Gold & Silver Trading Alert: Reversal at 300-day Moving Average

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Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

The precious metals sector soared substantially last week, but started to decline before the week was over. It would look like a regular pause within a rally if it wasn’t for the important fact that the reversal took place when gold reached the very important resistance – its 300-day moving average. What are the implications?

In short, the implications are exactly as they were on Friday and on Thursday. There were only a few developments in the precious metals market that are worth focusing on, so today’s alert is going to be short once again, but we would like to emphasize that many additional reasons justifying our current outlook and preferred way of taking advantage of it were described in Thursday’s alert. These reasons remain up-to-date, so if you haven’t had the chance to read the mentioned alert, we encourage you to do so today.

Having said that, let’s take a look at the two charts that show some new developments (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

First of all, we would like to once again emphasize the fact that gold reversed after moving right to the 300-day moving average and this average has been particularly important since late 2001. In fact, it was 100% efficient from late 2001 to 2007. It was quite efficient in the subsequent years as well. It was reached once again and the volume during Thursday’s session was significant. It could be the case that the rally is already over.

The Stochastic indicator flashed a sell signal and the RSI more or less did the same (it was not at 70 but very close to it). The implications are bearish.

HUI:SPX - Gold stocks to the general stock market ratio

The gold stocks’ performance relative to other stocks shows that the downtrend remains in place. The HUI to S&P 500 ratio moved to the declining resistance line, but there was no breakout. Precisely, there was a small breakout that was already invalidated. Either way, the implications are bearish. It seems that the rally is ending or already over.

Summing up, gold, silver and mining stocks moved visibly higher last week, but despite the rallies being generally a positive phenomenon, this resulted in several bearish signs that we covered in Thursday’s and today’s alerts. Based on multiple signals that we have right now, it seems that the next big move will be to the downside and being positioned to take advantage of it remains justified from the risk/reward point of view.

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: $1,223, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $62.34
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: $18.13, initial target price for the DUST ETN: $26.61; stop loss for the DUST ETN $9.22

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: $25.23
JDST: initial target price: $46.47; stop-loss: $15.58

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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