Briefly: In our opinion, speculative short positions (150% of the full position) in gold and silver and regular (100% of the full position) short position in mining stocks are justified from the risk/reward point of view.
The precious metals sector declined yesterday, just like it was likely to, based on the weak performance after the employment data was released on Friday. What can the shape of the decline tell us about the following price moves? That the decline is likely not over – conversely, it seems that it’s has just started.
Let’s take a closer look (charts courtesy of http://stockcharts.com).
In yesterday’s alert, we wrote the following:
On the short-term chart we see that gold moved to almost $1,300 on Friday, but finally closed below $1,290. There was no breakout above the previous highs and the sell signal from the Stochastic indicator remains up-to-date.
The outlook was already bearish, but based on yesterday’s decline, it further deteriorated. The reason is that gold finally closed below the previous high (in terms of daily closing prices). That’s an invalidation of the breakout above the March 2016 high and an important sell sign. We saw similar situations in May 2015 and October 2015 and in both cases that was the start of a major, $100+ decline.
Not much changed in the case of silver’s outlook but the only reason is that it was clearly bearish even before yesterday’s session. Silver had invalidated the breakout above the 2015 high and based on yesterday’s decline, the invalidation is even clearer. Naturally, the implications remain bearish.
As far as mining stocks are concerned, the outlook deteriorated as well, but not based on the sign that we had expected to see. In yesterday’s alert we wrote the following:
(…) since gold stocks didn’t break back below the 2015 high the technical situation didn’t change that much. (…) Once that happens, we’ll likely increase the size of the short position in mining stocks. We will most likely wait for the daily close, but if something else convinces us that increasing the position in the miners is a good idea, we’ll let you know.
Miners didn’t move back below their 2015 high, but they did break below the rising support line based on 3 short-term bottoms. The breakdown took place on big volume (biggest daily volume since late March) and we view this as a bearish sign, especially that the price-volume link has been negative this month (GDX moved higher on volume lower than the volume on which it declined).
Consequently (and based on what happened in gold), we think that the situation became more bearish and it is now justified from the risk to reward perspective to increase the size of the short position.
What about the USD Index?
In yesterday’s alert, we wrote the following:
As you can see on the first chart, the USD Index remains below the blue line, which represents the April low (in terms of closing prices). As we wrote many times in the past, the precious metals market tends to react particularly strongly to breakouts in the USD Index, so without a short-term breakout (as traders seem to be rather short-term oriented) it’s no wonder that we are not seeing breakdowns in gold or mining stocks yet.
Does it matter? Not really, because, as you can see on the lower of the above charts, the key – long-term – breakdowns were invalidated and the implications are very bullish for the following weeks – the lack of the short-term breakout is really of little meaning (compared to the above) even if it is being viewed as important by some market participants.
Yesterday, the USD Index broke above the April low and even though this move was rather small, gold and silver declined visibly – just as it’s been the case many times in the past. What’s next? The outlook for the USD Index remains bullish and the implications for the precious metals market remain bearish.
Summing up, the outlook for the USD Index remains bullish and the outlook for the precious metals sector remains bearish and yesterday’s price moves confirm it. The USD’s breakout above the April low triggered a decline in metals and miners, just as we expected and based on the resulting breakdowns in gold and mining stocks it seems that we can expect much lower prices in the following weeks. Based on the above, we think that increasing the size of the short position in the case of mining stocks is now justified from the risk to reward perspective.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (150% of the full position) in gold and silver and regular (100% of the full position) short position in mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:
- Gold: initial target price: $973; stop-loss: $1,317, initial target price for the DGLD ETN: $89.05; stop-loss for the DGLD ETN $46.25
- Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $61.16; stop-loss for the DSLV ETN $26.34
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.47, initial target price for the DUST ETF: $4.27; stop-loss for the DUST ETF $1.16 (the price for DUST is dependent not only on the prices of mining stocks themselves, but also on the way mining stocks decline and the real price that DUST will achieve will likely be much higher than this target, but the conservative pricing models don’t take - and generally can’t take - the above into account).
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: $39.43
- JDST ETF: initial target price: $5.78; stop-loss: $1.60
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.
=====
Latest Free Trading Alerts:
The European Central Bank decided to end production of the €500 banknote. What does it mean for the gold market?
Although crude oil moved higher after the market’s open, the key resistance zone stopped oil bulls once again, triggering another invalidation of earlier small breakout. What impact did this event have on the black gold?
Oil Trading Alert: Third Time Lucky
We haven’t seen much action recently. Bitcoin remained above $450 but not very far from this level. The volume was not spectacular. What does it mean for the Bitcoin market?
Bitcoin Trading Alert: Space for Move up Limited
=====
Hand-picked precious-metals-related links:
Major correction underway for mining stocks
=====
In other news:
Global Stocks Rise With Commodities; Yen, Treasuries Decline
US need not fear challengers to dollar: Fed official
The World's Most Extreme Speculative Mania Unravels in China
Man who foresaw oil crash bets against Saudi Arabia
=====
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
