Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
The most interesting thing during Wednesday’s session took place in gold, and in the case of yesterday’s trading, it was silver that provided us with the most meaningful signal. What was it?
Silver’s short-term outperformance that we’ve seen so many times at previous local tops. Before discussing it in greater detail, let’s take a look at gold (charts courtesy of http://stockcharts.com).
Yesterday’s action was, to a big extent, a repeat of Wednesday’s action, so we will quote our previous comments on the above chart:
The volume was indeed low, but in several previous similar cases low-volume declines were in fact the final step before a sharp decline in gold.
History tends to repeat itself to a considerable extent, so it’s hard to view the low volume during gold’s decline as a bullish sign.
Moreover, please note that gold’s performance since mid-August can be viewed as a bearish head-and-shoulders pattern. Gold moved to the line that is parallel to the neck level, which means that the 2 shoulders of the pattern are similarly big. This makes the formation more believable. Of course, it will have very bearish implications only after it is completed, but it seems that this it’s completion is a quite likely possible.
Overall, the situation in gold deteriorated once again.
Silver moved higher, especially on an intra-day basis, and for those who are new to the precious metals realm it might have seemed bullish. The tendency, however, is for silver to perform like that right before sharp declines. The intra-day rally and reversal to the 20-day moving average meant local tops several times in the recent months and it seems that this will be the case also this time.
Moreover, please note that yesterday’s intra-day high is practically the same as the late-July high, which means that we might be looking at a bearish head-and-shoulders pattern in silver, just like we are likely looking at one in gold. Again, the implications are bearish.
Mining stocks declined once again even though they tried to start a bigger rally in the first part of the session. The inability of miners to hold the early gains is – once again – a bearish sign. The miners’ reversal was similar to the one that we saw on the general stock market, but – unlike main stock indices – miners closed the day lower (almost 2% lower).
We saw an additional important bearish sign for the PMs yesterday.
The USD Index broke above the declining support line (thus increasing the profits on our short EUR/USD position) and breakouts in USD very often have very bearish consequences for the precious metals sector. The breakdown above the declining medium-term resistance line will be even more profound, but what we saw yesterday is already bearish for PMs and miners.
On a side note, since we have many new subscribers, we would like to emphasize that even though in the past several alerts we covered just a few charts, it doesn’t mean that these are the only ones that we are monitoring. In fact, we are reviewing about 100 charts (indices, ratios etc.) each day, before writing the alert. The reason that we don’t include more of them (besides this being impossible as we only have several hours to create, post and send the alert) is that in most cases they don’t feature anything useful or no changes over something that we covered several weeks / months ago. You can rest assured that when something meaningful happens in a given ratio / index etc., we will let you know.
Overall, since the situation in the precious metals market has once again deteriorated (and the short-term outperformance of silver has actually bearish implications) and we can summarize today’s alert in the same way as we summarized yesterday’s issue:
Summing up, the situation and outlook didn’t change based on yesterday’s price move and the outlook remains bearish.
The analogy to the similar session (Oct. 15, 2014), gold’s underperformance relative to the USD Index, and other technical signs make us think (our opinion) that much lower prices are in the cards and that the short positions will become much more profitable than they already are (despite natural corrections along the way).
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:
- Gold: initial target price: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
- Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
- Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54
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: initial target price: $16.27; stop-loss: $24.33
- JDST: initial target price: $16.98; stop-loss: $3.42
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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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