Gold & Silver Trading Alert: Major non-Brexit Factor

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Briefly: In our opinion speculative short positions (full) are currently justified from the risk/reward point of view.

Quite a lot has been written about today’s Brexit from both the fundamental and technical point of view and since the markets didn’t move much yesterday, we don’t have much to add about this issue today. However, something else has happened recently that also deserves a lot of attention.

Let’s take a closer look (charts courtesy of http://stockcharts.com).

BPGDM - Gold Miners Bullish Percent Index

The Gold Miners Bullish Percent Index is a gauge of overbought and oversold conditions for the gold mining sector. It is a breadth indicator based on the number of stocks with Point & Figure buy signals (a Point & Figure chart emphasizes strong moves while ignoring small ones) within this index. The Gold Miners Bullish Percent Index's range varies between 0 and 100. Generally, a reading below 30 indicates oversold conditions in the gold mining stocks sector, and a reading above 70 indicates overbought conditions.

However, when the index moves above the 87 level we have a very overbought situation and a signal that a sizable move lower is likely. It happened only a few times in the previous years and each time a decline followed. With this kind of performance, the implications are very bearish.

The additional thing that we would like to discuss is the only time when the index was as high (actually a bit higher) than its current value – in November 2010. The intraday high of the HUI Index was 588. The final high in September 2011 was about 639, which was only 8.7% higher than the Nov 2010 high.

If the HUI Index was to exceed its recent high of 241 by 8.7%, it would mean an increase to only 262 (the March 2014 high). This may seem significant on a day-to-day basis, but from the long-term point of view, it’s a small upswing. So, if a move to the extreme value corresponding to the final top of 2011 means just a relatively small increase from the recent high, then the outlook is clearly bearish as if such extreme levels were reached, a big decline would extremely likely follow anyway.

Summing up, besides the Brexit vote (and the likely result of Bremain) there is another factor that one should keep in mind and that is just how overbought mining stocks are on a medium-term basis (as represented by the Gold Miners Bullish Percent Index). The outlook for the precious metals remains bearish.

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

To summarize:

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

Gold: initial target price: $1,006; stop-loss: $1,323, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $44.35
Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $27.47, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.50

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: $41.73
JDST ETF: initial target price: $61.74; stop-loss: $9.87

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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