Briefly: Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective.
Gold moved lower early during yesterday’s session, but came back up later on and finally gold ended the session only less than $3 lower. Can we view such a reversal as a bullish sign? Not necessarily – a reversal should be confirmed by high volume and yesterday’s session wasn’t. Consequently, one needs to look at other parts of the precious metals sector for confirmations.
The above action, however, provides bearish signals, not bullish ones. Let’s start with the USD Index chart (charts courtesy of http://stockcharts.com).
Gold had a very good reason not to decline more – the USD Index moved higher a bit and then gave the gains away. The important thing, however, is that the support line remains intact – consequently, the outlook remains bullish.
As we wrote earlier, gold reversed, but the volume that accompanied the reversal was relatively small, which suggests that it wasn’t really a “reversal”, even though the price action may suggest so.
At the first sight it may appear that technical phenomena like reversals, or breakouts etc. are just more or less random names for more or less random price movements without anything that justifies changing the outlook based on any of them. In reality, these are simple terms that refer to phenomena that are indeed happening in the market and that were found to be usually followed by some kind of action. If enough of the reliable factors are seen, the outlook may indeed change.
In case of reversals, the thing that the single candlestick on the chart represents is the situation, in which one side (bulls or bears) attempted to push the price in one direction and got almost or mostly overwhelmed by the other side. If both forces equal each other, the price will not change in terms of daily closing prices (or weekly closing prices, which was more or less the case with gold last week). Now, if the price had been falling previously and we saw this kind of action, it means that the selling pressure was no longer significant enough to trigger further declines and at the same time, the buyers were stronger than previously. The implications would be bullish. Conversely, if the price had been rallying previously and we saw the mentioned kind of action, it means that the buying pressure was no longer significant enough to trigger further upswings and at the same time, the sellers were stronger than previously. The implications would be bearish.
The key thing here is for the above to make sense, there really has to be some kind of “fierce battle” between buyers and sellers. If there was none, we couldn’t speak of one side overwhelming the other and thus about bullish or bearish implications. How can we tell, whether one side really overwhelmed the other? By looking at the volume. High volume confirms the above as it suggests that there were high numbers of both buyers and sellers who participated in that session and low volume suggests that there are little implications of this session (in terms of viewing the reversal as important).
With the above in mind, let’s take a look at yesterday’s volume. It was relatively low. Consequently, it doesn’t appear that yesterday was the session when the sellers and buyers were fighting hard to push the price of gold in a given direction with buyers fighting back strongly – significant volume would suggest the above, and instead we saw a move lower and a corrective upswing shortly thereafter. Instead of being bullish, yesterday’s session was rather inconsequential by itself.
In the case of silver, however, we saw a decline on volume that we hadn’t seen in weeks. Consequently, while gold’s reversal wasn’t confirmed, silver’s decline was. The implications are bearish.
The volume wasn’t as huge in the case of mining stocks, but it wasn’t very low either and the size of the move is quite visible. Gold stocks continue to underperform gold and this is a sign that lower prices are likely to follow.
Summing up, the analogy to the 1983 decline remains in place and so do many bearish signals discussed previously. Based on the invalidation of the breakdown in the USD Index, it seems that the decline in the USD and the rallies in gold, silver and mining stocks are over. The outlook for the precious metals sector is very bearish for the following weeks.
As always, we will keep you – our subscribers – updated.
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 entry prices, stop-loss orders and initial target price levels:
- Gold: initial target price: $1,006; stop-loss: $1,423, initial target price for the DGLD ETN: $74.37; stop-loss for the DGLD ETN $34.91
- Silver: initial target price: $13.12; stop-loss: $21.63, initial target price for the DSLV ETN: $39.78; stop-loss for the DSLV ETN $14.34
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $33.17, initial target price for the DUST ETF: $16.38; stop-loss for the DUST ETF $3.77
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: $54.29
- JDST ETF: initial target price: $14.39; stop-loss: $3.22
Long-term capital (core part of the portfolio; our opinion): No positions
Insurance capital (core part of the portfolio; 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 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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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