Gold & Silver Trading Alert: The Critical Reversal

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

The precious metals sector soared yesterday, but only initially. Before the session was over gold erased almost all gains and so did mining stocks, while silver moved below the previous close. The implications of this move are extremely important – it seems that we are on the brink of the next major move in the sector.

The move that is likely beginning is naturally a decline. Just as we wrote yesterday, a move higher to (and above) the 61.8% Fibonacci retracement level was quite natural. In the past similar moves were seen right before the slides accelerated, so such a scenario became much more likely. Let’s take a closer look at the details (charts courtesy of http://stockcharts.com).

Long-term Gold price chart - Gold spot price

Starting with the big picture, we see that there was another move to the upper border of the declining trend channel, but there was no breakout (let alone a confirmed breakout). As we wrote yesterday, as long as there is no confirmed breakout above it, it’s very likely that the next big move will be to the downside.

Gold moved very temporarily higher and the red resistance line quickly triggered a reversal – the implications are bearish.

They are bearish also because of what happened with the volume after previous tops – our yesterday’s comments remain up-to-date:

Please note that in case of the previous local tops within the trend channel that we marked with red arrows (the major ones) it took gold at most 3 weeks before the decline really started. This is the third week after the intra-day top, so we are likely to get the bigger decline relatively soon. Naturally, this is not (yet?) happening today and may not happen tomorrow, but it’s very likely to happen within a week or so.

Short-term Gold price chart - Gold spot price

In yesterday’s alert we wrote the following:

Today, gold is moving higher and it once again moved to the 61.8% Fibonacci retracement level - $1,236. The triangle pattern is over (the upper and lower borders crossed), so it is not clear if one can view today’s upswing as a breakout. If we take this pattern out of the picture, the move back to the 61.8% retracement is quite normal – gold moved to this retracement a few times in the past after the initial part of the decline. In late October 2015, gold even moved visibly above this retracement on an intra-day basis before declining.

The pattern from October 2015 seems to be repeating – gold moved initially higher only to decline later during the session. Gold didn’t end the session much lower, but the invalidation of a daily $20+ rally is significant. This intra-day move created a reversal candlestick pattern called a shooting star. This is a very bearish development, especially that it was accompanied by huge volume.

Long-term Silver price chart - Silver spot price

Silver moved initially higher yesterday just as gold did and it not only erased the entire rally, but it actually closed lower than on the previous day – the implications are clearly bearish. Moreover, silver closed the session below the 50-week moving average, which is also bearish.

HUI Index chart - Gold Bugs, Mining stocks

The HUI Index moved a bit higher – even a bit above the 170 level – but it gave away almost all gains, just like gold did. Consequently, nothing changed on the above chart.

GDX - Market Vectors Gold Miners - Gold mining stocks

From the short-term point of view, the reversal is clearly visible, just like the one in gold. The volume that accompanied the reversal was not huge, but it was bigger than what we saw in the past few days, so the reversal appears to be meaningful. At the same time the volume wasn’t significant enough to confirm a small breakout above the previous highs. Consequently, the overall implications of yesterday’s session in mining stocks are bearish, but not as strongly bearish as the reversal in gold and silver, where the turnaround was much more visible.

Summing up, the precious metals sector appears to be on the brink of starting another powerful slide. The previous post-final-top patterns suggested that another temporary move higher was possible and that’s exactly what happened. Gold and silver reversed very quickly and even formed a bearish shooting star candlestick, which would make us double the size of the current short position (if it wasn’t already a full one). All in all, the outlook remains bearish and short positions in gold, silver and mining stocks appear to be justified from the risk/reward point of view.

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: $1,274, initial target price for the DGLD ETN: $94.27; stop-loss for the DGLD ETN $52.44
Silver: initial target price: $12.13; stop-loss: $16.14, initial target price for the DSLV ETN: $77.53; stop-loss for DSLV ETN $42.69
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $20.33, initial target price for the DUST ETF: $17.31; stop-loss for the DUST ETF $3.58

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: $27.34
JDST ETF: initial target price: $36.46; stop-loss: $6.88

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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