Gold & Silver Trading Alert: Temporary Correction or Beginning of Another Rally?

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Briefly: In our opinion, speculative short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward point of view.

Gold and mining stocks rallied yesterday and the likely reason was what we had heard from the Fed. Has another big rally just begun?

Not likely. Let’s take a look at the charts, starting with gold (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold moved higher yesterday, but not above the rising (black) and declining (red) resistance lines. A breakout above $1,260 could change the short-term outlook, but gold is relatively far from this level. Volume is very important and it was relatively small. It was smaller than what we had seen in the previous days (not counting the days when the gold price didn’t really move). This tells us that the move higher is not the true direction in which gold is likely to move in the following weeks.

Moreover, please note that even though gold moved higher once again after comments from the Fed (just like it was the case earlier this month), it moved to a lower high.

Consequently, even though gold moved higher yesterday, it didn’t change the outlook, which remains bearish.

Long-term Silver price chart - Silver spot price

As far as silver is concerned, nothing changed (silver is up 16 cents this week – close to nothing) and the outlook remains bearish – silver remains below the key green resistance line and our previous comments remain up-to-date:

Silver topped at the declining green resistance line and the rally appears to be over. Once silver confirms the breakdown below the 50-day moving average, the decline will likely accelerate. The major trend remains down.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks moved higher on big volume, but – as we indicated previously – daily upswings on huge volume are not really bullish in the case of mining stocks. In most cases such sessions preceded declines, not rallies. Consequently, even though it appears bullish according to classic technical analysis, we don’t view yesterday’s session as bullish.

Moreover, since mining stocks didn’t move above the early-March high, it could be the case that a head-and-shoulders formation is underway. It’s too early to say so, because GDX would have to break below $19 for the formation to be complete, but still, that’s something that could be seen in the following days.

To summarize, it might have appeared that yesterday’s move higher was bullish, but when we take a closer look at what happened and what didn’t happen, it seems that nothing really changed. Gold moved higher, but didn’t break any support lines and the rally was accompanied by relatively low volume, silver did close to nothing and miners rallied in a way that’s similar to what we had seen before declines in the past. Moreover, gold is underperforming the USD Index in today’s pre-market trading (we saw a decline in the former – visibly below yesterday’s low, while gold didn’t rally well above yesterday’s high), which is another bearish sign.

Consequently, we think that a speculative short position is currently justified from the risk to reward point of view.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (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:

Gold: initial target price: $973; stop-loss: $1,304, initial target price for the DGLD ETN: $90.29; stop-loss for the DGLD ETN $48.27
Silver: initial target price: $12.13; stop-loss: $16.62, initial target price for the DSLV ETN: $71.92; stop-loss for DSLV ETN $36.89
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $22.57, initial target price for the DUST ETF: $7.60; stop-loss for the DUST ETF $2.16

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: $31.23
JDST ETF: initial target price: $14.14; stop-loss: $4.05

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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