Gold & Silver Trading Alert: Miners Cancel the Friday’s Rally

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

The miners’ outperformance was something that appeared bullish after Friday’s session. It no longer does – yesterday, gold stocks declined more than they had rallied on Friday and that happened along with a move lower in the USD Index. What’s next given the invalidation of the bullish sign?

In short, most likely precious metals will move lower, if not immediately, then soon. Miners had a good reason to rally on Friday in the form of rallying (on strong volume) stocks. On Friday, miners moved higher on low volume, so we wrote that it didn’t seem that the move was a real one.

What happened yesterday seems to confirm the above. The general stock market moved lower by just 0.19% and it was enough to trigger an invalidation of Friday’s rally in mining stocks. If it had been a true move, we wouldn’t have seen such bearish action yesterday – but we did.

Let’s take a look at the HUI Index chart (charts courtesy of http://stockcharts.com).

HUI Index chart - Gold Bugs, Mining stocks

In yesterday’s alert we wrote the following:

On Friday, we commented on the self-similar pattern in the HUI Index. As of today, it seems that self-similarity is still present and the implications remain bearish. Based on Friday’s rally, it seems that we are still ahead of the final decline, not within it. Based on this pattern, we are not likely to see substantial strength shortly, but rather a reversal followed by continued weakness.

The above remains up-to-date. It seems that the self-similarity continues and it has bearish implications. Gold stocks have just moved visibly back below the 38.2% Fibonacci retracement level and thus are likely to decline in the coming weeks and – quite likely – days.

Short-term Gold price chart - Gold spot price

On the above chart, we don’t have much new to comment on, but we are featuring it to let you know that if the top has already been formed at the 300-day moving average – which seems likely – then the gold price is declining at a pace we would expect it to, based on the previous declines. Gold is declining more or less between the 2 green lines, which means that the pace of the decline is exactly like during the previous declines. Consequently, the fact that it’s not plunging yet is not concerning.

Other than the above, there’s little new that we can say today, as practically everything that we wrote yesterday remains up-to-date also today.

Summing up, gold stocks seem to have reversed their previous rally, which is a bearish sign. The key thing is that multiple bearish signals that we’ve described in the recent alerts remain in place and continue to have very bearish implications for the medium term. While the situation and outlook for the next few days are still rather unclear (although more bearish than not), the medium-term outlook remains clearly bearish. Again, based on multiple signals that we have right now, it seems that the next big move will be to the downside and being positioned to take advantage of it remains justified from the risk/reward point of view. The next big downswing in PMs may be triggered by a breakout in the USD Index, which seems to be just around the corner.

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

To summarize:

Trading capital (our opinion): Short 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: $1,050; stop-loss: $1,223, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $62.34
Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
Mining stocks (price levels for the GDX ETF): initial target price: $11.57; stop-loss: $18.13, initial target price for the DUST ETF: $26.61; stop loss for the DUST ETF $9.22

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: $16.27; stop-loss: $25.23
JDST ETF: initial target price: $46.47; stop-loss: $15.58

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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