Gold & Silver Trading Alert: Some Things Change, Some Things Don’t

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Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

During yesterday’ session the precious metals market didn’t move very much, but still, we saw some changes as a result. Some things changed (especially these related to the bond market) and some things didn’t – both need to be addressed and taken into account while making investment decisions.

Let’s move right to it (charts courtesy of http://stockcharts.com).

Long-term Gold price chart - Gold spot price

Starting with gold’s long-term chart, we see no changes – gold moved $5 higher yesterday (and it has moved $5 lower in today’s pre-market trading at the moment of writing these words), which doesn’t change anything from this perspective. Consequently, our previous comments remain up-to-date:

We see that gold approached the declining resistance line and that’s one important factor that alone could suggest opening short positions, not the long ones. This line stopped the rally in late 2015 and it’s currently created by 3 major tops: the late 2012 top, early 2015 top and late 2015 top and this makes it a strong resistance.

Back in late 2015 gold moved a bit above this line, so we can’t rule out a move above it this time either, but it’s unlikely that this move would be significant (more than $20+). At this time gold is right at this line if we base it on the weekly closing prices. If highs are considered, then this line is at about $1,137.

Short-term Gold price chart - Gold spot price

Gold moved very close to the 61.8% Fibonacci retracement level and the 200-day moving average (only about $5 below them). This action remains in tune with that happened in May 2015 – gold moved a bit above the 50% retracement, but not to the 61.8% retracement. Consequently, not much changed on the above chart and what we wrote yesterday, remains up-to-date:

For a few weeks, the above chart has been featuring the following description:

“Gold corrected about 50% of the decline in the mid-2015, so a move in gold to this retracement would not necessarily have very bullish implications”.

Gold just moved to this retracement and – as you’ve read many times before, it does not necessarily have bullish implications. In fact, right now, the current move higher is even more similar to the March – May 2015 corrective upswing than it was the case when we wrote about this similarity previously.

The declines (marked in blue) were almost identical. The initial corrective upswing took gold above the 38.2% retracement, but not above the 50% one. Back in 2015 there was another move higher during which gold broke above the 50% retracement, which is what we have just seen as well. Back in 2015 it took about 2 months before gold moved from the bottom to the top and almost the same is the case right now – the post-decline corrective upswing has taken almost 2 months now. The volume one which the previous rally ended is rather similar to what we’re seeing right now. The position of the Stochastic and RSI indicators was very similar as well.

Consequently, gold is repeating a very similar pattern from the past and according to this pattern the yellow metal is likely to decline shortly. Based on the long-term chart we can say that even if it doesn’t, the upside in the short term is likely very limited. Therefore, it is a short position that one should be at least considering now, not a long one.

Short-term Silver price chart - SLV ETF - iShares Silver Trust

Silver moved back and forth, but ultimately ended the session rather unchanged. Consequently, our yesterday’s comments remain up-to-date:

Silver moved higher right at the cyclical turning point, which has bearish implications. If silver is truly in an early phase of a major move higher, then it would be something against practically all similar cases in the recent past. Please note that silver’s sharp rallies at or close to the cyclical turning points were always followed by significant declines and each of them was bigger than silver’s recent move higher. Is silver’s yesterday’s rally really bullish? No.

The implications remain bearish.

GDX - Market Vectors Gold Miners - Gold mining stocks

The action seen in mining stocks is somewhat bullish because miners moved once again higher despite a move lower in the general stock market. However, the sizes of the moves were not very significant and the rally above the 50-day moving average is quite in tune with the previous January 2015 move higher. Moreover, since the move was not significant, we continue to view the current move higher as similar to the previous attempts to break above the 50-day moving average. Consequently, most of our yesterday’s comments remains up-to-date:

Most importantly, we would like to focus on the 50-day moving average and yesterday’s small breakout. On a stand-alone basis it might be viewed as bullish especially that the size of the volume was significant… If it weren’t the case that exactly the same thing had been seen previously when mining stocks moved above the 50-day moving average. We marked the similar situations in red. In August 2015, September 2015, December 2015 and earlier in January 2016 we saw breakouts above the 50-day moving average that were similar to the current one and the size of the volume was very similar as well. What happened next? Mining stocks declined – if not right away than within the following couple of days.

