Gold & Silver Trading Alert: Silver Closes Below the September Lows

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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.

Silver moved lower once again and finally managed to close below the September low of $14.38 (it closed at $14.30). What are the implications? Should we expect a breakdown below the 2015 low shortly?

That’s quite likely. The implications are simply that the decline continues as we have been expecting it to. The decline was not big – only 8 cents – but it was significant as we just saw the second lowest close of the year. Once we get a close below $14, the real slide could begin – and silver can move very sharply at times. One of these times could be just ahead. Let’s take a closer look (charts courtesy of http://stockcharts.com).

Short-term Silver price chart - Silver spot price

In addition to the above, we can say that the RSI being below 30 doesn’t necessarily imply a big rally. We saw good examples of this in mid-June and in early-July. We could see a corrective rally, but it’s not clear if it’s going to be anything more than just a 20-cent move.

GDX - Market Vectors Gold Miners - Gold mining stocks

Meanwhile, mining stocks moved a bit higher yesterday, but does that imply a move higher in the near future? No, because the corresponding volume was low.

Please note that even a small rally here (to $14.70 or so) wouldn’t change much as it would simply be a verification of this month’s breakdown. Furthermore, a rally to $14.70 or so – the September high – followed by a move lower, would create a bearish head-and-shoulders pattern, which would then further increase the odds of the continuation of the decline.

Other than the above, there’s once again little new that we can say today – the technical picture for the key metals, indices and ETFs remains unchanged, so our previous comments simply remain up-to-date. Consequently, we will summarize today’s short alert in the same way we summarized the previous issue:

Summing up, the medium-term decline in the precious metals sector continues and there are multiple signs that confirm this bearish outlook (including the outlook for the USD Index). We could (and are in fact likely to) see some sort of corrective upswing eventually (perhaps this week, but that could also happen next week or in the following weeks – it doesn’t have to happen shortly), but when that happens, it’s not likely that the move higher would be significant or long-lasting. There is a good chance that the next wave down will be very sharp and even if one exits the short position now, re-entering it at more favorable levels might be difficult. In our opinion, the current short position continues to be justified from the risk to reward point of view and it seems likely that the profits on it will increase further, which will consequently further increase our profitability.

If / when we see a corrective upswing, it’s not likely to be big or to take long. We expect it to take between 1 day and 2 weeks (approximately) and to take gold $10 - $50 higher. It’s not clear what parts of these time and price ranges are more probable, so we don’t think that adjusting the current position in light of the above is justified from the risk/reward point of view. It’s clearer that the decline will continue after the possible correction.

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: $1,167, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $71.04
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 ETF): initial target price: $11.57; stop-loss: $18.13, initial target price for the DUST ETF: $26.61; stop loss for the DUST ETF $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 ETF: initial target price: $16.27; stop-loss: $25.23
JDST ETF: initial target price: $46.47; stop-loss: $15.58

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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