Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Some market participants were expecting the rates to be increased yesterday and the rate increase was „in the price“ to some extent. Consequently, leaving the rates unchanged was both a negative (for the USD) and positive (for precious metals) surprise for the markets. How much did change regarding the outlook?
In our opinion, nothing changed. Rates are where they were, the comments from the Fed continue to indicate that there will likely be an interest rate increase in the future. In other words, nothing changed and once the dust settles, the markets will be likely to resume their previous trends. The major medium-term trend in the precious metals market is down.
Let’s take a look at the charts (charts courtesy of http://stockcharts.com).
Gold moved above its 50-day moving average, but this is much less bullish than it may seem. In fact, it’s not bullish at all. The reason is we saw such action several times earlier this year and it was still followed by more declines. Is this time different? Not likely – why would it be?
Gold corrected 50% of the Aug. – Sep. decline and it could reverse shortly. However, if it doesn’t and we see a rally to $1,150 - $1,155 or so, then this would still not change the medium-term trend. Gold would still remain below the declining medium-term resistance line. Will gold move as high before reversing? That’s rather unclear but the decline is more likely than not and it doesn’t seem that exiting the short positions in light of the above possibility is really justified.
Please note that gold didn’t manage to close above its 2014 low – what was previously a strong support seems to have now turned into resistance.
From the long-term perspective, nothing changed – the medium-term trend remains down.
From the non-USD perspective, nothing really changed this week. Gold is at its 2015 lows and the move back up was negligible. The medium-term trend remains down.
Silver moved higher once again and once again we don’t view this as a bullish sign. Our yesterday’s comments on the above remain up-to-date:
Viewing a daily rally on significant volume as a bearish sign seems to be against the direct way in which one can apply classic technical analysis, but the key thing that one needs to keep in mind is that this analysis and the analogies to past situations need to be applied to each market differently. “Technical rules” are not set in stone – they are more like guidelines that leave discovering the details to the one analyzing the market. The “problem” for those who are new to the silver market is that it doesn’t act in a classic way. We saw silver’s fake breakouts and false outperformance on many occasions and we witnessed and profited on the subsequent declines almost as many times. Consequently, we are far from viewing silver’s strength and outperformance as a true bullish sign. We view it as a bearish phenomenon.
What can we say about silver’s rally from the long-term perspective? That it’s negligible. It’s just another move to the 10-week moving average – similar to many other corrections within the medium-term decline.
Moreover, please note that the long-term declining resistance line is relatively close – the upside for this rally seems very limited, while the downside is significant.
What about mining stocks? Was their rally extraordinary?
Our previous comments on the above chart remain up-to-date:
Not really. The decline continues and it’s still similar to what we saw during the previous downswing (red dashed lines on the above chart). Yesterday’s rally didn’t even make the decline less steep.
In our opinion, the sell signal from the weekly Stochastic indicator is a much more important signal than yesterday’s rally, and the implications continue to be very bearish for the medium term.
On the above short-term chart we see that while GDX reached one of the important resistance levels (the 50-day moving average), it has an additional one relatively close (the declining resistance line). We created a target area based on both of them. Even if the 50-day moving average doesn’t keep the rally in check, it seems that the declining resistance line will. Will GDX rally to it before reversing? It’s unclear, but we think that keeping the short position intact and focusing on the medium-term move is a good idea. We could exit the position and re-enter it later, but in this case we would be vulnerable to missing out on a sudden decline, just like the one that we saw about a month ago.
The USD Index chart has similar implications to the GDX ETF one. The USD Index moved to the 50% Fibonacci retracement and it could form a bottom based on that, but there’s a combination of stronger support levels only a little lower (slightly above 94): the declining support line, the 61.8% Fibonacci retracement and the medium-term rising support line based on the daily closing prices. If this level doesn’t stop the decline, then it’s highly likely that the May low would. Either way, we think that lower values of the USD would only be temporary, just like higher values of precious metals and mining stocks (as far as the medium term is concerned; we think metals and miners will be much higher in the coming years).
At the moment of writing these words (Friday morning), the USD is trading at 94.17 (declining 0.32), so the mentioned combination of support levels has more or less been reached. Gold reacted by moving higher only about $4, which is a small bearish sign (gold is not really responding to additional bullish signs).
Summing up, we could (! – which doesn’t mean it’s a sure bet) see some more strength in the precious metals sector in the next few days, but it’s likely to be just a corrective upswing or a pause within the medium-term decline. Nothing really changed after yesterday’s announcement regarding interest rates and markets are likely to resume their previous trends – if not immediately, then soon (after the next several days). Either way, focusing on the medium-term decline seems to be appropriate. It seems that the profits from our short position will increase significantly in the coming weeks (not necessarily days).
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:
- Gold: initial target price: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
- Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
- Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54
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: initial target price: $16.27; stop-loss: $24.33
- JDST: initial target price: $16.98; stop-loss: $3.42
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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