Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are keeping the stop-loss levels at their current levels, which means that we are effectively keeping some gains locked and at the same time we’re allowing the profits to increase.

Gold moved initially lower on Wednesday only to come sharply back up before the end of the session. Miners did the same and some gold traders probably thought that a rally would follow. And it did – for a few hours. Precious metals and mining stocks moved higher in the first part of the session only to decline and reverse the previous day’s bullish action. Is the rally over?

That’s quite probable. The rally was not likely to be big and what happened is in tune with this description. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

The long-term picture didn’t change and our previous comments remain up-to-date:

Gold moved below the declining support line. The breakdown is not confirmed, but it is definitely a bearish development. Did the situation become much more bearish based on the above chart? No. More bearish, yes, but not much more bearish.

Gold moved higher on Wednesday, but it did not move back above the declining resistance line. Consequently, the move back below it is almost confirmed (we think it’s best to wait for 3 closes above/below a certain level for a given breakout or breakdown to be confirmed). Therefore, if we focus on the closing prices, the outlook actually deteriorated based on what happened yesterday.

The breakdown is now confirmed by 3 consecutive closes below the declining support/resistance line and a weekly close would confirm it even further. The outlook remains bearish.

What about the short-term chart?

We were skeptical toward gold’s reversal and it seems that we were correct. The following strength was very temporary. Of course, the rally may not be over, but this outcome seems quite likely. Even if it’s not, it’s not likely to move much higher, anyway. Gold was likely to correct in an insignificant manner based on the support levels that were reached and it seems that we saw just that.

Here’s what we wrote previously:

The analysis of price levels suggests that the next interim target (but not the final target for this decline) is $1,200. That’s where the 61.8% Fibonacci retracement level and the rising short-term support line intersect. Plus, the $1,200 is a round number, which makes it significant from the psychological perspective. Will gold form a bottom at this level? A local one – quite likely. A final one – not likely.

Gold moved to our target area (…) and it almost reached the $1,200 level. As we indicated above, the very short-term situation improved based on this move as we can see a bounce here, but we don’t think that it will be significant or that it will last long. Gold declined on significant volume, so the implications are bearish, even though we could see some strength in the following days.

We indeed saw some strength as gold reversed its intra-day decline and ended the session slightly higher. The daily candlestick is a reversal hammer candlestick, which has bullish implications, but before thinking about exiting the short positions, let’s keep in mind the comments based on the long-term chart (and the long-term charts are more important than the short-term ones) and the fact that yesterday’s price action took place on volume that was not nearly as significant as what we’d seen during the previous decline. If it had indeed been a major reversal then we would have expected to see average volume in the preceding days and very high volume during the reversal – there was no such action. Consequently, the following rally doesn’t have to be significant, and it doesn’t seem that it will be. In fact, it’s doubtful enough for us not to adjust the speculative positions at this time.

All in all, the outlook remains bearish.

What about silver?

Once again - not much. Silver hadn’t moved much on Wednesday and whatever it had rallied on that day, it gave back yesterday. The Wednesday upswing didn’t take silver back above the rising resistance line. Consequently, the technical picture remains unchanged and what we wrote previously remains up-to-date:

What’s important on the above chart is that we saw a visible breakdown below the rising support line. This is a major bearish signal for the coming weeks regardless of the possibility of a small bounce in the next few days.

Even if we see a small move higher here, it will not change anything.

Mining stocks moved higher more visibly on Wednesday, but they had a good reason to do so – gold stocks moved to their 2013 lows. It’s no wonder that this level is a strong support.

Yesterday, gold stocks moved below their 2013 lows once again and even managed to close a bit lower than on Tuesday (184.60 vs. 183.89). It seems that Wednesday’s reversal has been nullified.

Moreover, please note that the Stochastic indicator suggests that we are still in the early days of this decline as it’s not even close to the 20 level which level can be interpreted as oversold territory.

Overall, the outlook remains bearish.

Summing up, the outlook for the precious metals sector remains bearish. By keeping our full speculative position intact, we aim (and it seems that we are likely to) increase our profits on it and by keeping only half long-term investment capital in the precious metals market we are likely to continue to outperform the simple buy-and-hold approach.

As always, we’ll keep you – our subscribers – informed.

To summarize:

Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks with the following stop-loss orders and initial (!) target prices:

• Gold: initial target level: $1,180; stop-loss: $1,254, initial target level for the DGLD ETN: $75.23; stop loss for the DGLD ETN $63.16
• Silver: initial target level: $15.70 ; stop-loss: $17.63, initial target level for the DSLV ETN: $66.25 ; stop loss for DSLV ETN $45.40
• Mining stocks (price levels for the GDX ETN): initial target level: $18.40; stop-loss: $22.17, initial target level for the DUST ETN: $18.99 ; stop loss for the DUST ETN $11.32

In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:

• GDXJ: initial target level: $23.37; stop-loss: $28.37
• JDST: initial target level: $12.30 ; stop-loss: $7.00

Long-term capital (our opinion): Half positions in gold, half positions in silver, half position in platinum and half position in mining stocks.

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 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.

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Latest Free Trading Alerts:

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Thank you.

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

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