Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
The most important development that we saw on Friday was the weekly close below the rising long-term support lines in the case of the mining stocks, however, this breakdown is only one of the several developments that one should keep in mind at this time. The other signs that we saw may be less popular, but they are not really less important.
They include the long-term sell signals in the Stochastic indicator in the case of gold and the gold-to-S&P ratio, the weekly move together in the case of gold and financial stocks (along with the situation in the latter) and the continuation of the decline in silver.
Let’s start with the miners’ breakdown (charts courtesy of http://stockcharts.com).
The breakdown in the HUI Index is now fully confirmed - not only by 3 consecutive closes below the rising resistance line, but also by a weekly close below it. The resistance is very important and so are the breakdown’s implications for the following weeks.
At times the gold-to-stocks ratio leads gold (and the same goes for the indicators and the signals that are based on it) and at times they move together. This time, we saw both weekly Stochastic indicators flash sell signals at the same time – they confirm each other, which makes the signal more important.
The RSI indicator based on the mentioned ratio also moved below the 50 level, which quite often meant that lower prices (for both the ratio and gold itself) were to be seen in the following weeks.
As we’ve written on multiple occasions, the major moves in the financial stocks are usually reflected by the precious metals sector. Consequently, a verification of a very important breakout in financial stocks is something that could have been / should have been reflected by a move higher in the metals (and it was) and a continuation of an uptrend would be something likely to be reflected by a decline in the metals.
Since we just saw the continuation of the uptrend in the financial stocks and the PM sector reacted in the usual way (by declining), it seems to make sense to assume that the financials-gold link remains intact and that further appreciation in financials will correspond to further declines in PMs. Naturally, the implications are bearish for the latter.
Finally, the price of silver declined further and the points that we made on Friday remain intact. Please note that silver declined on significant volume for the second week, which confirms the bearish outlook.
Summing up, the bearish signals coming from the silver market are confirmed by the breakdown in mining stocks and its continuation and other signs. Lower prices are to be expected for the precious metals sector in the following weeks.
As always, we will keep you – our subscribers – informed.
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 stop-loss orders and initial target price levels / profit-take orders:
- Gold: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
- Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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: $45.31
- JDST ETF: initial target price: $104.26; stop-loss: $10.78
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)
Insurance capital (core part of the portfolio; our opinion): Full position
Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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