Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Much was written in the previous days and weeks about the “imminent” rally in the precious metals sector due to January being a strong month for the sector. It turns out that we didn’t even move beyond the first half of the month and whatever rally was seen in silver and mining stocks, is already canceled and both parts of the PM sector moved below their December 31 2015 closing prices. Consequently, instead of a major rally, despite a recent upswing, we have actually seen a move lower in January. The same is not yet (!) the case with gold but that’s very likely due to gold’s safe-haven reputation and the recent events that have likely contributed to a temporary upswing in the yellow metal.
What’s next? Probably more declines, even though we can’t rule out a pause given the sharpness in the mining stocks’ decline in the past 3 trading days. Let’s take a closer look (charts courtesy of http://stockcharts.com).
Gold declined more than $7 yesterday and the important thing is that it moved back below the rising support line (marked in blue) and that the Stochastic indicator flashed a sell signal.
Moreover, the gold price invalidated the previous small move above the 38.2% Fibonacci retracement level. The implications of all of the above are bearish.
As you can see on the above chart, gold invalidated the move above the long-term 50% Fibonacci retracement as well. Again, the implications are bearish.
Silver moved to a new 2016 low. The decline was not huge – only 10 cents, but still, this – along with the previous days’ decline – was enough to invalidate the previous rally. Overall, we can say that silver has declined this year. The decline hasn’t really accelerated yet, but we expect to see a major acceleration once silver breaks below the 2015 lows.
Having said that, let’s take a look at the mining stocks.
Mining stocks declined to new lows as well and the volume of the daily downswings continues to be significant. It continues to be likely that the next big move will be to the downside, especially that miners are once again back below their 50-day moving average.
In Monday’s alert we wrote the following about the above chart:
Taking a look at the gold stocks’ performance relative to other stocks from the short-term point of view suggests that we are indeed likely to see a downswing relatively soon. The GDX to SPY ratio moved to its resistance line and the RSI is at a level we saw right at tops in gold or shortly before them (there was one case when a pause followed).
Interestingly, if this year begins like the previous one (which many say is the case), then based on the position of the RSI it seems that the rally is already over or about to be over.
We didn’t have to wait long for the above to become reality – the ratio bounced off the declining resistance line and is likely to decline further.
The situation in the ratio of gold stocks to gold is also particularly interesting. It appeared to have broken out of the triangle pattern to the upside, but this turned out to be a fake move, which was shortly invalidated and followed by a breakdown below the lower border of the previous triangle pattern. The invalidation of the breakout is a bearish factor and the implications of the above chart are bearish.
We discussed much regarding gold stocks recently, but what about the silver stocks?
The situation in silver stocks is even worse as silver miners have just broken below the previous lows and the neck level of the bearish head-and-shoulders pattern. These patterns were seen quite often and the implications of the breakdown are strongly bearish.
Summing up, based on yesterday’s price action, especially in silver stocks, the situation in the precious metals market deteriorated once again. The outlook remains bearish and the full short positions appear to be justified from the risk / reward point of view. It seems likely that profits from this trade will at least match the current profits in oil and likely exceed the recent profits in stocks.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (full) 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: $973; stop-loss: $1,143, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $74.28
- Silver: initial target price: $12.13; stop-loss: $14.83, initial target price for the DSLV ETN: $101.84; stop-loss for DSLV ETN $57.49
- Mining stocks (price levels for the GDX ETF): initial target price: $10.23; stop-loss: $15.47, initial target price for the DUST ETF: $31.90; stop-loss for the DUST ETF $10.61
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: $15.23; stop-loss: $21.13
- JDST ETF: initial target price: $52.99; stop-loss: $21.59
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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