Briefly: In our opinion, a speculative short position (full) in gold, silver and mining stocks is justified from the risk/reward point of view.
Yesterday’s session was quite similar to what we had seen previously as far as performance of metals is concerned, however, the mining stocks’ decline has very important implications.
As you might expect – based on the fact that miners declined – these implications are bearish. The reason is that we have bearish head-and-shoulder patterns visible from long- and short-term perspectives and they were both completed.
Let’s start with the short-term one (charts courtesy of http://stockcharts.com).
The miners’ underperformance relative to both gold and the general stock market continues to have bearish implications for the entire precious metals market, but that’s not what we want to emphasize today.
The important thing here is that the breakdown below the neck level of the bearish head-and-shoulders pattern was confirmed and that the GDX ETF declined once again after moving back to the neck level. The formation is completed and likely to trigger further declines. This formation allows us to estimate the size of the next short-term move – the breakdown is often followed by a decline equal (or similar) to the size of the head of the pattern. In this case, the pattern suggests that the GDX is likely to move below $17, which is in tune with our initial target for this decline.
What’s even more important is that this move will more than confirm an even bigger head-and-shoulders pattern in gold stocks.
The head and shoulder pattern that took about 6 months to complete is something that could trigger another major slide in the precious metals sector. The target based on this formation is at about the 120 level for the HUI Index, which is the upper border of our target area. The targets based on the H&S pattern tend to work on an “at least” basis, so it seems that our target area is even more likely to be reached.
The important thing is that the HUI moved below the neck level of the pattern, and based on the short-term H&S, it’s likely that the move below the neck level of the bigger H&S will be clearly visible and thus much more meaningful.
Summing up, Summing up, more and more signs seem to confirm our outlook for the precious metals sector – it seems that the final bottom is still ahead of us. The current short positions in the precious metals sector are already profitable but it seems that they will become much more profitable in the future, so we are keeping them intact. If we see another decline, we will quite likely adjust the stop-loss levels and effectively lock-in some gains while keeping the chance of increasing them even further.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short (full position) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:
- Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $18.13, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $38.44
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $10.37
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 price: $21.17; stop-loss: $28.68
- JDST: initial target price: $14.35; stop-loss: $5.65
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.
=====
Latest Free Trading Alerts:
S&P 500 index got back above the level of 2,100, as investors reacted to global economic news. Is holding short position still justified?
Stock Trading Alert: New Uptrend Or Just A Quick Upward Correction?
Earlier today, the U.S. Department of Labor reported that the number of initial jobless claims in the week ending June 6 increased by 2,000, beating analysts’ expectations. Additionally, the U.S. Commerce Department showed that retail sales increased by 1.2% in May (beating expectations for a gain of 1.1%), while core retail sales (without automobile sales) rose by 1.0% in the previous month (also beating forecasts for a 0.7% increase). Thanks to these solid numbers, the USD/CHF broke above two important resistance lines, but will this improvement trigger further rally?
Forex Trading Alert: USD/CHF – Short-term Consequence of Medium-term Resistance
=====
Hand-picked precious-metals-related links:
Gold bulls lose key ally as diehard coin buyers vanish in US
Jim Rogers: 'Flawed' Dollar Isn't a 'Sound Currency'
=====
In other news:
Bond selloff a wild card that could delay Fed rate hike
Inflation is making a comeback
Gartman: Emerging market flows will go straight to US
Precious metals back in favor as volatility rises
=====
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
