Gold & Silver Trading Alert: Mining Stocks – Comeback or Correction?

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Briefly: In our opinion, speculative short positions (150% of the full position) in gold and silver and regular (100% of the full position) short position in mining stocks are justified from the risk/reward point of view.

Not much happened in gold, silver or the USD Index yesterday, but mining stocks moved visibly higher. How bullish is this daily outperformance and how much does it change the outlook?

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

GDX - Market Vectors Gold Miners - Gold mining stocks

In yesterday’s alert, we wrote the following:

Miners didn’t move back below their 2015 high, but they did break below the rising support line based on 3 short-term bottoms. The breakdown took place on big volume (biggest daily volume since late March) and we view this as a bearish sign, especially that the price-volume link has been negative this month (GDX moved higher on volume lower than the volume on which it declined).

Consequently (and based on what happened in gold), we think that the situation became more bearish and it is now justified from the risk to reward perspective to increase the size of the short position.

What changed based on yesterday’s upswing? Basically, nothing. The move didn’t take miners back above the previously broken support line and the volume that accompanied the daily rally was low. Moreover, the general stock market rallied substantially, which gave miners a big boost… And even with this boost, miners were not able to get back above the previously broken support.

Consequently, there is no reason to think that yesterday’s move higher was anything more than just a post-breakdown correction and as such it didn’t change anything as far as the outlook is concerned.

Since nothing changed in the case of gold, silver and the USD Index, the above chart is the only one that we feature today as yesterday’s analysis remains up-to-date (if you haven’t had the chance to read yesterday’s alert, we suggest that you do so today).

Summing up, it doesn’t seem that yesterday’s price action changed anything and the outlook for the precious metals sector remains bearish. Today’s pre-market move higher also appears to be a post-decline correction – nothing more (at least not at this time). The likely reason behind the rally is the move back to the April low in the USD Index – traders fear/hope that the move above the April lows will be invalidated, but nothing like that has happened so far today and we don’t think that it will be seen based on the daily closing prices.

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

To summarize:

Trading capital (our opinion): Short positions (150% of the full position) in gold and silver and regular (100% of the full position) short position in 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: $1,317, initial target price for the DGLD ETN: $89.05; stop-loss for the DGLD ETN $46.25
Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $61.16; stop-loss for the DSLV ETN $26.34
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.47, initial target price for the DUST ETF: $4.27; stop-loss for the DUST ETF $1.16 (the price for DUST is dependent not only on the prices of mining stocks themselves, but also on the way mining stocks decline and the real price that DUST will achieve will likely be much higher than this target, but the conservative pricing models don’t take - and generally can’t take - the above into account).

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: $39.43
JDST ETF: initial target price: $5.78; stop-loss: $1.60

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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