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