Gold & Silver Trading Alert: Silver’s Rally – Breakout or Fakeout?

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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 situation in the USD Index and in the precious metals market is developing in tune with our expectations – the USD moved lower and precious metals moved higher. Will this move continue for much longer?

Most likely not. In yesterday’s alert, we emphasized that the precious metals’ and miners’ reaction is likely to be weak if we see additional declines in the USD Index and we wrote that these declines are likely to be seen until the USD reaches its 61.8% Fibonacci retracement level at about 96.40.

Let’s see what happened (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The USD Index did indeed decline, but it hasn’t moved to the mentioned support level yet. It was relatively close, though, and it closed below Friday’s close, so the potential size of the decline is now lower than it was before yesterday’s session.

It seems more likely than not that we will see an additional move lower before the USD Index truly bottoms.

Now, how did the precious metals sector respond?

Short-term Gold price chart - Gold spot price

Gold moved higher on relatively low volume and it didn’t move above the previous intra-day high. This kind of reaction is more or less in tune with our expectations – gold is moving somewhat higher, but not significantly higher (it’s down to $1,259 at the moment of writing these words).

Short-term Silver price chart - Silver spot price

The silver market moved strongly higher, but those who have been reading our analyses for some time know not to get overly excited by such outperformance - it could easily be a sign of an upcoming top as silver tends to outperform on a very short-term basis right before and right at important tops. Silver is at $17.06 at the moment of writing these words.

GDX - Market Vectors Gold Miners - Gold mining stocks

Finally, mining stocks barely moved higher and even erased a part of their intra-day rally before the session was over. The volume that accompanied this upswing was low, which further confirms the overall bearish implications. Outperforming silver and continuously underperforming mining stocks are a combination that indicates a topping pattern.

Again, based on the USD Index and its downside potential, it could be the case that gold, silver and mining stocks move even higher this week before forming the major top.

How high could they rally? In the case of the yellow metal, the very short-term upside targets are the recent intra-day high at $1,265 and the upper rising resistance line at about $1,270. In the case of silver, the very short-term upside targets are the 50-day moving average and the final of the classic Fibonacci retracement levels: $17.44 and $17.52, respectively. In case of the GDX ETF, the upside target is the previous May high and the 200-day moving average just several cents below $24.

Again, the above targets are not very likely to be reached – based on the previous (not yesterday’s action in the case of silver) underperformance of the precious metals sector – it’s only a possibility. The implications depend not only on probabilities but also on the likely follow-up action in each case. The potential rally in metals (and the decline in the USD Index) is likely to be small. The potential decline in the metals (and the rally in the USD Index) is likely to be huge. With pennies to the upside and dollars to the downside (literally in the case of silver and mining stocks) the overall outlook remains bearish.

Summing up, the USD Index broke through significant support levels and it could decline some more before turning up again. However, it doesn’t seem that adjusting the positions in the precious metals sector is justified at this time as neither gold nor (in particular) mining stocks want to react to these additional bearish signals. The only part of the precious metals market that managed to rally visibly yesterday was silver and since silver’s short-term outperformance (especially accompanied by mining stocks’ underperformance) is a bearish sign, the outlook still remains bearish.

Consequently, it could be the case that additional decline in the USD Index is accompanied by only a relatively small move in precious metals that is followed by a big slide and trying to time this move might backfire. The confirmation of the breakdown in palladium serves as an additional bearish confirmation.

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: $417.04; stop-loss: $43.12

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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