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. This position was originally featured on Jan. 12, 2017 at 3:49PM.
The precious metals market didn’t do much yesterday in terms of daily closing prices – gold and silver closed more or less where they had closed on Friday. Does it invalidate the implications of Friday’s reversals?
In short, that’s likely not the case. We’ll use the SLV ETF chart to show that the daily pause is actually something normal and not a game-changer. Let’s take a closer look (charts courtesy of http://stockcharts.com).
About a month ago, right after silver’s initial slide, it moved back a bit and this didn’t change anything regarding the outlook – silver paused, not reversed. Interestingly, the pause took place at the same price levels as we have right now and it took silver higher by almost an identical amount as it did yesterday. So, is a daily pause really bullish, if an almost identical move was recently followed by a $1 slide? Not really.
In yesterday’s alert we wrote the following about the above USD Index chart:
Moving back to the USD Index, the thing that we would like to emphasize today is the fact that it moved and closed the week above the 61.8% Fibonacci retracement based on the March decline. The implication is that the most recent rally is not just a correction within a decline, but a part of a bigger rally – a one that’s bigger than most people expect.
Yesterday’s tiny pullback didn’t take the USD back below the mentioned Fibonacci retracement, so nothing changed from the technical point of view. The bullish implications of the breakout above the retracement remain in place.
So, all in all, nothing really changed based on yesterday’s session. Before summarizing, we would like to comment on gold’s relationship with the general stock market.
Major tops in the gold to S&P ratio generally corresponded to the major tops in gold and the same goes for the tops in the Stochastic indicator. The important new development on the above chart is that the latter moved above the 80 level and then back below it. Stochastic didn’t move below the red line, thus flashing a classic sell signal, but please note that in the past a move back below 80 level also meant that an important top was likely in. Consequently, the bearish implication are already in place and a move below the red line in Stochastic will serve as a confirmation.
Summing up, Friday’s pre-market upswing in the precious metals sector appears to have been just a temporary news-based move that has already been invalidated. The resulting reversals are very bearish developments especially that they were seen in both gold and silver. Yesterday’s pause doesn’t seem to change anything regarding the above.
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: $1,294; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $45.87
- 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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