Gold & Silver Trading Alert: Is the Rally Over?

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Briefly: In our opinion, long (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

Gold, silver and mining stocks declined on Friday for another trading day and silver closed below its 50-day moving average. Is the rally over?

While that’s possible, in our opinion, it is not the case. Let’s see why (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

In Friday’s alert we wrote that the important thing is that yesterday’s decline didn’t take gold back below the previously broken declining support/resistance line. Without the breakout’s invalidation, the bullish implications remain in place. The above remains up-to-date. Moreover, the short-term outlook actually improved because Friday’s close was the third close above the declining resistance line, so the breakout above it is now confirmed.

The above is more important than the fact that gold ended the session lower, so, in a way, Friday’s decline was actually bullish, because of its limited size.

Our other comments on the above chart remain up-to-date:

Will the top be within our target area? Well, the only true answer is that “nobody knows”, but taking into account the past patterns allows us to say that it’s likely, but not imminent. We can’t rule out a move even higher (on a short-term basis), but if / once gold moves above our target area it will mean that the most likely / profitable part of the move higher is over. The following part is something that could take place, but it’s not certain enough to be worth betting on.

Gold from the non-USD perspective - GOLD:UDN

The average of gold prices in non-USD currencies doesn’t say much about the next short-term move, but the shape of the most recent move higher suggests that this is just a pause within a bigger decline, not the start of another major rally. Please note that the volume moved lower as gold moved higher, so the implications are bearish.

Long-term Silver price chart - Silver spot price

Silver moved higher last week and the small correction that we saw in the final part of the week didn’t change anything. Our previous comments remain up-to-date:

There is significant long-term resistance relatively close to where silver currently is. The declining dashed resistance line and the 50-week moving average provide resistance close to the $16 level. It’s unclear whether silver’s next local top is more likely to take place a bit below or above this level, but it seems likely that we will get confirmation from another market (gold or mining stocks) once silver moves close to this area.

GDX - Market Vectors Gold Miners - Gold mining stocks

We commented on the above chart in the following way on Friday:

Did anything change yesterday based on the miners’ decline? Not really. No market can move up or down without periodic corrections and miners are not an exception to this rule. The decline took place on volume that was lower than what we had seen the previous day (during the daily rally), so there are no bearish signs here. Plus, mining stocks only corrected to the first (38.2%) of the classic Fibonacci retracement levels without breaking lower, so technically, nothing changed. The outlook remains bullish.

Miners moved even lower, but not much lower – only to the 50% retracement level. The important thing is that the decline took place on tiny volume. It’s extremely low when we compare it to the volume on the previous 2 days, which suggests that Friday’s decline should not make one worried as it’s not the true direction in which the market is moving in the short term.

Overall, since nothing really changed yesterday, we can summarize today’s alert just as we summarized yesterday’s issue:

Summing up, from the medium-term perspective nothing changed in the precious metals market recently as the situation was and still is bearish (we don’t think the final bottom for this decline is in yet), but it seems very likely that we will see a corrective rally before the decline continues.

There are more bullish factors than bearish ones (the bearishness in the mainstream media being the most significant bullish factors) and we believe that it’s currently justified from the risk/reward perspective to keep the full size of the profitable speculative long position in the precious metals sector. It seems quite likely that our profits on this trade will become even bigger.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Long position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:

Gold: initial target price: $1,135; stop-loss: $1,063, initial target price for the UGLD ETN: $9.44; stop loss for the UGLD ETN $7.69
Silver: initial target price: $15.90; stop-loss: $14.12, initial target price for the USLV ETN: $16.54; stop loss for USLV ETN $11.51
Mining stocks (price levels for the GDX ETN): initial target price: $15.87; stop-loss: $12.37, initial target price for the NUGT ETN: $5.17; stop loss for the NUGT ETN $2.46

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: initial target price: $21.78; stop-loss: $17.67
JNUG: initial target price: $12.01; stop-loss: $6.39

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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