Gold & Silver Trading Alert: Silver: Time is Running Out

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Briefly: In our opinion, no speculative positions in gold, silver and mining stocks are justified from the risk/reward perspective.

Not much happened yesterday in the precious metals market in terms of the price movement, but time is just as important (or more important) a factor and with each passing day an important pattern in silver is becoming more and more important.

Let’s take a look at the silver chart for details (charts courtesy of http://stockcharts.com).

Short-term Silver price chart - SLV ETF - iShares Silver Trust

The thing about the above SLV ETF chart is that the cyclical turning point is just a few days away. This was not a very important issue previously as it was relatively far and it was difficult to say what the short-term move that would take silver to the turning point would be. It is still not certain, but we now can make more detailed predictions based on it.

If silver moves higher shortly, then the turning point is likely to have negative implications as it would imply a short-term top. If silver does nothing for a few more days, the turning point will imply a rally in the following several days. The implications of the turning point in light of silver’s decline in the coming days would be similar – silver would likely rally based on it, at least temporarily, perhaps moving back to the previously broken support level (like the August low).

All in all, the proximity of the turning point means that one should not take silver’s price move at its face value. In the next several days, the very short-term implications are likely to be contrary to the assumed ones (traders usually assume that an upswing is bullish, while a downswing is bearish). Moreover, if we get another small rally here, it would confirm the bearish outlook and possibly create a great entry point for short positions.

Such a rally still seems quite probable based on what we’re seeing in mining stocks.

GDX - Market Vectors Gold Miners - Gold mining stocks

In yesterday’s alert, we wrote the following:

Miners indeed moved higher yesterday, which was nothing unexpected. In yesterday’s alert we explained which technical phenomenon made it quite possible:

Mining stocks declined [on Tuesday], but the volume was low once again, which means that the above comments remain up-to-date. Miners could still rally on a very temporary basis before the big decline resumes.

Moreover, GDX moved to the rising support line, which could trigger another rally before the big decline starts.

Miners had a good reason to decline – gold declined yesterday. However, they didn’t. Even the lack of movement would have bullish implications as miners would outperform in this case. The latter did more than that – miners rallied. Moreover, the volume that accompanied the upswing was bigger than what we’ve seen so far this week, which suggests that the move was not accidental.

The general stock market rallied as well, but the rally was not huge enough to explain – by itself – the strength seen in mining stocks relative to gold. Consequently, we view it as a bullish signal for the very short term. The emphasis is important, because this factor alone is not a game-changer in our view. There are many other factors that need to be considered and quite a few of them have bearish implications.

So, what does yesterday’s strength in the mining stocks imply? That we could see higher prices in the precious metals sector in the next several days, but nothing more. In particular, it doesn’t invalidate the bearish outlook for the medium term.

The above remains up-to-date. Today, we can add that the price-volume link continues to have bullish implications for the next few days as miners moved a bit lower today on volume that was lower than what we had seen on Wednesday, when miners rallied. Moreover, please note that the general stock market declined sharply yesterday and miners declined only a bit, just like gold.

Summing up, it’s quite likely that the precious metals sector is close to starting another big decline, but it’s also likely that another short-term rally could be seen beforehand. The cyclical turning point in silver is just around the corner and it suggests that a counter-trend rally is quite likely to be seen. If it is seen shortly, it could be the final upswing before another big decline and a great entry point for short positions.

Just as we wrote yesterday - the opportunity in the precious metals sector will likely present itself shortly, just like it is already the case with crude oil, forex and stocks (we currently have profitable positions in all of them).

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): No positions

Long-term capital (core part of the portfolio; our opinion): No positions

Insurance capital (core part of the portfolio; 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 signs 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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