Briefly: In our opinion, no speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view. We will likely have another trading opportunity shortly.
Gold declined yesterday, but it didn’t move below the upper border of the previous triangle pattern, so the action appears to be rather insignificant. However, mining stocks just broke below the rising support line and were not able to move back above it yesterday. Is the next big slide in the precious metals sector already underway?
In our view that’s about 60% - 65% likely. That’s more than 50%, so this is most likely the case, but at the same time the chance is too low to justify opening short positions at this time.
Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).
In yesterday’s first alert we wrote the following:
Gold tried to break higher once again and once again it didn’t manage to do so. Finally gold ended yesterday’s session lower and this was the third day in a row when we saw a bearish reversal (an attempt to move higher followed by its immediate invalidation). This is a bearish combination.
In yesterday’s second alert, we wrote the following:
This could be a sign that the next big decline in the precious metals sector is already underway, but it doesn’t have to be the case. By moving to $1,242 gold simply moved back to the declining blue support line (as seen on the short-term gold chart in today’s alert) - the upper border of the previous triangle pattern, so today’s decline could still be just a verification of the breakout and something that precedes a rally to $1,328 or so. We are not saying that the outlook for gold is bullish - we are saying that it’s not crystal clear that it has become extremely bearish, or at least bearish enough to justify getting back on the short side of this market.
Gold moved lower once again yesterday and it closed $8 lower. That’s only a bit bearish, because we did not see a breakdown below the rising support line and the upper border of the previous triangle pattern. Consequently, the situation is still too unclear to enter a position at this time.
Gold has moved a few dollars lower also today, but that’s still above yesterday’s low and it still doesn’t change much.
The situation in silver didn’t change much either – silver declined by only 5 cents and the volume was not particularly huge. The outlook for silver was bearish based on the long-term chart and it remains to be the case also today, but we didn’t get a bearish confirmation from the white metal yesterday.
Ideally, we would like to see a sharp move higher in silver, a small move higher in gold and a tiny move higher in miners or even a decline (all on the same day, ideally accompanied by a declining USD and a rising stock market). This would serve as an excellent confirmation that the top is most likely in (silver tends to outperform right at the top, miners tend to lag at and before it and gold’s underperformance relative to the USD would also have bearish implications). The bearish confirmations could also take a different form so we will keep our eyes open and will report to you accordingly.
The most interesting short-term sell sign came from the mining stocks.
The miners broke below the rising support line on big volume on Tuesday (insignificantly, but still) and the bearish fact is that despite yesterday’s small move higher, the breakdown was not invalidated. The size of the volume that accompanied yesterday’s move higher (or a pause, depending on how one chooses to look at it, but this doesn’t change much) was low, which further confirms the bearish outlook.
The thing that we learned over many years of analyzing the precious metals market is that unlike many other markets, it takes 3 consecutive closes below a certain level for the breakdown to be confirmed. A “confirmed breakdown” is more likely to result in lower prices than an unconfirmed one. Consequently, if we see yet another daily close below the rising support line, the outlook will become much more bearish and we might re-open short positions at that time.
Summing up, the situation in the precious metals sector is bearish, but not bearish enough for us to re-open the short positions in the precious metals sector just yet (it is almost the case, but not yet). Gold appears to be starting to underperform the USD Index (in the past few days the USD declined and gold didn’t rally) but the size of this phenomenon is not yet very significant. Mining stocks broke below their rising support line and the breakdown is almost confirmed. Consequently, it seems that it’s justified to wait and re-enter the short position (or open a long one if we get much more bullish signs, but this doesn’t appear likely) in more favorable conditions (preferably at higher prices after seeing a major daily reversal).
The important thing is that when we are close to today’s close, it might be obvious (or at least very likely) that miners will once again close below the rising support line, thus confirming the breakdown. This would in turn make the outlook much more bearish and we would most likely re-open the speculative short positions. Consequently, we will be sending another alert today, most likely 1 to 2 hours before the market close today. Stay tuned.
As always, 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
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 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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