Gold & Silver Trading Alert: Miners Rally but Other Stocks Rally More

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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.

Silver and mining stocks moved higher yesterday, invalidating the previous breakdowns, which seems to be a bullish sign. On the other hand, the size of the comeback was very small when we compare it to the size of the comeback in the main stock indices and the USD Index. Did the outlook improve or deteriorate based on yesterday’s price action?

It actually changed very little, if at all, in our opinion. Let’s move right to the charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

In yesterday’s alert we emphasized that gold broke (insignificantly, but still) below the short-term rising support line. Gold didn’t move back above this line and it closed below it for another day, so the situation on the above chart deteriorated a bit. If gold closes below the mentioned line also today (which would also mean a weekly close below it), the breakdown will be confirmed and the implications will be even more bearish.

Short-term Silver price chart - Silver spot price

Silver is also verifying a breakdown of its own. The white metal didn’t stay below the Nov. 2014 low for long but it didn’t rally well above the short-term resistance levels either. The previous 2015 low serves as resistance and so does the declining red line based on the May and July highs.

Did the situation improve much since silver moved back above the intra-day low of 2014? Not really, as it was only an intra-day low – the daily closing price was much higher and this year’s previous lows seem more important (silver stayed there for much longer).

GDX - Market Vectors Gold Miners - Gold mining stocks

What about mining stocks? It’s true that they moved higher, but the size of their upswing compared to the size of the previous decline is not impressive. In fact, miners corrected only a small part of their decline, but the S&P corrected about 60% of the slide. Consequently, on a relative basis, the miners’ rally can even be viewed as a bearish sign.

Is the rally a sign of strength in the precious metals sector? Again, not likely, as the decline was big and sharp so a correction is something natural, not unexpected.

Summing up, the situation and outlook didn’t change based on yesterday’s price move and the outlook remains bearish. The analogy to the similar session (Oct. 15, 2014), gold’s underperformance relative to the USD Index, and other technical signs make us think (our opinion) that much lower prices are in the cards and that the short positions will become much more profitable than they already are (despite natural corrections along the way).

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: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
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 ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54

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: initial target price: $16.27; stop-loss: $24.33
JDST: initial target price: $16.98; stop-loss: $3.42

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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