Gold & Silver Trading Alert: Silver’s Breakout Invalidated

tools spotlight

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

At the first sight, not much happened in the precious metals market in the final days of last week. However, taking a closer look reveals that even without price movement, quite a lot changed. Silver’s breakout was invalidated and gold’s lack of movement also “flashed a signal”. What are their implications?

In short – they are bearish. Silver’s invalidation of the breakdown – confirmed by a weekly close – is a sell signal, and gold’s confirmation of the breakdown below the rising short support line is bearish as well. Mining stocks paused, but they were already after a confirmed breakdown, so the situation simply remains bearish in this part of the precious metals market. Let’s take a closer look (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold has not only managed to stay below the broken support line for 3 consecutive trading days, but it has also corrected the decline on relatively low and declining volume. Both of the above are bearish indications.

Long-term Silver price chart - Silver spot price

We can say the same thing about the situation in the silver market. The white metal stayed below the long-term support/resistance line for an additional day (and we finally saw a weekly close below it), which makes the invalidation of the previous breakout complete. Based on our experience, weekly confirmations are much more important than daily ones in the case of long-term lines. Consequently, the outlook for silver deteriorated quite significantly because of Friday’s lack of rally.

In the case of mining stocks, Friday’s price action didn’t change anything.

HUI Index chart - Gold Bugs, Mining stocks

The declining resistance line was never broken and gold stocks simply bounced off it when they had approached it weeks ago. The decline simply continues.

True Seasonal Gold Price

The True Seasonal patterns for gold suggest a move lower in the first half of June, so its quite likely that we will not have to wait for the decline much longer (even if it doesn’t happen right away, as visible on the above chart).

Summing up, silver’s invalidation of its breakout and gold’s confirmed breakdown further confirm the bearish outlook for the entire precious metals sector. It seems that the final bottom is still ahead of us.

Several weeks have passed since we opened our speculative short positions in the precious metals sector and while the positions are not yet significantly profitable (miners and silver are trading at about the same price levels, while gold is lower), the reasons for which we opened them remain up-to-date, and so does the enormous profit potential.

We realize that gold’s lack of exciting movement (it’s been moving back and forth around the $1,200 level for weeks) is discouraging and boring, but it seems very likely that patience will be well rewarded. It’s before the move that one should be paying extra attention to the signals, not after it. The former is definitely the case at this time.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short (full position) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:

Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
Silver: initial target price: $15.10; stop-loss: $18.13, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $38.44
Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $10.37

In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:

GDXJ: initial target price: $21.17; stop-loss: $28.68
JDST: initial target price: $14.35; stop-loss: $5.65

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.

=====

Latest Free Trading Alerts:

S&P 500 index extend its short-term fluctuations along record highs. Is holding short position still justified?

Stock Trading Alert: Mixed Expectations Following Last Week's Uncertainty - Which Direction Is Next?

=====

Hand-picked precious-metals-related links:

The Real Value of Gold in the Ground

Gold Speculators Reduce Net Bullish Positions

=====

In other news:

Lynch’s Secret to Finding Value Discovers Little in S&P 500

Rate hike needed to pop bubbles: Robert Shiller