Gold & Silver Trading Alert: Silver: How Far Is Too Far?

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Briefly: In our opinion speculative short positions (full) in gold and mining stocks are currently justified from the risk/reward point of view and the same is the case with orders to enter short positions (full) in silver at higher price levels.

Silver continues to move higher, also in today’s pre-market trading. How much change and how much is changing today? How high will silver rally? Let’s take a closer look at the long-term chart to find out (charts courtesy of http://stockcharts.com).

Long-term Silver price chart - Silver spot price

Generally, our yesterday’s comments on the above chart remain up-to-date:

(…) Silver broke a little above the previous 2015 high, but since silver is known for fake breakouts, we don’t think that’s particularly important.

Please note that the RSI indicator recently flashed a medium-term sell signal, just like it was the case in the second half of 2012. In 2012, after that signal, silver declined and moved higher once again before continuing the decline. The same would have most likely happened also this time if it wasn’t for the Brexit voting and its result. What did Brexit change in this case? We saw an additional daily rally. Where would be silver if it wasn’t for this particular rally? It would most likely be below the previous 2015 low, thus repeating the 2012 pattern.

Silver was already very overbought on a medium-term basis and it was about to decline, but Brexit gave it an additional boost. However, a single boost is not something that changes the situation on the market. Given that RSI moved to 70, silver is still likely to decline, but the difference between 2012 and now is that this time the second local top before the decline is higher – the bearish implications of the overbought situation as indicated previously by the RSI indicator remain in place.

What happened since we published the above? Silver moved even higher, but it doesn’t invalidate the above. The area around the $19 level is rich in resistance levels – important lows of 2013 and 2014. Consequently, the reply to the question from the opening paragraph is that silver is that $20 level is most likely too high for silver right now. Our positions in silver were closed well below the current price and due to silver’s volatile nature we are not automatically re-opening them at this time (silver could move even higher very temporarily), but we will likely do so shortly.

Please note that the RSI indicator was almost at the 70 level yesterday and based on today’s pre-market move it is most likely already at or a bit above 70, which is a sign that the rally is already over or very close to being over.

SILVER:GOLD - Silver to Gold ratio chart

We can say exactly the same about the RSI indicator based on the silver to gold ratio – it also moved almost to the 70 level yesterday and it most likely moved above this level today. The moves in the RSI back below 70 are strong sell signals with very good accuracy.

As far as similarity to late 2012 is concerned, please note that back then we saw a rally in both: silver to gold ratio and the RSI indicator based on it, just like we are seeing it now.

Short-term Gold price chart - Gold spot price

The changes in gold were not profound and there’s not much that we can add to our yesterday’s comments:

Where would gold be and what would it do if there was no Brexit voting? Most likely it would be much lower, as it invalidated the breakout above the April/May high in a profound fashion and it was declining after that. It was only the Brexit that caused the sudden spike in prices. Without a Brexit, we would have likely seen a decline below $1,200, completion of a head-and-shoulders pattern and then further declines. But Brexit postponed all that and changed the shape of the patterns. Ultimately, gold is still likely to decline, but it will happen based on new patterns, not the previously visible head-and-shoulders pattern.

GDX - Market Vectors Gold Miners - Gold mining stocks

Yesterday’s performance of mining stocks was more or a repeat of what we saw on Wednesday (it moved higher on even lower volume) and our previous comments remain up-to-date:

Mining stocks moved a bit higher yesterday, but the rally was seen on relatively low volume (lower than on the previous day) and we also saw an intra-day reversal. That’s a bearish kind of rally, not a bullish one.

Summing up, this week’s rally in silver is not as bullish as it appears to be at the first sight and can actually be viewed as a bearish sign as – based on the RSI indicator for both: silver and RSI indicator – it’s something that happened before a major decline in 2012.

The question is how to adjust the trading positions based on the possibility of seeing another intra-day upswing in silver. The latter makes in difficult to place stop-loss assuming opening a position right away. On the other hand, silver could slide on Monday when placing trades in the US will be difficult as the markets will be generally closed. It seems that given these circumstances, it is a good idea to enter an order with a higher entry price and if silver doesn’t reach it, consider opening a short position closer to the end of the session either way. If the latter is the case and we view re-opening positions right away at the current silver price as justified from the risk to reward point of view, we’ll send a second alert today, but for now, we think placing an order with a higher entry price is justified.

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 entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,423, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $44.35
Silver: entry price: $19.66; initial target price: $12.13; stop-loss: $20.32, entry price for the DSLV ETN: $21.74; initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $20.27
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $30.77, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $3.62

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: $50.70
JDST ETF: initial target price: $61.74; stop-loss: $1.97

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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