There was only one time when mining stocks truly broke above the 50-day moving average and that was in early October 2015. The session when we saw this breakout was not similar to yesterday’s session – the size of the rally and the volume that accompanied it was much bigger than what we saw yesterday.

There were also 2 other attempts to move above the 50-day moving average that were not successful, but their implications are only a little bearish, because the volume was not similar to what we saw yesterday.

Overall, a rally on sizable volume is generally a bullish event in any market, but based on what followed similar sessions (and the small breakouts above the 50-day moving average) we don’t view it as such. In fact, one can say that the implications are bearish for the short-term (but rather nonexistent for the immediate-term).

HUI:SPX - Gold stocks to the general stock market ratio

There were no changes in the gold stocks to other stocks ratio:

Comparing the performance of gold stocks to the general stock market continues to show that there was no breakout and that the trend remains down. The implications are bearish as the HUI to S&P 500 ratio is at its declining medium-term resistance line.

Speaking of ratios, let’s take a look at the gold price compared to the corporate bond index.

Gold to bonds ratio chart - GOLD:DJCB

The above ratio shows that the main trend remains down and that gold’s corrective upswing is either over or about to be over. The reason is that the ratio moved very close to its 50-day moving average and this is what has accompanied local tops since early 2012. That’s a very important development as tops have practically always transpired – the only difference was if the ratio and gold topped a bit before moving to this line, right at it, or slightly above it. Consequently, the implications are bearish and they will continue to be bearish even if a bit more strength is seen in gold.

UST20Y:UST1Y - Gold and ratio of US Treasury Yields

There is also another way in which the bond market provides signals to gold traders. Whenever long-term yields sharply and quickly outperform the short-term yields (as measured by the Rate of Change indicator) we see a top in gold – usually a major one. We have just seen this important signal once again.

Summing up, we saw a few new bearish developments yesterday and there was little that made the picture more bullish. Overall, the implications didn’t change and we can summarize today’s issue similarly to how we summarized it yesterday:

Gold moved higher a bit above the 50% Fibonacci retracement, exactly like it was the case in May 2015, after a very similar decline and post-decline upswing. Back then a much bigger decline followed and it’s quite likely that the same is about to happen also this time. Gold also moved to the long-term declining resistance line based on the weekly closing prices. Moreover, there is a combination of resistance levels relatively close to the price, so even if gold moves higher from here, it’s not likely to move far before starting the next major decline.
Silver moved higher right at the turning point, which is something that has always had bearish implications in the recent past. In fact, the declines that followed previous similar situations were bigger than silver’s recent rally.
The rally in mining stocks took them a bit above the 50-day moving average on relatively strong volume, which is something that was followed by declines many times in the recent past. There was only one time that miners really managed to break.
Investors are very bullish on gold and that’s something that we see before or at tops.

Overall, we believe short positions continue to be justified from the risk to reward point of view.

We realize it’s not easy or pleasant to hold on to a position that's moving against us temporarily, but that’s the price of making big profits over the long run - the necessity to hold through the unpleasant times. If it were easy, everybody would be extremely profitable. In fact, while some of our trades were immediately profitable, many of them were unprofitable for many days only to provide great profits in the end. As you read today, there are multiple reasons for which a decline is likely to be seen. As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short positions (full) 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: $973; stop-loss: $1,143, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $74.28
Silver: initial target price: $12.13; stop-loss: $14.83, initial target price for the DSLV ETN: $101.84; stop-loss for DSLV ETN $57.49
Mining stocks (price levels for the GDX ETF): initial target price: $10.23; stop-loss: $15.47, initial target price for the DUST ETF: $31.90; stop-loss for the DUST ETF $10.61

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: $15.23; stop-loss: $21.13
JDST ETF: initial target price: $52.99; stop-loss: $21.59

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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