Gold & Silver Trading Alert: Invalidation of a Breakdown?

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Briefly: Short positions (full position) in gold, silver and mining stocks are justified from the risk/reward perspective.

Not much happened during yesterday’s session, so we will dedicate most of today’s alert to discussing today’s pre-market moves. In fact, as far as yesterday’s price and volume moves are concerned, the only thing that we can say is that we saw another low-volume upswing in gold, silver and mining stocks, which is a bearish sign.

Today, however, the USD Index took a dive (-0.62 at the moment of writing these words) and gold moved $13 higher. That’s quite a small reaction to a rather significant move in the USD, which is a bearish combination. However, the question is if the move higher invalidates the recent breakdown below the rising short-term support line.

In order to see if it is the case, let’s zoom in our usual short-term term gold chart (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

The mentioned line is currently (as of today) at about $1,352 and gold is currently trading at about $1,353 – more or less at this line. The session is far from being over, so it could easily be the case that gold closes below the line and there will be no real invalidation of the breakdown. Speaking of closing prices, if we draw the support/resistance line based on them, we will get a line that provides resistance at a price a bit higher: $1,354.

Consequently, it’s too early to say that the breakdown was invalidated.

Platinum and palladium soared today and silver also rallied more visibly than gold did, but the above is something that we saw (especially in the case of silver and palladium) when the precious metals market topped, so it doesn’t have bullish implications either.

Short-term US Dollar price chart - USD

Moving back to the USD Index, it moved to about 95.50 today – the early July low and more or less the 38.2% Fibonacci retracement level based on the May – July rally. Consequently, since 2 support levels were reached, the decline could be over or is very close to being over as today’s decline doesn’t invalidate the bullish outlook for the USD Index in the medium term.

Long-term US Dollar price chart - USD

The USD Index is still within an over-a-year-long consolidation after a huge run-up. It’s likely to break above the previous highs and start another powerful upleg – similar to the one seen in 2014 and 2015 – the moves that follow a consolidation tend to be similar to those that have preceded it.

What implications does this have for the precious metals market? It continues to have bearish implications for the following months. The gold-USD link took a break from the normal way it works due to the Brexit vote, but now the yellow metal is once again moving in the opposite direction to what the USD does. With the big picture for the USD Index being bullish, the medium-term outlook for gold is bearish. We expect gold to rally – at some point - despite a big move move higher in the USD Index, but we don’t think we are at this stage just yet.

Summing up, the analogy to the 1983 decline remains in place and so do many bearish signals discussed on Monday, yesterday’s session didn’t change anything and today’s pre-market upswing seems to have smaller implications than it appears at the first sight. Gold is very close to the support/resistance line (so it’s too early to say that there was indeed an invalidation of the breakdown) that it broke a few days ago and silver’s outperformance is something that we quite often see at local tops. Consequently, we don’t think that the bearish outlook for the precious metals market for the short and medium term changed based on today’s pre-market action.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,423, initial target price for the DGLD ETN: $74.37; stop-loss for the DGLD ETN $34.91
Silver: initial target price: $13.12; stop-loss: $21.63, initial target price for the DSLV ETN: $39.78; stop-loss for the DSLV ETN $14.34
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $33.17, initial target price for the DUST ETF: $16.38; stop-loss for the DUST ETF $3.77

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: $14.13; stop-loss: $54.29
JDST ETF: initial target price: $14.39; stop-loss: $3.22

Long-term capital (core part of the portfolio; our opinion): No positions

Insurance capital (core part of the portfolio; 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 signs 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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