Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold broke below the previous 2015 low (in terms of daily closing prices) last week, but moved back above this important level yesterday. It seemed to be a bullish development at first, but ultimately gold reversed and closed even lower than on Friday. What are this rally’s implications?
In our opinion, the implication could be that the small corrective upswing that was likely to happen has already happened and the decline can now continue. It’s not 100% clear if that is indeed the case, but based on what happened yesterday, the short-term outlook deteriorated.
In our opinion, the only yesterday’s price/volume moves that have some implications happened in gold and mining stocks, so these are the charts that we’ll focus on in today’s alert. Let’s take a look (charts courtesy of http://stockcharts.com).
In yesterday’s alert we commented on the above chart in the following way:
Gold closed below the previous lowest close of the year – we saw a breakdown. That’s a bearish development, but it’s not very bearish, because the breakdown is not confirmed yet – the move below the previous low is very small and it was just one close below this level. So, while the breakdown itself is a bearish event, we need to remember that if it is invalidated, the invalidation itself will serve as a short-term buy signal that could take gold visibly higher (to the 38.2% - 61.8% Fibonacci retracement levels, which are approximately at $1,118 and $1,146). When would the breakdown be truly invalidated? Technically, as soon as gold moves a bit above the broken low, but we think it’s better to take into account some possible random movement on a very short-term basis and focus on the $1,100 level instead. Conservatively, we’ll view not the $1,100 level as critical, but a few dollars higher – we think that $1,103 is appropriate in this case.
Consequently, while at this time the continuation of the decline is probable even if gold moves above $1,103, the chance for a bigger corrective upswing would become too big to continue to remain on the short side of the precious metals market if such a move materializes. That’s why we moved the stop-loss level to $1,103. Actually, that’s not a stop-loss level, but effectively a take-profit level, as we entered this short position when gold was trading at about $1,150, so closing it at $1,103 does not result in a loss, but a profit.
Gold seems to have indeed corrected to the $1,100 level, but the market was not strong enough to push the price above this level. Instead, gold reversed a few dollars below this level – at $1,097.40. What does this tell us in light of the above? That the corrective upswing may already be over. May – it’s not certain, so we are keeping the stop-loss (or, more precisely, profit-take) levels at their current values.
Mining stocks moved higher yesterday (less than 1%, but still) and the important fact is that it happened on low volume. Gold didn’t rally, but it didn’t decline either, so a 12 cent move higher in the GDX is not really a sign of outperformance. Let’s keep in mind that the general stock market moved higher in a much more meaningful way, so the fact that mining stocks moved a bit higher is not really a sign of strength.
The volume that accompanied the move was low, which suggests that this is not the true direction in which the market is likely to move. The implications are bearish.
Summing up, the short-term outlook for the precious metals deteriorated a bit after yesterday’s session, while the medium-term outlook remain bearish. Consequently, we are remaining out of the market with the long-term investment capital and we are viewing speculative short positions as justified from the risk/reward perspective. It seems that the profits on this position will become even bigger before this trade is over.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:
- Gold: initial target price: $1,050; stop-loss: $1,103, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $85.51
- Silver: initial target price: $12.60; stop-loss: $14.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $61.00
- Mining stocks (price levels for the GDX ETF): initial target price: $11.57; stop-loss: $14.23, initial target price for the DUST ETF: $26.61; stop loss for the DUST ETF $17.55
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: $16.27; stop-loss: $20.03
- JDST ETF: initial target price: $46.47; stop-loss: $29.71
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
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