In short: In our opinion, small (half) short positions in gold, silver, and mining stocks are still justified (no changes since yesterday).

We’ll start today’s alert with what we ended the previous one with – the USD Index. Let’s take a look (charts courtesy of http://stockcharts.com.)

Yesterday, we wrote the following:

Overall, we might see another move lower in the USD Index and a move higher in the precious metals market, but we doubt that these moves would be significant. The medium-term trend in the precious metals market remains down and we can expect surprising moves to be to the downside, especially that the strong resistance levels are relatively close to where gold is right now.

We have indeed seen a move lower – it was not that significant and very temporary. The USD index moved back up before the end of the session and the outlook is actually more bullish than it was yesterday. The USD is more or less where it was, but at this time the bearish threat from the cyclical turning point is much smaller.

This paints a more bearish picture for the precious metals market.

Gold’s Wednesday’s performance was a mirror reflection of the USD Index. In this case, the intra-day reversal meant an invalidation of the previous small breakout above the declining resistance line. Analogously to bullish implications for the USD Index, this type of action has bearish implications for the gold market. In fact, gold formed a bearish shooting star candlestick. The signal was not that strong as the candlestick didn’t form on significant volume, but still, the situation has deteriorated.

Of course, there was no invalidation of the long-term breakdown in gold, and we didn’t see a move above similarly important line in silver either.

The white metal rallied quite strongly in the first hours of yesterday’s session and even touched the declining red resistance line. However, it reversed direction quite quickly and ended day well below the line, without any breakout. This session simply didn’t change anything in the silver market and the medium-term trend remains down.

Meanwhile, mining stocks declined by more than 1.5%.

At the same time, the mining stocks ETF (GDX ETF) broke below the rising support line. We saw the first attempt to move below it yesterday, but since miners closed at the line, we didn’t view it as a true breakdown. On Wednesday, however, we saw a close that was definitely below the support line and the breakdown is now a fact. It’s not confirmed (2 more daily closes would be required or a more prominent move lower) yet, so the bearish implications are not yet very strong, but still, the situation has deteriorated.

Before we summarize, we would like to discuss a bullish factor that has emerged recently. The above chart features the CCI Index – a proxy for the commodities sector. The bullish event is the recent breakout above the declining, medium-term resistance line (solid red line). However, there are 2 things that we should keep in mind before viewing the situation as very bullish. First, the breakout is too small to be viewed as confirmed, and second, the previous breakout (in 2012, above the red dashed line) was a fake one, which makes us even more suspicious about the real implications of the current move.

Overall, the implications are bullish for the precious metals market, but are not as strong as they appear to be at the first sight.

Summing up, taking all of the above into account, we arrive at the same conclusion at which we arrived previously – namely, in our opinion it’s a good idea to use a small part of the speculative capital to trade the (likely) coming decline in precious metals. If we see a meaningful confirmation of the bearish case (for instance, a decline on strong volume or a breakdown in the HUI Index), we will likely think that increasing the size of the short position might be a good idea. Naturally, in case of an invalidation of the bearish outlook, we will keep you informed as well.

To summarize:

Trading capital: In our opinion a short position (half) in gold, silver and mining stocks is justified from the risk/reward point of view. We are planning to profit on a significant downswing, so the stop-loss orders that are appropriate in our opinion are not that close (however, if something invalidates the bearish outlook, we will let you know ASAP, even if stop-loss orders are not reached).

Stop-loss orders for the short position:

• Gold: $1,307
• Silver: $21.20
• GDX ETF: $27.20

Long-term capital: No positions.

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 from your Editor, and the automated tools (SP Indicators and the upcoming self-similarity-based tool).

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.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA