Gold & Silver Trading Alert: Reversal or No Reversal in Gold?

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Briefly: In our opinion speculative short positions (full) are currently justified from the risk/reward point of view.

Gold moved sharply higher on Tuesday, invalidating the slide that we saw on Monday, but silver didn’t (closing right at the $16 level) and miners have more or less closed unchanged. Which marked shows the real direction of the precious metals sector?

As it is usually the case, the context provides the most important details. Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The USD Index broke above the May high yesterday and it moved back to it in today’s pre-market trading. The implications are bullish for the short term, but let’s keep in mind that the RSI indicator is getting close to the 70 level, which suggests a looming pause or a correction and the size of the current rally in the USD Index is more or less the same as the size of the only similar rally from the recent past – the October 2015 rally. We marked the size of that rally with a rising dashed line and we can already see some similarity between them. Right before the end of October, there was a small consolidation followed by a breakout above the previous high and then another decline to the most recent lows (at the end of the month). If the pattern is to repeat itself to a considerable degree (as it is quite often the case), we can expect the USD Index to move to 95 or so.

What kind of impact would this likely have on the precious metals sector? A small one, just like it was the case previously. There was a move higher in gold and silver when USD declined in October, but it was a very small move – not something that justifies adjusting the current position.

Short-term Gold price chart - Gold spot price

As far as gold’s short-term chart is concerned, we wrote the following in the previous alert:

(…) based on what happened on Friday we can also add that gold’s breakdown below the rising blue support line is now verified. Once gold confirms a breakdown below the March low and the 38.2% Fibonacci retracement level, the decline is likely to accelerate because there is little very strong support for tens of dollars.

We didn’t see the above-mentioned breakdown so far. Instead, we saw a move to the Fibonacci retracement and the previous low and then a corrective upswing. Gold didn't break below the previous lows, but the session that appears like a daily reversal are actually 2 sessions (the data provided didn’t show it as 2 separate sessions, but that’s exactly what happened): Monday's (when gold futures were trading) and Tuesday's. Consequently, what appears to be a daily reversal is actually a decline in a subsequent daily correction. What difference does it make? The implications of a daily reversal here would be much more bullish than the implications of seeing a bounce after a move to a quite strong support level.

In case of silver, even if we view both sessions as a single one, we still get bearish implications in case of silver. Silver declined, didn’t really correct it, and it also managed to close below the October highs (in terms of daily closing prices). The implications are bearish.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks didn’t do much – they moved a bit higher and the volume that accompanied this move was relatively low. The implications are bearish, but not strongly so – they would be much more bearish if miners actually managed to decline despite gold’s move higher yesterday.

Summing up, not much changed on the precious metals market this week. Gold moved down (on Monday) and back up yesterday, but that’s not surprising given the support that was just reached. Miners are not showing strength and silver just flashed a new bearish signal by closing below the October 2015 highs. Based on the similarity between the current move higher in the USD Index and the one seen in October 2015, we can see a corrective decline in the USD to about 95 or so, but it is not likely that this move would affect the precious metals sector in an important way. Consequently, we think that the short positions in the precious metals sector remain justified from the risk to reward point of view.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short positions (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:

Gold: initial target price: $1,006; stop-loss: $1,317, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $43.71
Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.47, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.11

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: $40.13
JDST ETF: initial target price: $61.74; stop-loss: $9.38

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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