Briefly: In our opinion no speculative positions are currently justified from the risk/reward perspective.
In yesterday’s alert we wrote that short positions were still too risky and it now seems that the market agrees. Gold, silver and mining stocks moved higher yesterday. Is it justified to get back on the short side of the market? Based on yesterday’s price action we have one thing that can tell us when that will be the case.
The thing is the situation in the USD Index. Let’s take a closer look (charts courtesy of http://stockcharts.com).
Base on yesterday’s intra-day reversal, we see that the USD Index created a small triangle pattern. We marked it with red lines. Triangles are generally a consolidation pattern, especially during upswings. The size of the next move (after the USD breaks above the upper red line) is – based on the triangle formation – likely to be significant as the move that preceded the pattern was also significant. The USD rallied for more than 2 index points, so it could move over 90, based on this pattern alone.
Naturally, there is a strong long-term resistance at the 2009 and 2010 highs, so the U.S. dollar might not rally as high, or at least not confirm a breakout above these highs.
The U.S. dollar’s consolidation meant also a consolidation in the precious metals sector. Since the USD Index is more likely than not to continue its rally, then gold is more likely than not to continue its decline. However, it will be only after the USD breaks above the triangle that the odds for these moves will become much greater. Until we see a confirmed breakout (or at least an unconfirmed one) the situation will remain rather unclear for the short term (with a bearish bias for gold).
Our previous comments remain up-to-date:
Gold definitely has room for further declines, as no strong support was reached and the closest one is below $1,100.
On Friday, however, gold moved higher on strong volume, which is a bullish sign. Gold didn’t manage to close the week above the 2013 low, so the breakdown below it was not invalidated – which in turn is a bearish sign. Moreover, gold corrected to the 38.2% Fibonacci retracement, which means 2 things. Firstly, the current move is still down - until we see a move above the 61.8% retracement the rally will be a correction, not necessarily a beginning of a bigger upswing, and gold hasn’t even moved above the lower retracement of 38.2%. Secondly, the rally could be already over as the resistance was reached.
After Friday’s session we saw a move lower on Monday and another upswing on Tuesday. As stated earlier – gold is consolidating.
Finally, please note that silver is behaving just as it was been behaving in April 2013 when it paused (not ended) its decline.
Summing up, the final bottom is most likely not yet in, but there are some signs that point to further increases in the very short term (several days). Not all signs, however, suggest strength in the short run and the overall the situation is rather unclear. The medium-term trend remains down, so the surprises should be to the downside and we think that we will see another decline relatively soon. Based on yesterday’s price action in the USD Index, we have something that will help us determine when the risk associated with having a short position decreases significantly. It seems that this will be the case when the USD Index successfully breaks above from the triangle pattern.
As always, we will continue to monitor the situation and report to you – our subscribers – accordingly. We will aim to multiply the recent profits and will quite likely open another trading position shortly – stay tuned.
To summarize:
Trading capital (our opinion): No positions
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.
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 automated tools (SP Indicators and the upcoming self-similarity-based tool).
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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Hand-picked precious-metals-related links:
A final purge to $700? What gold bulls' surrender might look like
Gold is doing something it hasn't done in 17 years
BofA's Hartnett: Gold Below $1,000 Could Mark Peak for Stocks
LBMA-Gold industry top brass predict bullion will stabilise
India gold imports to rise into 2015 – Scotia-Mocatta
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In other news:
There's More to QE Than Krugman Thinks
Regulators fine global banks $3.4 billion in forex probe
Japanese stocks touch seven-year peak on talk of tax hike delay
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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