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 Jan. 12, 2017 at 3:49PM.
Gold, silver and mining stocks reversed yesterday – they declined initially, but ended the session relatively unchanged. The opposite was the case for the general stock market and the USD Index. What are the implications? Did the trends reverse?
Not necessarily. The common denominator for the reversals seems to be the USD Index, so uncovering the implications of this reversal should give us insight into the other reversals. Consequently, let’s take a look at the USD Index chart (charts courtesy of http://stockcharts.com).
The intra-day reversal to the downside is generally a bearish development for the following several days, but it doesn’t have to be the case given what happened recently. Namely, the USD Index was after a substantial decline that caused the RSI indicator to move to the 30 level. It rallied from there along with the index and reached the middle of its trading range – the 50 level.
Does it change the implications of yesterday’s reversal? Yes, because we can see 2 similar situations from a year ago and we see what followed them – effectively nothing. The reversal that we saw at the end of February 2016 and the one that we saw in early May 2016 (marked with black ellipses) also took place after the RSI bottomed at about 30 and then moved to the 50 level. The thought behind technical analysis is that patterns tend to repeat. Is self-similarity more or less important than the classic way of interpreting candlesticks? Both approaches have their merit (and the above may generate some trading opportunities in individual currency pairs), but since the long-term picture and the analogy to what happened in 2002 and 2003 remains in place, higher prices are still favored and it doesn’t seem that any possible correction would be anything significant.
Since the reversals in gold, silver and mining stocks have all reflected the reversal in the USD Index, there is actually not much that we can add to the above (at the moment of writing these words, gold and silver prices are practically right where they were 24 hours ago). The bullish outlook for the USD Index translates into a bearish outlook for the precious metals market even though the two were not moving in tune in the past several days (except yesterday, that is). The big moves are still highly likely to be aligned and the big move for the USD Index is still very likely to be seen shortly.
Before summarizing, we would like to discuss the outlook on the chart that we haven’t covered in a while – gold priced in the Australian dollar.
There are 2 related things that are interesting on the above chart: one short-term development and one long-term implication.
The short-term development is the move to a combination of 2 important resistance lines – one declining line based on three 2016 tops and one rising line based on this year’s tops. We haven’t seen a breakout, so the implications are bearish. The RSI close to the 70 level is also a bearish factor – please note that important tops formed both: close to the 70 level and right at it. Consequently, the implications are already bearish, even without the move right to this level.
The long-term implication of the above is that if we see a decline here and a move below the previous 2017 lows, the sizable flag pattern (mid-Dec 2016 bottom – now) will be completed and the decline will likely to be similar to the preceding decline. A repeat of the 2016 decline (because that’s what’s being implied) is something that is likely to cause gold to decline below its 2015 low – also in terms of the USD. A confirmed breakdown below $1,050 could lead to a sharp move below $1,000 and - as the panic begins – finally to about $900.
Summing up, the current price of gold in terms of the Australian dollar and the proximity of strong resistance levels suggest that a turnaround – and quite likely a big slide – are just around the corner. The points made earlier this week remain up-to-date as well. Namely, the Dow to gold ratio chart is another reason to expect lower gold prices in the coming weeks and months, even if gold doesn’t slide in the next several days. The long-term analogy to 2002 and 2003 in the USD Index remains in place and it fully supports the above outlook and the same goes for the bearish long-term signs form the silver market, gold-to-bonds ratio and the analysis of the 50-week moving averages.
As always, we will keep you – our subscribers – informed.
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: $1,273; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.17
- Silver: initial target price: $13.12; stop-loss: $18.67; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $19.87
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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: $45.31
- JDST ETF: initial target price: $104.26; stop-loss: $10.78
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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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