Gold & Silver Trading Alert: Pitiful Reaction

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Briefly: Short positions (full position) in gold, silver and mining stocks are justified from the risk/reward perspective.

Yesterday’s price moves were significant only in the case of the USD Index – gold and mining stocks moved just a little (at least in terms of the closing prices) even though the intra-day price action was more volatile. Mining stocks, however, ended the session lower even though gold moved higher. What can we infer from these moves and the relative differences?

We can infer that we have yet another confirmation that we are on the correct side of this trade. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

Starting with action, we can see that the USD Index moved and closed below the previous August low. There was no breakdown below the 50% Fibonacci retracement level in terms of daily closing prices, though. The outlook for the USD Index will remain bullish for the following weeks unless we see a confirmed breakdown below the lowest of the classic retracement – the 61.8% one. This level coincides with the rising support line and is currently at about 94 – 94.2 (depending on when it would be reached). So, to make a long story short, without a big breakdown below 94, the short-term outlook for the USD Index will remain bullish. Still, we could see another temporary move lower. The turning point suggests that the reversal will be seen shortly (or that it was seen yesterday) and that higher prices will follow.

What implications does it have for the precious metals market? Actually, it matters little and the reason is that the precious metals sector refuses to follow the USD’s bullish indications. The U.S. dollar just moved to new monthly lows. Did gold move to new monthly highs?

Short-term Gold price chart - Gold spot price

No, it’s well below them. In fact, even if we take Stockcharts’ data into account, the breakdown below the rising support line was not invalidated and the implications thereof remain bearish. Gold’s inability to invalidate the breakdown (let alone break above the August highs) despite a mirror action in the USD Index is a very bearish sign for the yellow metal. That’s even more bearish than another sell signal in the Stochastic indicator that we can also see on the above chart.

Gold perma-bulls will surely say that gold’s weak reaction was just accidental.

GDX - Market Vectors Gold Miners - Gold mining stocks

If so, then why didn’t miners even manage to move higher despite the recent breakdown? If the outlook was truly bullish, miners would have pierced through the previously broken support and started a new rally. They didn’t. Not only did the USD decline substantially, but also we saw a daily rally in gold. The miners’ reaction is yet another bullish confirmation – they underperformed gold in a clear way.

Summing up, the analogy to the 1983 decline remains in place and so do many bearish signals discussed last week and on Monday and yesterday’s session provided us with yet another confirmation of the bearish outlook. Consequently, the trading positions in the precious metals sector are likely to become profitable in the coming days and weeks (just like it is already the case with the crude oil positions).

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (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: $16.38; stop-loss for the DUST ETF $3.77

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: $14.39; stop-loss: $3.22

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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