Gold & Silver Trading Alert: Long-term Signals

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

The end of the previous week was rich in signals as gold, silver and mining stocks all reversed along with the USD Index. Gold closed the week below the rising support line and the implications should not be ignored even by those who usually focus on fundamentals alone.

Why? Because in the short- and medium term, the important technical developments will shape the price – not the fundamentals. Why should one care? In early 2008 silver was priced above $20 and in late 2008 it was priced below $10, even though the fundamental outlook didn’t change. Similar price swings can make a lot of money for those who pay close attention to what’s going on – but knowing about positive fundamentals is not enough.

Consequently, let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

As indicated above, gold broke and closed the week below the rising support lines. This may not seem significant on a day-to-day basis (or when one focuses on fundamentals), but it changes a lot from the technical perspective. Technically, the 2016 rally is over. The weekly closing price is very significant and even without zooming in, the breakdown is clearly visible and the volume that accompanied the downswing was significant. The implications are very bearish.

Short-term Silver price chart - Silver spot price

Silver just formed a big reversal and the volume was significant. Actually, the volume alone is the factor suggesting that the top is in – please note what happened after sessions that were accompanied by huge volume in the past. Mid-April, early July, early September, mid-February – all these tops were accompanied by huge volume. The mid-April one was not the final top, but still, it was a good shorting opportunity – silver bottomed over $1 lower than that price after a huge-volume reversal.

Short-term Silver price chart - SLV ETF - iShares Silver Trust

In terms of turning points, we get the same bearish implications. It “was about time” for silver to change its course and the thing was that we saw a decline instead of a short-term rally. That was a problem because, in general, the trend remains down, and the implications of the turning point after a decline would be bullish. It all changed based on silver’s intra-day rally. We now have silver after an intra-day rally and it seems that the next move will be to the downside.

XAU - The Philadelphia Gold and Silver Index (XAU Index)

Mining stocks (XAU Index) moved higher last month, but only slightly. The most important thing is that they closed the month below the rising support / resistance line. The implications are bearish as it implies that the temporary move back above the line was a fake one.

Summing up, we were previously waiting for bearish confirmations and we just saw them. Consequently, the bearish outlook became even more bearish and it appears that short positions in gold, silver and mining stocks are currently justified from the risk to reward point of view.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (100% of the 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: $1,373, initial target price for the DGLD ETN: $73.19; stop-loss for the DGLD ETN $38.89
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: $30.67, initial target price for the DUST ETF: $297; stop-loss for the DUST ETF $21.80

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: $53.41
JDST ETF: initial target price: $245; stop-loss: $16.59

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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