Gold & Silver Trading Alert: Miners Dive First

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Briefly: Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective.

Gold and silver moved to previous lows yesterday, but miners declined about 5% and the decline took place on big volume (in both: absolute and relative terms). Are miners breaking lower indicating that the rest of the PM sector is to follow, or was the move in the mining stocks rather unconfirmed and likely to be invalidated? Fortunately, we have reliable signs pointing to the most likely outcome.

We already discussed some of them above – the volume is the thing that very often confirms (or invalidates) a given move. Naturally, before applying this technique, one should check whether it really worked for the previous moves. In case of mining stocks, we’ve been seeing these confirmations work over and over again, so seeing it now is indeed meaningful.

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

GDX - Market Vectors Gold Miners - Gold mining stocks

In yesterday’s alert, we wrote the following:

(…)

The above-mentioned price/volume action suggests that what we saw was just another breather after a big decline that prepares investors and traders for another slide. Moreover, that was the fourth subsequent close below the above-mentioned resistance levels – the breakdown was confirmed, which makes the outlook for the following weeks even more bearish.

The mining stocks declined after a breather, which makes the move much more sustainable then it would be if the price would just continue to slide without pausing. The increased volume confirms that the small consolidation is likely over and the decline has already resumed.

Short-term Gold price chart - Gold spot price

While mining stocks paused after moving below their July low and they now continue their slide below it, gold only reached its July low. In other words, mining stocks are underperforming gold and are leading it lower – the exact opposite to what’s been the case earlier this year. This technical development alone is a strong suggestion that the main downtrend is back.

Let’s take a look at gold. It declined, but the volume was not significant. One might ask if yesterday’s session was bullish in consequence of the above. It wasn’t and the reason is that the previous declines in gold also included many sessions during which gold declined on rather insignificant volume. Nov 2, 2015, June 19 – June 25 2015, Feb 11, 2015, Oct 24 and Oct 27, 2014, and many other daily declines in the early parts of major declines were characterized by relatively low volume. Consequently, since there were many cases, when gold declined right after the low-volume daily declines, there’s little reason to view the latter as bullish.

To be clear – there were also cases, where such low-volume declines preceded upswings, so the overall implications are none (not bearish).

Short-term Silver price chart - Silver spot price

In case of silver we see that the pause still continues even though the white metal is well below its July low. Should this make one concerned? Not really – silver is known for taking its time before starting to move, but when it does move, then the volatility can be enormous. For instance, it wouldn’t be surprising to see silver do nothing for another week and then decline $2 or even $3 within one week. That’s not our official prediction, but that is a scenario that would be quite in tune with silver’s nature – we’re presenting it to emphasize that no visible move for several days (or even weeks) in case of silver, doesn’t mean that a bigger move is not around the corner – one needs to stay alert despite this seemingly calm environment, especially in light of miners’ breakdown and underperformance.

Summing up, yesterday’s decline in mining stocks is most likely signaling that another big decline in the precious metals sector is underway (which has been likely for weeks based i.a. on the 1983 analogy). Low volume in gold doesn’t seem to have any bullish implications at this time and we can say the same about silver’s short-term stagnation. The outlook for the precious metals market remains bearish.

Still, based on the sharpness of the recent daily rally in the USD Index, we wouldn’t be surprised to see a small corrective downswing in it, which could translate into a few additional days of consolidation in case of the precious metals sector (it doesn’t seem that it will be anything radical, though).

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% 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: $1,423, initial target price for the DGLD ETN: $74.37; stop-loss for the DGLD ETN $34.91
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: $33.17, initial target price for the DUST ETF: $297; stop-loss for the DUST ETF $18.80 (we have adjusted the prices for the DUST ETF based on the 5 for 1 split)

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: $54.29
JDST ETF: initial target price: $245; stop-loss: $15.80

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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