Briefly: In our opinion, speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward point of view.
Yesterday, the Fed announced that it had decided to leave the interest rates unchanged. However, this doesn’t mean that nothing changed. There was something that the Fed said that altered the outlook and in today’s alert we focus on the implications for the precious metals market.
We will start today’s Gold & Silver Trading Alert with… today’s Forex Trading Alert as in the latter we focused on the USD Index and both “nominal” and “real” implications of the Fed’s comments. Both topics have important implications for gold, silver and mining stocks.
In today’s Forex Trading Alert we wrote the following:
(…) Let’s start with the long-term chart (charts courtesy of http://stockcharts.com)
The most important thing visible on the above chart is that the USD Index is in a major uptrend, and more precisely in a consolidation within it. After breaking through the resistance of 92, the USD Index has been consolidating – and that’s perfectly natural, because the previous rally was both: big and sharp.
Once the consolidation is over, the move that follows it is likely to be similar to the one that preceded it (note the green lines on the above chart) and this implies a huge rally in the coming months (likely later in 2016).
The question is when the current consolidation is going to end and the answer is based on the support levels. First of all, we don’t expect the 92 level to be broken, so even if USD slides much lower, it doesn’t seem likely that it would result in a breakdown. Secondly, the declining, red support line is something that is likely to keep declines in check – this line is more or less being reached at the moment of writing these words.
Let’s take a look at the short-term chart.
The USD Index moved to the rising support line yesterday, but this line was broken in today’s pre-market trading, so the question is what is the next level that could trigger a bounce or a rally.
The February 2016 low and the lower border of the declining trend channel are both good candidates. Since they are relatively close to each other it’s quite likely that either USD will reverse either right at one of them or somewhere in between. This is where the USD Index is right now (slightly above 95).
There is one additional important factor that should be considered here – the cyclical turning point. Yesterday’s decline took place right at it and today’s move lower is still very close to it. In almost all recent cases, the turning points in the USD Index were followed by rallies and since the most recent move was definitely to the downside it appears likely that the USD Index will move higher relatively soon (perhaps even this week).
All in all, the technical picture for the USD Index is bullish.
Now, how does the announcement regarding the interest rates impact the above? The impacts of all important announcements should be discussed along with discussing the previous expectations. Remember when the Fed lowered rates by 0.75 and the stock market plunged? It was because people were expecting an even bigger cut. It didn’t matter that the rates were lowered dramatically – it only mattered that they were lowered less than market had expected.
What did the market expect of yesterday’s announcement? Pretty much what the Fed delivered. As we are writing in today’s Gold News Monitor, the investors are expecting only one rate hike this year. Consequently, since yesterday’s comments more or less confirmed investors’ expectations, did anything change? On “nominal” level – yes, the Fed said something else than it’s been saying previously, however, on “real” level – how this is likely to impact the markets – not much changed, if anything.
Consequently, yesterday’s news is not likely to have a major impact on the markets, including the USD Index, except for a short-term impact – and this short-term impact (based on yesterday’s and today’s declines) could be already over.
Summing up, yesterday’s comments from the Fed include changes that are likely not to have a major impact on the main trends because they were in tune with what the investors have been expecting. Consequently, the technical patterns are likely to remain the key source of signals (as the news was not a game-changer) and the outlook (based on the above) for the USD Index is bullish for the medium term and there are good reasons for the USD Index to rally shortly (being at about 95 at the moment of writing these words). If it doesn’t rally, then it could move even to 92 without major medium-term implications.
The medium-term implications remain unchanged for the precious metals sector and they are bearish. The thing that changed was the very short-term outlook in which some investors “discovered” what most investors were expecting all along – no changes in interest rates now and then just one increase in 2016. The rally in the precious metals appears to be rather temporary, but still, we have yet to see meaningful bearish confirmations before entering short positions here.
From the long-term perspective, not much changed, gold is pretty much where it was several days ago. On the above chart we see that the next upside target levels (if they are reached that is) are $1,288 and $1,328. Gold is moving closer to the former at the moment of writing these words, but still relatively far from it ($1,268 right now).
Gold corrected to the 61.8% Fibonacci retracement level (based on the March decline) yesterday and it moved a bit above it in today’s pre-market trading.
There are 2 things that we would like to discuss here. The first thing is the size of the volume – it was low, which is a bearish sign compared to the size of the rally. The second thing is the size of the move. It appears to be huge, but… The USD Index moved below its previous March low and gold didn’t respond similarly.
What’s even more important, the USD Index declined much further in today’s pre-market trading (almost a full index point) and gold rallied a mere $6. Gold appears unwilling to really respond to the bullish signals from the USD Index and since the latter is quite likely to reverse, gold could slide quite far.
The long-term silver chart continues to have bearish implications – the trend remains down from this perspective. Please note that the major resistance line (green line) based on the 2011 and late-2012 tops is right very close to the current price. It’s more or less at the $16 level and silver moved to $15.84 earlier today. It’s quite likely that we will see a reversal close to the current price levels.
The reversal is also likely to happen shortly as silver rallied right at its cyclical turning point. The volume was not significant (given the size of the volume seen previously and the volume in silver contracts), which serves as an additional bearish sign.
The HUI Index moved higher and is about to reach its May 2015 high, which will serve as resistance. In fact, that’s the first strong horizontal resistance that the HUI Index would reach that would come from an important top.
The RSI indicator just moved above 70 and this meant that an important top was in or about to be in on many occasions.
With the bearish implications of gold charts (mainly due to gold’s weak performance relative to the USD Index, especially today), silver charts and in light of the bullish outlook for the USD Index it would appear that the outlook is actually very bearish for PMs. However, mining stocks just rallied on strong volume and closed at new highs. Isn’t this a bullish development that would invalidate all of the above?
It actually isn’t. It is generally said that a move higher on strong volume is a bullish sign for any market, but let’s just take a moment and see what actually happened after similar sessions in the recent months.
In 3 out of 4 similar sessions, this kind of session actually marked a local top. In the fourth case, the most recent one, it was not the top, but still it was followed by a daily downswing. Consequently, applying this “general rule” to mining stocks appears inappropriate – the analogy to the previous situations doesn’t suggest that a rally will follow. It suggests that we’ll see a decline.
Summing up, based on many long-term signals (discussed on Monday) we have been waiting to see some bearish confirmations in order to enter short positions in the precious metals sector. Based on gold’s weak reaction to the USD’s decline, gold’s low volume during yesterday’s rally, the long-term resistance in silver, turning points in both the USD and silver, the miners’ daily rally on huge volume (like the ones that we saw at previous tops), and the USD’s medium-term support line, it seems that we have just seen the bearish confirmation that we were waiting for.
The markets seem to have overreacted to the Fed’s statement as it was more or less in tune with previous expectations, so it shouldn’t have generated a substantial reaction. This is also a sign that the markets will move in the other direction (up in the case of the USD and down in case of the precious metals sector).
Consequently, we think that opening speculative short positions (full) in case of gold, silver and mining stocks is now justified from the risk / reward perspective.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (full) 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: $16.42, initial target price for the DSLV ETN: $71.92; stop-loss for DSLV ETN $36.55
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $22.57, initial target price for the DUST ETF7.60: $; 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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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