Briefly: In our opinion, speculative short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold, silver and mining stocks didn’t do much in the past 2 trading days, but that doesn’t mean that there were no implications of this pause. It appears to be meaningful as it was accompanied by several important signs. At this time, it seems that what didn’t happen is even more important than what happened.
Let’s take a look at the long-term gold chart (charts courtesy of http://stockcharts.com).
In our previous alert we wrote the following:
From the long-term point of view, we see that gold has clearly moved back into the declining red trend channel and that the medium-term outlook therefore remains clearly down. We also saw a very visible sell signal from the weekly Stochastic indicator – the week is not over yet, but since the markets are closed in the U.S. tomorrow, this signal will be in place if we don’t see an invalidation of yesterday’s move today. It’s likely that we won’t get a major rally today, even though a corrective upswing could be seen. All in all, it seems that we will get another major bearish confirmation based on today’s closing prices.
The week ended with the clear sell signal from the Stochastic indicator still in place, so it is now clearly meaningful and the implications are more important and more bearish than they were previously.
Before moving to the short-term chart, please note that we marked the targets for gold with red ellipses and the “targets” are for both the price and time, so the reply to the question “when do we expect gold to bottom” is always visible on the long-term chart. We expect silver and miners to bottom along with gold.
The sell signal from the Stochastic indicator was also clearly visible in case of the gold to USD ratio, which serves as a confirmation of the signal in gold. The implications are bearish.
In the previous alert we wrote the following:
Gold plunged below the 61.8% Fibonacci retracement (based on the most recent upswing), the rising support line and the previous March low. The breakdowns took place on significant volume (which was big especially on a relative basis) and the implications are clearly bearish. Still, a move to $1,227 or so (as a corrective pause), would not surprise us.
There was only a very brief move higher, which was later canceled anyway. The most important thing is the thing that was not seen – there was no invalidation of the mentioned breakouts. Gold moved a bit higher yesterday as the USD declined, but the rally was very small compared to the decline in the USD (and at the same time mining stocks didn’t rally at all), which is a bearish sign. The fact that the small move higher was accompanied by low volume is another bearish indication.
As far as silver is concerned, nothing changed and the outlook remains bearish – silver remains below the key green resistance line and our previous comments remain up-to-date:
Silver topped at the declining green resistance line and the rally appears to be over. Once silver confirms the breakdown below the 50-day moving average, the decline will likely accelerate. The major trend remains down.
The sell signal from the Stochastic indicator is also clearly visible in the case of the HUI Index. While this may not seem like a big deal, it actually is – please note that since 2011 the visible sell signals from the Stochastic indicator that were seen when the indicator was above 80 have always (!) accompanied major tops. The last time we saw such signal was in early 2015 and back then gold stocks erased about 50% of their value in the following months. A similar move at this time would imply the HUI at about 80 in the coming months, which is in tune with our target area.
Summing up, the short-term outlook was bearish previously and it is still bearish after the last couple of sessions (and in light of today’s pre-market action). The breakdowns in gold were confirmed, we saw clear sell signals from important long-term indicators and gold (the same goes for silver and mining stocks) didn’t react to the USD’s decline yesterday and these are all bearish signs. Consequently, we think that a speculative short position is currently 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 (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:
- Gold: initial target price: $973; stop-loss: $1,304, initial target price for the DGLD ETN: $90.29; stop-loss for the DGLD ETN $48.27
- Silver: initial target price: $12.13; stop-loss: $16.62, initial target price for the DSLV ETN: $71.92; stop-loss for DSLV ETN $36.89
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $22.57, initial target price for the DUST ETF: $7.60; stop-loss for the DUST ETF $2.16
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: $31.23
- JDST ETF: initial target price: $14.14; stop-loss: $4.05
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.
=====
Latest Free Trading Alerts:
U.S. consumer spending rose 0.1 percent in February. What does it mean for the gold market?
February U.S. Consumer Spending and Gold
The idea of helicopter money is gaining popularity right now. What is it and how would it affect the gold market?
=====
Hand-picked precious-metals-related links:
Negative interest rates spark 2016 gold rush - but can German buyers push prices even higher?
September cyanide spill at Argentina gold mine wasn't the first
=====
In other news:
Europe shares, dollar gain as investors look to Yellen
ECB's Gloomy Price Outlook to Be Confirmed Just as QE Grows
Flood of Central Bank Moves Can't Get World Economy Out of Rut
Japan PM Abe: Will raise sales tax barring severe Lehman-scale shock
Calif. governor announces plan to raise minimum wage to $15 an hour by 2022
Barclays Warns Commodities May Slump on a `Rush for the Exits'
=====
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
