Briefly: In our opinion speculative short positions (full) are currently justified from the risk/reward point of view.
The precious metals sector moved higher yesterday and the way it moved higher (and how high it moved) was something that we had seen many times previously. As the history often repeats itself, the above means that we have some technical indications of what could be waiting just around the corner.
Let’s take a look at the charts (charts courtesy of http://stockcharts.com).
The USD Index moved to the 61.8% Fibonacci retracement level and wasn’t able to close below it. In yesterday’s alert we wrote the following:
The USD Index has support at 93.43 and if it closes the day below it, more weakness could follow and this would be a bullish factor for gold. However, it doesn’t seem like this will be the case. Even if it would, we don’t think that the USD would move and stay below the previous 2015 low, due to the situation in the long-term USD chart.
Since the USD closed at 93.60 and at the moment of writing these words it’s trading at 93.90, we can say that the support at the Fibonacci 61.8% resistance has clearly held. Consequently, the outlook remains bullish.
The above chart also shows why (most likely) gold rallied significantly even though the USD didn’t plunge significantly yesterday. The USD moved below the early April lows and gold tends to react to breakouts and breakdowns more than to other moves in the USD. So, as the breakdown below the April lows is invalidated, gold’s rally is also likely to be invalidated.
The above is the case also because gold also reached the 61.8% Fibonacci retracement and more or less moved to its April highs. What’s important is the size of the volume, which was low or very low (if we compare it with the size of the rally, which was quite visible) and the implications are bearish.
Silver outperformed significantly (on significant volume) which is actually a bearish sign as that is something that preceded many local tops.
Mining stocks moved higher and GDX managed to close above its previous high, but only a little above it. The volume that accompanied this tiny breakout was relatively low as well, so the breakout is not confirmed. In fact, in the case of both the HUI and XAU indices, there was no breakout, so the one in the GDX appears to be more of an accidental move. We expect it to be invalidated shortly.
GDX moved a few cents above our stop-loss level, but due to the above we don’t think that the outlook changed, so we think that keeping the position intact (or opening it if it was closed) is justified from the risk to reward point of view.
Summing up, the rally in the precious metals market appears to be ending and the decline is likely to resume this or the next week. The small breakout in the GDX ETF was not confirmed by volume or the HUI / XAU indices and it appears likely that we will see an invalidation thereof. All in all, the outlook remains bearish for the precious metals sector.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (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:
- Gold: initial target price: $1,006; stop-loss: $1,317, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $43.71
- Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $27.17, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.67
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: $41.33
- JDST ETF: initial target price: $61.74; stop-loss: $10.31
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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 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, Gold & Silver Fund Manager
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