Briefly: In our opinion, a speculative short position (full) in gold, silver and mining stocks is justified from the risk/reward point of view.
What we saw based on Monday’s price action was very significant even though most traders don’t realize that we saw anything at all. Yesterday’s price action, being the previous action’s follow-up, caught much more attention. Precious metals declined yesterday, just like they were supposed to, but the question is if this is just a single-day action and miners will continue their rally shortly, or it is the start of something much bigger and even more bearish.
We think the latter is much more likely. As shown yesterday, the days when miners moved (especially higher) on extremely low volume usually marked excellent entry points for short positions as they were followed by big declines before miners had a chance to show a bigger rally. Let’s take a one more look at mining stocks (charts courtesy of http://stockcharts.com).
Here’s what we wrote about the above chart yesterday:
There were 3 other cases when the volume was similarly low and 2 of them were seen right before volatile plunges. The third time we saw no major decline immediately thereafter, but it was a great time to enter or double a short position anyway.
Even though mining stocks moved a bit higher yesterday, we think that the probability of seeing another decline before another upswing increased significantly based on the price-volume action.
Even though a one-day decline is not a major development by itself, it seems that we didn’t have to wait long for the market to agree with us. The size of the volume that corresponded to yesterday’s decline confirms that this is the real direction in which the market is currently moving – we can expect further declines and it seems that doubling the size of the short positions yesterday was a good and profitable idea (which is already the case).
What did gold do?
Our yesterday’s comments are up-to-date to a large extent:
Pretty much the same thing that it’d been doing in the previous 5 trading days – it reversed once again and once again the price-volume action favored the bearish outcome. The back-and-forth movement has been tiring, but the bearish case has been becoming stronger with each passing day.
It seems that at this time both gold and mining stocks have more bearish implications than it was the case just yesterday.
Yesterday’s price-volume action was a relatively big decline on strong volume. It seems quite likely that the boring back-and-forth-movement days are over or almost over.
What might seem concerning is the lack of a huge decline in silver. Given silver’s recent underperformance, one might have expected it to take a deep dive given gold’s decisive action. Is it a sign of strength?
Not really. Silver simply encountered a relatively significant support (the rising support line based on the 2014 and 2015 lows), which made a pause quite likely. Instead of a pause, we saw a limited decline – another likely outcome. Given this support, it could take a few extra days for silver to verify the breakdown and then we would expect the decline to continue, as it’s been the case previously.
Overall, yesterday’s price action confirmed our (and Fractalyzer’s) yesterdays (pre-market) comments and we can summarize today’s alert in a similar way to what we wrote in yesterday’s alert:
Summing up, the outlook for the precious metals sector deteriorated quite significantly [this week] and it seems that doubling the size of the small speculative short positions in gold, silver and mining stocks [was and – if the position was not increased yesterday – still is] justified from the risk / reward point of view. Naturally, we’ll keep our eyes open and we’ll report to you if we see an invalidation of the above.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short (full position) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:
- Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $17.63, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $44.97
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $12.23
In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:
- GDXJ: initial target price: $21.17; stop-loss: $27.31
- JDST: initial target price: $14.35; stop-loss: $6.18
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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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