Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Some say that the first session of the year can determine how the market will perform for the rest of the year. Gold and mining stocks moved higher yesterday – will the rest of the year be just as bullish?
Eventually, it may very well be the case that the precious metals sector will move higher this year, but very likely not until it has declined even further. Overall, yesterday’s session didn’t really improve the outlook. Let’s see why (charts courtesy of http://stockcharts.com).
In the previous alert we wrote the following:
We still can’t rule out a corrective, temporary move higher toward the rising blue line and the 50-day moving average (at about $1,090), but it seems more likely that a big decline will follow even without another small rally.
(…) The sell signal from the Stochastic indicator remains in place and the medium-term trend remains down.
At the moment of writing these words gold has moved about $10 higher (to $1,072) as the USD Index has declined, which doesn’t change anything, in our opinion.
Gold closed quite close to the mentioned price, after an additional temporary rally. The volume was quite significant, but let’s wait a minute before viewing a big-volume rally as a bullish sign. Yesterday’s session was the first session of the year, so whoever sold gold in order to reap tax benefits, might have bought back yesterday. Plus, let’s keep in mind that the Chinese stock market plunged so bad that it had to be closed yesterday and tensions increased in the Middle East (Saudi Arabia announced that it would sever all commercial ties with Iran and cut diplomatic relations with it). Both are positive factors for gold. Given the above, is gold’s rally really bullish? It’s a natural and relatively small reaction to 2 unexpected events, not really a reflection of a change in the market participants’ attitude. Consequently, we think that yesterday’s rally in gold was just a temporary event and the sizeable volume doesn’t change much.
The price action in silver was even more interesting. Silver formed a major reversal that points to lower prices in the coming days. Sessions during which silver initially moves much higher but finally cancels these gains are not seen often, but when they are, they are usually followed by lower prices. Consequently, yesterday’s session has bearish implications, at least in the case of the silver chart.
Gold stocks moved higher as well, but – unlike gold - they didn’t move very close to the mid-December 2015 high. Consequently, it doesn’t seem that yesterday’s rally is really bullish – miners are not outperforming.
In fact, miners moved to the 50-day moving average and even a bit above it (to the 38.2% Fibonacci retracement level) on an intra-day basis, but didn’t manage to close above this important average. Consequently, we don’t think there are any bullish implications of yesterday’s session.
With negligible “outperformance” relative to gold, perhaps it is the outperformance relative to other stocks that we should focus on – let’s take a look.
In the previous alert we wrote the following:
Moving back to the long-term perspective, we continue to see bearish implications of the situation in the HUI to S&P 500 ratio. The consolidation seems to be nearing its end and the odds are a breakdown will be seen, just like in early 2013, late 2014 and mid-2015.
Please note that once this ratio had broken below its previous lows, it plunged quickly and significantly – it was difficult to move back into the market with one’s short-term positions if one was waiting for a confirmation of the breakdown– once it was seen, the decline might have been almost over and the profit opportunity almost gone. This has important implications – it shows that being positioned to take advantage of the upcoming slide and staying in the market with the short position despite a risk of a very short-term corrective upswing is justified from the risk/reward point of view. This is exactly what we’re doing now – not focusing on day-trading, but on the major move that will likely be seen in the coming days or weeks.
The above remains up-to-date. The ratio moved a bit higher, but not above the declining resistance line. In fact, the position of the ratio relative to the resistance line suggests that the “strength” of the mining stocks is coming to an end.
Summing up, even though a lot happened in gold and mining stocks yesterday, it turns out that little changed in these markets. The situation deteriorated in silver, though. Overall, there are either none or bearish implications of yesterday’s session as far as the medium term is concerned. The very short term outlook (the next few days) remains unclear.
In our opinion, we are in a similar situation to what we saw in mid-August 2014, in mid-June this year, or in the final part of 2012. If the major move that is going to follow is to the downside, then a daily or relatively small upswing is not that relevant - it’s most important not to miss the big move and thus the speculative short position seems to be justified from the risk/reward perspective. It seems that the current speculative short position in the precious metals sector will prove very profitable in the following weeks even if this will not be the case for the next few days. After all, our target of $960 in gold is well below the current market price and if the analogy to the 2013 slide is indeed in place, then we will likely not have to wait long before this level is reached.
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: $1,107, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $81.84
- 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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