Gold & Silver Trading Alert: Reversals – Who Would Have Thought?

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

Gold, silver and mining stocks all rallied strongly early during the session and moved to new highs (except silver) and it all looked so bullish especially that it all happened during a move up in the USD Index… But it all failed – and it failed with an exclamation mark. Gold, silver and mining stocks all reversed and declined for the day despite early gains and the sizes of both the late-session move and the volume were very significant. So are the implications.

And the are bearish. In yesterday’s alert we emphasized the following regarding gold:

Today, however, we saw a move higher – above the May highs, which could trigger additional moves higher, if the breakout is confirmed. At the moment of writing these words, gold moved back to $1,303, so there was no clear breakout so far. Why did gold move higher at all? It’s always a difficult (and practically impossible in most cases) to say why a given move took place, but today it seems that it’s the reaction of the European markets to yesterday’s news from the Fed. If this is the case, we don’t need to see any other bullish consequences, as the announcement didn’t change anything.

Let’s see what happened (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold didn’t just invalidate the early breakout – it declined, but that doesn’t say enough. Yesterday, gold closed at the lowest levels so far this week and since that happened on huge volume, it is very meaningful. The implications are very bearish.

It also serves as a great example as to why confirmations of breakouts are necessary to really view them as something serious – otherwise they can easily become a strong sign that the market will move in the opposite direction (down, instead of up in this case).

The implications wouldn’t be as bearish if the signals weren’t confirmed by other markets. But they are.

Short-term Silver price chart - Silver spot price

GDX - Market Vectors Gold Miners - Gold mining stocks

Both silver and mining stocks reversed despite early gains (and a breakout in the case of mining stocks) and they both declined on significant volume (on both a relative and absolute basis). That’s a clear bearish sign.

Short-term US Dollar price chart - USD

As far as the USD Index is concerned, we can finally say that gold didn’t outperform the U.S. dollar. The latter closed without a significant change, but gold declined. What are the direct implications? That the outlook for gold deteriorated. What are the indirect implications? It’s not so simple.

The USD Index is the average of the currency exchange rates of the U.S. dollar versus other major currencies (mostly the euro and the yen). So, if people think that the U.S. dollar is better than other currencies (better in terms of more security, with better upside potential), the USD Index is likely to rally. Consequently, the USD Index can rally because of 2 things: people think the U.S. is doing great and the U.S. dollar is a great currency to be invested in, or they might think that their domestic currency is bad and they want to get out of it and buy something else (be that the U.S. dollar or, for instance, gold). If people buy the U.S. dollar because they believe in it, gold is likely to decline and that’s what usually happens. However, if people are not fans of the U.S. dollar, but they just want to get out of their domestic currencies, they will likely buy both the U.S. dollar and gold. In the latter case, both gold and the USD Index can rally and that doesn’t necessarily reflect the true strength of the precious metal sector. Why? Because there is great uncertainty regarding the UK, given the possibility of Brexit. This drives both the U.S. dollar and gold higher. In terms of other currencies gold could show greater correlation as Brexit doesn’t reflect it, but still, it’s all about whether it is the U.S. dollar that is viewed as strong/weak, or whether one’s domestic currency is viewed as such.

Summing up, even though the beginning of yesterday’s session in gold, silver and mining stocks seemed bullish, they all flashed major sell signals and the outlook remains bearish.

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: $1,323, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $44.35
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: $27.47, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.50

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: $41.73
JDST ETF: initial target price: $61.74; stop-loss: $9.87

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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