Briefly: In our opinion speculative short positions (full) in gold, silver, and mining stocks are justified from the risk/reward perspective.
In yesterday’s first alert we wrote that the precious metals sector was likely to decline, and we didn’t have to wait for the market to agree with us. The entire sector declined significantly and the short positions became more profitable. Let’s see what happened (charts courtesy of http://stockcharts.com.)
Gold more or less erased the previous week of gains in just one day. It reversed before the session was over, but it’s not surprising to see a corrective move after such a significant decline. No market moves in just one way without correcting, even on a short-term basis. Still, the volume during yesterday’s decline was rather significant and it confirms that the true move is down, and this month’s upswing was just a correction, not the start of a new rally.
Moreover, the intraday shape of the corrective move higher that we saw on Tuesday suggests that it is indeed just a correction, nothing more. We expect the downtrend to continue, even if we see a few more days of trading sideways.
As you have read in yesterday’s second alert, we moved our final target for silver’s decline lower and the above chart features the new target area (red rectangle). The main reason for the change of targets is silver’s significant underperformance in the recent weeks. It’s now starting the decline from levels that are lower than previously expected and if the underperformance continues, it’s likely to move much lower before the decline is over.
Once the rising red support line and the 2013 lows are broken, there is no strong support all the way to the $16 level (more precisely, slightly above it), which is where we currently see the very long-term support line (based on the 2003 and 2008 bottoms).
This support is strong, but if gold is to decline to $1,000 - $1,100 and silver is to underperform even more visibly than it does now, then even $16 may not be low enough for the final bottom. In this case, we have a combination of two support lines, the declining green support line (parallel to the declining resistance based on the 2011 and 2012 tops) and the 2010 bottom. It’s also very close to the 2006 high in silver. This level – slightly above $14 – seems low enough to stop the decline and for the final bottom to form right there. Still, given silver’s volatility, it would not even surprise us to see an intraday move below this level.
On a short-term basis, we see that silver declined on significant volume – something that we usually see in the early stage of big declines. The implications remain bearish.
In yesterday’s first alert we wrote the following about mining stocks:
Miners moved just a little higher. They barely erased Friday’s declines and did so on relatively low volume. This is bearish daily action and if we take the last 3 trading days into account, we also get bearish implications. The reason is that overall gold moved higher, while mining stocks declined on average.
Miners declined on visibly higher volume on Tuesday and the bearish implications remain in place. The sell signal from the Stochastic indicator further strengthens the bearish outlook.
To summarize:
Trading capital (our opinion): speculative short positions (full) in gold, silver, and mining stocks. You will find our take on many trading vehicles in our Precious Metals ETF Ranking.
Stop-loss details:
- Gold: $1,353
- Silver: $20.86
- GDX ETF: $26.2
Long-term capital: No positions.
Insurance capital: Full position.
Please note that a full speculative position doesn’t mean using all of the speculative capital for this trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
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 automated tools (SP Indicators and the upcoming self-similarity-based tool).
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.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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