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 last week and especially its last day were quite rich in developments – silver rallied, gold moved a bit above its 300-day moving average, the USD Index moved decisively higher, while the EUR/USD closed the week below the key, long-term support line. What are the implications?
Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).
Gold moved briefly above the 60-week moving average (marked in blue on the above chart) and closed the week back below it. The tiny breakout above it was already invalidated. This makes the current situation similar to what we saw at all major tops of 2014 and 2015 with the exception of the May 2015 top (when gold topped about $15 below the 60-week moving average). The implications are bearish.
In terms of daily closing prices, gold closed at the 300-day moving average, but it’s trading at $1,229 at the moment of writing these words, so it’s back below the MA anyway. The thing that we would like to discuss here is the position of the indicators – the RSI is right after a move to the 70 level and the Stochastic generated a sell signal after moving above 80. Both are bearish developments.
Silver, on the other hand, rallied once again and there are a few things that this (along with silver’s performance earlier last week) shows. The bearish news is silver’s outperformance was not accompanied by analogous action in gold or mining stocks. Silver’s outperformance heralded declines many times in the past and what we saw on Friday was very similar to the previous “fake rallies”.
The bullish news (or rather neutral news, previously bearish) is that the current upswing is no longer similar to what we saw in October and November 2016. The implications of the similarity were very bearish and are currently nonexistent.
Another bearish piece of news is the sell signal from the Stochastic indicator after its rally and a corrective downswing. There were 2 similar cases in the past and in both cases, it was the second sell signal that marked the final top and was followed by weeks / months of lower prices.
Speaking of sell signals from the Stochastic Indicator, we saw one in gold stocks as well. This confirmed the sell signal from the RSI indicator, which altogether paints quite a bearish picture.
The XAU Index touched the long-term resistance line last week. The line is very important as it is based on 2 key bottoms – the 2000 one and the 2008 one and because it already worked a few times: in 2013, in early 2014 and (as resistance) initially in early 2016. Since there was no breakout, the above has bearish implications.
Finally, the chart below has the key implications.
The Euro Index moved – and closed the week – well below the rising long-term support/resistance line. The previous breakdown was small and it was never confirmed (and thus followed by another upswing). This time, the breakdown was confirmed so the implications are very bearish for the following weeks (and likely months).
The big moves in the Euro Index and in gold are aligned, so the above has very bearish implications for the yellow metal for the following weeks and months.
Summing up, the bearish implications of the situation in the currency market for the precious metals market became even more bearish based on the euro’s weakness, which seems more important than the improvement in the short-term picture for silver (the self-similar pattern that pointed to a sharp drop in silver’s price is no longer present). The above plus signals from the RSI and Stochastic indicators in the case of gold, silver and mining stocks make the picture for the precious metals market very bearish for the following weeks.
Since silver outperformed, but nothing changed regarding the outlook (and in fact, we saw additional bearish signs from the EUR/USD and indicators), we are moving the stop-loss level for silver higher (in case the position was closed, it seems that its justified to re-enter it).
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: $1,263; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.47
- Silver: initial target price: $13.12; stop-loss: $18.67; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $19.87
- 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.
=====
Latest Free Trading Alerts:
Two weeks ago, the London Bullion Market Association released a new edition of its annual Forecast Survey. What does the new LBMA Forecast Survey say about the price of gold in 2017?
LBMA Forecasts Gold Price in 2017
S&P 500 index gained 0.4% on Friday, as investors' sentiment remained bullish following Donald Trump's future tax cut plan, among others. Will stocks continue even higher? Is holding short position still justified?
Stock Trading Alert: Stocks At Record Highs - Will Uptrend Accelerate?
=====
Hand-picked precious-metals-related links:
PRECIOUS-Gold slips as dollar strengthens against yen after Trump-Abe meet
Gold Speculators Trimmed Bullish Net Positions For 1st Time In 3 Weeks
=====
In other news:
FOREX-Dollar hits 2-week high after U.S.-Japan meeting
America’s Biggest Creditors Dump Treasuries in Warning to Trump
Fed could take the wheel from Trump and drive markets this week
Brexit's Hit to Growth Will Be Milder Than Expected, EU Says
Oil falls on rise in U.S. drilling, selling ahead of OPEC report
=====
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
