Gold & Silver Trading Alert: Mining Stocks’ Reversal

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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.

The biggest event that we saw on Wednesday was the huge slide and underperformance of mining stocks, but the reverse seems to have happened on Thursday – miners moved higher despite a move lower in gold. Is the bottom in?

Most likely it’s not and what we saw yesterday is nothing more than a breather after a big, volatile drop. 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 commented on the above chart in the following way:

It’s bearish as well. The GDX ETF moved over 7% lower on huge volume, and the size of volume serves as a bearish confirmation. Moreover, please note that there was no comeback before the session was over, so the decline may not be over even on a very short-term basis.

On the other hand, the RSI indicator moved very close to the 30 level, which could attract some buyers here. Still, even if it does, it doesn’t seem likely that we would see a sizable rally given all the bearish signals that are in place – some sideways movement seems more probable.

On Wednesday, the GDX ETF broke and closed i.a. below the July low. Did we see an invalidation of the breakdown yesterday? No – we saw a pause – a small corrective upswing during which miners attempted to invalidate the breakdown, but failed to do so. The lowest closing price of July was $27.73 and GDX closed at $27.31 – over $0.40 below the July low.

Without an invalidation of the breakout, nothing really changed on the above chart.

Then why did miners outperform gold? Isn’t that a bullish thing?

The size of the phenomenon was very small and the likely reason for the small bounce in case of mining stocks is the size of the preceding decline – miners got a little ahead of themselves and had to take a breather – it doesn’t seem that there are any bullish implications of the breather. In fact, the inability of mining stocks to close above the July low, can be viewed as a bearish sign.

Other than the above, little changed in case of gold, silver and the USD Index, and the comments that we made yesterday, remain up-to-date, so if you haven’t had the chance to read it yet, we encourage you to do so today.

Summing up, the analogy to the 1983 decline remains in place and so do many bearish signals discussed previously. Wednesday’s huge slide in mining stocks and yesterday’s inability of miners to invalidate the breakdown below the July low, confirms the bearish outlook and (along with the situation in gold and the USD Index) it suggests that the decline is in its early stage.

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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