Gold & Silver Trading Alert: Silver Soars – How High Will it Go?

tools spotlight

Briefly: In our opinion, speculative short positions (full) in gold and mining stocks are justified from the risk/reward point of view.

The precious metals market didn’t do much yesterday, but they rallied much higher in today’s pre-market trading, especially silver. Will the rally continue much higher?

Let’s jump right into the charts (charts courtesy of http://stockcharts.com).

Nothing changed on the long-term gold chart, so let’s move right to the short-term one.

Short-term Gold price chart - Gold spot price

In yesterday’s alert, we wrote the following:

From the short-term point of view, not much changed either. Gold moved to the 61.8% Fibonacci retracement level and declined after reaching it. There was no meaningful breakout.

The above remains up-to-date as gold moved to the 61.8% Fibonacci retracement once again yesterday, but declined shortly thereafter. We see the same today, with the exception that we haven’t seen the downswing so far. At the moment of writing these words gold is trading at $1,268, so the breakout is not confirmed.

Long-term Silver price chart - Silver spot price

We saw a much bigger rally today in case of silver. At the moment of writing these words, the white metal is trading at $17.62 after moving temporarily (according to kitcosilver.com) to $17.79.

In yesterday’s alert we wrote the following:

However, as we wrote many times in the past, silver’s breakouts often turn into “fakeouts” and we’ve seen this way too many times to view this breakout as bullish even though it’s visible even from the long-term perspective. Since the line that silver broke is of a long-term nature, we can expect the initial move after the breakout to be also visible from this perspective. Consequently, it’s not really bullish.

Still, given the size of yesterday’s move up and the strength of the momentum, we don’t want to re-open the short position automatically, just in case silver moves even higher on a temporary basis.

It turns out that the above decision was correct as the strength of the momentum pushed silver even higher. The question is, how high is silver likely to move before turning south again. The reply is provided by resistance levels in the form of previous tops. The May 2015 high was almost reached today – it’s at $17.77 – just 2 cents below today’s high and this could be enough to stop the rally. If not, then the next resistance is provided by the January 2015 high ($18.50).

Was the top reached / is going to be reached today? That’s quite likely the case, but given the strength of the momentum we would like to see some additional bearish confirmation today before opening short position in silver.

Before completing this alert we wrote the following paragraph:

At this time today’s session is too similar on an intra-day basis to the April 19 session – if this analogy holds, we could see another wave higher in silver in the next several hours. Based on how things evolve we will either open a position or wait for a better risk to reward ratio.

It turned out that the above became true before the alert was published. As above, it’ seems too risky to open the short position at this time without an additional bearish confirmation.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks tried to move higher yesterday, but ended the session almost 2% lower, thus forming a bearish reversal candlestick on significant volume. It would be very bearish if it wasn’t for the fact that gold is up about $15. Miners moved higher in pre-market trading, but not to yesterday’s high, so we see some underperformance here. On the other hand, what happens before session is not very representative, so all in all, we can say that not that much changed – the key thing is that the 2015 high in the HUI Index remains unbroken.

Short-term US Dollar price chart - USD

Meanwhile, our analysis of the USD Index remains up-to-date:

What was the likely reason behind the PM’s rally? The decline in the USD Index. The important thing is that despite this decline, the USD didn’t invalidate the previous breakout and that it didn’t move below the previous low. The outlook is still more bullish than it was about a week ago and the implications for the precious metals market continue to be bearish.

USD rallied yesterday, so the outlook remains bullish.

Summing up, even though a lot happened in today’s pre-market trading, it doesn’t seem that a lot changed – at least not based on what we saw on Tuesday and what we are seeing so far today. Consequently, we think that a short position (full) in gold and mining stocks is justified from the risk to reward point of view. We will likely adjust this position (probably by entering a short position in silver) in the coming days. It's rather unclear, but it seems that the decline should start within the next several days and the decline could remain in place for a few months (no market moves in a straight line and there will be corrections, though).

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short positions (full) in gold and 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: $1,304, initial target price for the DGLD ETN: $89.05; stop-loss for the DGLD ETN $47.15
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $24.07, initial target price for the DUST ETF: $5.72; stop-loss for the DUST ETF $1.74

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: $36.37
JDST ETF: initial target price: $8.86; stop-loss: $2.27

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:

Last week, Deutsche Bank agreed to settle U.S. lawsuits accusing it of manipulating gold and silver prices. What does it mean for the gold market?

Deutsche Bank Settles Gold Price Fixing Litigation

S&P 500 index continues to trade close to its last year's medium-term highs. Will it break above last year's May all-time high of 2,134.72? Investors will wait for more quarterly corporate earnings releases.

Stock Trading Alert: Highest Since Early November - Will It Continue Even Higher?

=====

Hand-picked precious-metals-related links:

PRECIOUS-Silver at 11-month top, gold rises as commodities rally

UBS, Macquarie say gold has peaked

BAML Says Silver Breakout Is For Real

Sibanye to invest $250 million in its gold mines, keeps shopping for new assets

=====

In other news:

Draghi Can Argue Glass Is Half Full as ECB Pumps Up Stimulus

The Germans are revolting over ECB policy

Can THIS be a game-changer for central banks?