Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
The most prominent action in the precious metals market that we saw last week, took place in silver – the white metal closed the week below the important long-term support/resistance line, thus invalidating the previous breakout. However, there’s more to the precious metals market than just the action in silver. In today’s alert, we discuss both the developments in silver and other factors.
Let’s start with silver itself (charts courtesy of http://stockcharts.com).
In Friday’s alert, we wrote the following:
(…) Still, if gold was to move higher (to $1,310 or so), then the above chart provides us with an analogous upside target – the upper, long-term green line (based on the same major tops as the lower line, but drawn through intra-day tops). It’s currently at about $18.70 – just 10 cents above this week’s high. So, the upside is quite limited.
Silver has indeed moved lower after it reached the upper of the declining, long-term, green resistance lines. The lower one (based on weekly closes) is currently at about $18, so if silver manages to close the week below it (which seems likely), the previous breakout will be invalidated and it would likely trigger another powerful decline. For now, the fact that the upper resistance line held, continues to have bearish implications – the upside is very limited and the downside is huge.
It didn’t take long for silver to slide below $18 – it did so a few hours after we posted the above and it’s been trading below it since that time. At the moment of writing these words, silver is at $17.92, so the odds are that it will indeed close the week below $18.
The volume on which silver declined was significant as well, so the implications are definitely bearish.
Naturally, if silver’s signals are not confirmed by other markets, one shouldn’t rely on them, but this time they are. In addition to multiple factors that we discussed in the previous alerts, we would like to emphasize that the breakdown in mining stocks was not invalidated yesterday.
The invalidation of the breakdown is now a clear fact. It’s no longer bearish, somewhat bearish, or a bit bearish – it’s very bearish. It’s been confirmed by the weekly closing price, and since the support/resistance line is based on the same kind of prices, the invalidation of the breakout is meaningful and clearly bearish.
The long-term gold chart confirms the above bearish comments. The yellow metal moved to the declining long-term resistance line and then declined once again. There was no breakout, so the trend remains down.
The Japanese yen which is closely linked to the price of gold, also moved to its critical resistance level (further supported by the zigzag corrective pattern) and thus it’s likely to have reversed its recent direction and decline in the coming days – and so is gold.
The financials were more clear as far as their signals are concerned. They too moved to an important level, but their bounce after reaching it was very visible. That’s a major medium-term development. This description is particularly important as the precious metals sector tends to react to major (!) moves in financial stocks (moving in the opposite way). Since the major move up is now (given the confirmation of the breakout above the 2015 high) likely for the financial stocks, a major move lower is likely for the precious metals sector.
Let’s take a look at the short-term mining stock chart that appears to be leading gold once again (miners moved ahead of gold in the past months).
Mining stocks confirmed the breakdown below the rising short-term support line by closing below it for 3 consecutive trading days, moving back to it without invaliding it and by closing the week below it. The volume on which Thursday’s and Friday’s upswing materialized was low, which also confirms that the move lower is the current true direction and the upswings should be treated as corrections.
Summing up, the precious metals market appears to be starting to decline even despite the lack of direct reasons to do so and that’s a particularly bearish situation. Precious metals had all the reasons to rally – tensions regarding North Korea, the unresolved situation regarding the U.S. airstrike in Syria and tensions before the elections in France… And it didn’t do anything substantial. Silver declined and miners have not only broken below the rising support line, but they also confirmed the aforementioned breakdown. This, plus other factors discussed previously support the expectation of lower precious metals prices in the coming weeks.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:
- Gold: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
- Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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: $45.31
- JDST ETF: initial target price: $104.26; stop-loss: $10.78
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)
Insurance capital (core part of the portfolio; our opinion): Full position
Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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