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 Dec. 14, 2016 at 3:05PM.
The rallies that we saw last week got the attention of many (if not all) gold traders. Many think that the upswing that we saw last week ended the big decline that we saw in the second half of the 2016. Is this really the case?
Most likely not. Regarding the rally itself, it seems that the phrase “the more things change, the more they stay the same” reflects it very well. In other words, we saw almost exactly the same corrective upswing in gold and silver within the decline in 2013 and that was the last stop before the big plunge. Consequently, the rally (“change”) seems to be in tune with the past pattern, so overall nothing really changed and thus the outlook remains bearish. Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).
First of all, the long-term gold chart and the implications stemming from it remain up-to-date:
Let’s start with gold long-term chart. Gold declined substantially, moving from $1,350 to levels below $1,150 and is now taking a breather. In late 2012 gold was above $1,800 and it declined over $200 (below $1,600) before the final small corrective upswing was seen. Both situations continue to be similar. Back in 2013 gold moved initially to $1,554 and it then rallied to $1,616 within 4 weeks. So, it rallied about $62 in about 4 weeks.
The recent low was $1,124 and it was about 4 weeks ago. If we add the $62 to it, we get $1,186 as an analogous target price. What was yesterday’s intra-day high? Exactly $1,185.90.
Is gold breaking out of the similarity between 2013 decline and the current move? Absolutely not – it remains in place in terms of both price and time. Did the pattern have to repeat to the letter? No – we could have seen a sharp decline without a corrective upswing this time and the risk to reward ratio favored staying in the speculative short position (especially considering many other bearish indications). The point is that the rally that we just saw doesn’t invalidate (at all) the bearish implications of the big similarity to the 2013 decline.
Back in 2013, gold declined a bit before the end of the mentioned week and the same happened on Friday. The analogy remains up-to-date even regarding smaller details, which adds to its credibility.
On gold’s short-term chart, we see that it closed the week at $1,173 – less than a dollar above the 61.8% Fibonacci retracement level. If we view it as a breakout, it was definitely not confirmed. Interestingly, if we base the entire 2016 rally on the weekly closing prices, the 61.8% retracement would be at about $1,175 – there would be no move above it (in terms of weekly closing prices). The implication is that there is really no good reason to view the tiny move above the 61.8% Fibonacci retracement as something bullish – at least not yet.
The situation in silver is also just like we described it previously:
What about silver? Did it invalidate the 2013 analogy that has profound bearish implications? No. At the moment of writing these words, silver is trading at $16.43 (almost $0.80 below the entry price of the current short position) – after moving to $16.76, it’s back below the price target based on the analogy to 2013. How much does yesterday’s move above $16.50 change? Pretty much as much as it changes on the above chart at the first sight – nothing.
(…)
Speaking of the analogy to the 2013 decline, let’s discuss the time factor. If we use weekly closing prices as the starting point for both declines, then we are in the 26th week of the decline. The analogous top in the 2012-2013 decline was the week that started on September 10, 2012 and ended on September 15. If we add 26 weeks to that week, we get the week that started on March 11, 2013. That was in the middle of the topping pattern. The intra-week high was $29.35 and higher prices have not been seen since that time. The implications are very bearish.
On Friday, we wrote about the neck level of the big head-and-shoulders patterns in the HUI Index.
In terms of the weekly closing prices, there was no move back above it. Gold stocks simply corrected back to the previously broken neck level without closing above it. Therefore, the bearish implications based on the pattern remain up-to-date (based on it the HUI Index is likely to slide below 140).
Several days ago we wrote about the link between gold and the financial sector:
Another major, yet mostly unknown, relationship is the one between precious metals and the financial sector. A top in financials corresponded to a bottom in PMs and a bottom (the mid-2016 one) in financials corresponded to a top in PMs. In the past few weeks, financials pulled back after moving above their 2015 high and PMs moved a bit higher. The key thing here is that the breakout in financials was not invalidated and thus they are likely to rally once again. In fact, the pullback seems to have made another big upswing possible. The opposite is likely to be the case for PMs so the implications for them are bearish.
The breakout in the financial sector seems to have been verified and its ready to move higher – due to the mentioned link, the implications for the precious metals sector are bearish.
Finally, let’s take a look at the situation in the USD Index.
The USD Index closed the week above the November 2016 highs, and also above the 38.2% Fibonacci retracement based on the December rally. The recent move lower is therefore just a correction within an uptrend, even though it moved below the rising short-term support line.
The Euro Index closed the week marginally above its 2015 low (in terms of weekly closing prices) of 104.95 and thus the invalidation of this move is not necessarily an important and binding signal just yet.
Summing up, the key charts and developments continue to point to much lower precious metals’ and mining stocks’ prices in the following weeks and the extremely positive sentiment toward gold among traders confirms it. The analogy to 2013 seems to be perfectly in place and the current upswings in gold and silver are nothing extraordinary compared to what happened in 2013. In fact, based on the price levels that were reached back then, it seems that this rally is over or about to be over. In light of the strong bearish case confirmed by the above very important bullish signals would be needed to change the outlook. So far we have only seen temporary short-term bullish signals that are much less important than the ones coming from the long-term charts. It seems that the current significant profits in silver will soon be accompanied by profits from gold and mining stocks.
As always, we will keep you – our subscribers – updated.
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: $1,204; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $53.36
- Silver: initial target price: $13.12; stop-loss: $17.53; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $24.86
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $24.63; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $27.97
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: $40.12
- JDST ETF: initial target price: $104.26; stop-loss: $18.88
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:
The U.S. economy added 156,000 jobs in December. What does it mean for the gold market?
Are December Payrolls Positive or Negative for Gold?
S&P 500 index extended its almost-eight-year long bull market on Friday, as it reached new record high at the level of 2,282.10. Will it continue higher today? We still can see technical overbought conditions along with negative divergences. But will they lead to some more meaningful downward correction? Is holding short position still justified?
Stock Trading Alert: Major Indexes Reached New Record Highs - But Will They Continue Higher?
=====
Hand-picked precious-metals-related links:
PRECIOUS-Gold edges up as markets await Trump, but dollar caps gains
Gold Speculators Dropped Net Bullish Positions For 8th Week
=====
In other news:
Does Dow 20,000 Matter? Mostly No
S&P sees ECB staying in support mode until 2018
Pound Falls to 10-Week Low as May Hints at Single-Market Exit
Euro-Area Unemployment Holds at 7-Year Low as Growth Strengthens
German Industrial Output Rises in Sign of Economic Strength
Oil slips $1 on concerns U.S. production is rising
Bitcoin Extends Loss After China’s Central Bank Warns Investors
=====
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
