Briefly: In our opinion, speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward point of view.
In today’s alert we discuss in greater detail what happened during yesterday’s session and how we are going to be most likely affected by it. Let’s jump right into charts (charts courtesy of http://stockcharts.com).
Gold declined yesterday and despite the previous temporary upswing, it’s now only $4 higher than it was when the market’s closed last Friday. This means that unless gold rallies again (which is not likely), we will have a weekly reversal candlestick, which would serve as an additional bearish confirmation.
The previous small breakout above the upper border of the declining trend channel was also invalidated, which is another bearish sign.
In yesterday’s alert, we wrote the following:
Gold didn’t do anything unexpected – it moved a bit above the 61.8% Fibonacci retracement level and declined back below it (in today’s pre-market trading). Gold closed the day very close to this level, so the breakout was definitely not confirmed, and since it was already invalidated today (with gold at $1,244), we can say that the situation has just deteriorated.
Gold first moved a bit higher and then declined, ending the day about $13 lower. The volume was not huge, but it doesn’t have to be to at this time – previous post-top declines were not necessarily accompanied by huge volume right at the beginning.
Invalidation of the breakout above the 61.8% retracement is a bearish factor, especially that we saw the same thing before previous big declines.
In yesterday’s alert, we wrote the following:
In the case of silver, the situation has also deteriorated based on the short-term outperformance. Is the top in? It could be the case as silver just invalidated the breakout above the March high (being at $16.00 at the moment of writing these words). It may not be the case just yet because the rising resistance line and the October 2015 top are just above yesterday’s high and either of them may need to be reached to trigger the true decline.
Silver has indeed reached the upper part of our target area – a bit above the rising resistance line and a bit below the October 2015 high. Silver’s outperformance is known to be a bearish sign, so the above has bearish implications, especially given the importance of resistance levels that were (almost) reached.
The silver to gold ratio and the indicators plotted on the chart show how often the above signal worked. The RSI close to 70 usually meant that an important top was in or about to be in, especially if the ratio was close to the declining resistance lined and / or the 200-day moving average. This is the case right now and the implications are bearish.
In yesterday’s alert, we wrote the following:
The HUI Index finally closed at 207, so the top may be in. Ideally, we would prefer to see a reversal on huge volume – and we didn’t – but a very important resistance was reached and the next one is very close, so even if the top is not in yet, it’s likely not far from yesterday’s close.
In yesterday’s second alert, we wrote the following:
Now, the decline is not huge, but the fact that it is bigger than gold’s decline (percentage-wise - more than twice) despite (!) a quite big move higher in the main stock indices is a sign of underperformance.
After we wrote the above, the HUI declined some more, thus making the above even more true. Moreover, just like gold, the HUI Index is forming a weekly reversal, which – if completed – is likely to trigger a sharp decline in the prices of gold stocks.
Finally, the USD Index just broke above the declining resistance line close to the cyclical turning point and with the RSI very close to the 30 level. This is a very bullish combination, so we expect the USD Index to continue its rally in the following days and weeks. Naturally, this doesn’t mean that there won’t be any pullbacks along the way – we may even see one today or tomorrow.
The important thing is that the outlook for the USD Index became much more bullish based on yesterday’s price action and the implications are bearish for the precious metals sector.
Summing up, based on yesterday’s breakout in the USD Index, outperformance of silver, invalidation of gold’s move above the 61.8% Fibonacci retracement and underperformance of mining stocks, the outlook for the precious metals sector deteriorated and we think that a short position (full) in gold, silver and mining stocks is justified from the risk to reward point of view.
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: $1,304, initial target price for the DGLD ETN: $89.05; stop-loss for the DGLD ETN $47.15
- Silver: initial target price: $12.13; stop-loss: $16.62, initial target price for the DSLV ETN: $68.48; stop-loss for DSLV ETN $36.11
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $24.07, initial target price for the DUST ETF: $5.72; stop-loss for the DUST ETF $1.74
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: $34.57
- JDST ETF: initial target price: $8.86; stop-loss: $2.75
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, Gold & Silver Fund Manager
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