Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Yesterday we saw another big daily decline and it served as an additional confirmation that taking profits on long positions and entering short ones on Monday, at 2PM (when the GDX was at $15) had been a good idea. Will the short positions become more profitable in the future?
The only honest answer to this kind of question is “we don’t know”, but we do think that it’s very likely. The reason is the combination of several technical factors, the similarity to October 2014 and the way the precious metals perform relative to the USD Index. Let’s start with the former by looking at the charts (charts courtesy of http://stockcharts.com).
In Tuesday’s alert we wrote the following:
(…) more significant resistance levels remain just above where gold is right now. The 61.8% Fibonacci retracement and the declining resistance line coincide at about $1,170, which is our current target for the yellow metal.
(...)
Gold moved to $1,169.80, so effectively it moved to the mentioned target level, before declining. More importantly, it declined on huge volume, which is a very bearish sign. Moreover, we saw a sell signal from the Stochastic indicator and it very often corresponded to major local tops in the past. The implications are bearish.
Gold has indeed declined in the past few days and the decline took place on big volume – which serves as a bearish confirmation. Moreover, gold broke (insignificantly, but still) below the short-term rising support line. The outlook remains bearish.
Speaking of breakdowns, silver just broke below the major support in the form of the 2014 low. Remember when “everyone” (at least many precious metals analysts) wrote that the final bottom in silver had been formed back in November 2014, but we didn’t? Well, the theory that the final bottom was behind us was just proven incorrect.
The implications of yesterday’s move are not yet very bearish, but will likely soon become such. The reason is that the breakdown has not been verified just yet. The support is significant, so the breakdown could easily be invalidated, so it’s better to wait for additional several closes below the 2014 low and a weekly close. All in all, the situation deteriorated based on yesterday’s decline, but not significantly so.
We can say exactly the same about the above GDX chart as we saw a very similar pattern, only from the short-term perspective:
The implications of yesterday’s move are not yet very bearish, but will likely soon become such. The reason is that the breakdown was not verified just yet. (…) All in all, the situation deteriorated based on yesterday’s decline, but not significantly, so.
The above HUI Index (proxy for gold stocks) chart has the same implications, but it’s particularly interesting in light of the size of the decline in miners and metals. Namely, if gold and silver are likely to decline significantly (note the targets in the silver chart), then it’s very likely that mining stocks will decline significantly as well.
Miners are already very oversold from the long-term point of view, but it seem that they will need to become extremely oversold before the final bottom is seen. That’s just how the markets work – moving from excessive optimism to excessive pessimism and vice-versa. If miners are to decline significantly, then how low can they go? To the lower support levels, and the 2001 high and the late-2001 low seem low enough for the decline in miners to correspond to the big declines in gold and silver that we expect to see in the following months.
All in all, many technical factors point to lower prices, but, as mentioned earlier today, there’s more. The analogy to October 2014 is also a very bearish factor. We described it on Monday in the following way (and it remains up-to-date also today as the analogy continues):
Today’s session is very volatile, not only in case of the general stock market and the USD Index, but also in some parts of the precious metals market, and it’s a good example that a lot can change in a relatively short period.
Today’s session is definitely a significant one as there are not many cases when stocks and USD plunge sharply at the same time. Since it’s likely important, it’s also important that we check what is the likely impact on the precious metals sector.
As mentioned above, there were not many similar days to what we saw today on the stock market, but there is one day that is definitely similar. On Oct 15 2014 the S&P 500 declined significantly (after a big slide) and reversed in a major way. It was not the final bottom, but a day ahead of it. It looked very (!) similar to what we’re seeing today.
What happened on other markets? Was the session at least somewhat similar in them as well? Not only somewhat, but very.
That was a few days before gold’s local top and before a great shorting opportunity.
Silver was not outperforming before this local top, but there was significant intra-day volatility at that time. We’re seeing something similar also today and in the past few days.
After the initial sharp rally, mining stocks started to disappoint once again and Oct 15 2014 was a great day to be moving from long to short positions. Miners were rallying sharply recently, but started to underperform recently as well.
What did the USD do? It declined sharply to a significant support level (back then it was the 40-day moving average and right now the May and June 2015 lows serve as support - the USD Index moved temporarily below them but it’s once again above these levels at the moment of writing these words).
The implications of the above similarity are very bearish, and so is the precious metals sector decline despite a major slide in the USD Index.
Speaking of gold’s underperformance relative to the action seen in the USD Index, the latter is basically unchanged this week (0.13% gain) despite the intra-week plunge, so one would expect gold to be more or less unchanged as well. Gold declined more than $35 this week. The underperformance is clear and it serves as another confirmation of the bearish outlook.
Summing up, we believe that the outlook for the precious metals market deteriorated once again yesterday. The analogy to the similar session (Oct. 15, 2014), gold’s underperformance relative to the USD Index, and other technical signs make us think (our opinion) that much lower prices are in the cards and that the short positions will become much more profitable than they already are.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (full) 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: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
- 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 ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54
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: initial target price: $16.27; stop-loss: $24.33
- JDST: initial target price: $16.98; stop-loss: $3.42
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.
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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