Gold & Silver Trading Alert: The Golden Triangle

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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.

Gold declined yesterday but mining stocks didn’t. This seems to be an important bullish sign, but there is actually something more important happening in the gold market – a triangle pattern, which could result in a big move. In which direction will gold move in a major way?

Most likely, the next huge move in gold will be to the downside due to multiple factors that we covered yesterday, however, if we see another rally in gold and a breakout from the triangle pattern, we might see a re-test of the previous high or even a small move above it. However, this is not what is likely at this time, we are simply letting you know about this possibility, so that you are not surprised if a rally is indeed seen.

Let’s take a look at the details (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

First of all, the comments that we made in Friday’s alert remain up-to-date:

Moving back to the 61.8% Fibonacci retracement – practically all recent major upswings have ended in this way: the initial top, then a sharp decline and then a corrective – and usually very temporary – upswing to or slightly above the 61.8% Fibonacci retracement. We marked the similar cases on the above chart. What’s next? The decline is likely to resume.

The “bullish” factor that we would like to address is the fact that yesterday’s rally took place along without a decline in the USD Index, which normally implies strength of the gold market. However, we are right after a major upswing and then a sharp downswing and it’s critical to see what happened in previous such cases. Did gold get a boost from the declining USD to correct to the above-mentioned 61.8% retracement? Let’s take a look at the gold chart once again – this time with the USD Index plotted on it.

(…)

Thursday’s upswing was indeed accompanied by low volume and Friday’s volume during the small downswing was low as well, but the implications are not analogous – a move lower on low volume is usually meaningless (although it could have some implications in certain situations, but not necessarily in the current case). All in all, the implications of Thursday’s low volume remain in place and they are bearish.

Please note that in 2 previous cases (mid 2014 and early 2015) gold moved back to the 61.8% retracement a few times before the decline truly resumed, so gold’s intra-day move to it on Friday is not a bullish sign.

Moreover, we wrote the following on Friday regarding the fact that gold had moved higher without a decline in the USD Index:

In all 3 cases that we marked on the above chart (the ones that we plotted the Fibonacci retracements for) the corrective upswing in gold materialized without a decline in the USD Index. Even in early 2015 – the upswing in gold took place on the day when the USD did more or less nothing – it declined relatively shortly thereafter, but on the day that gold rallied sharply, it didn’t do much, if anything.

Consequently, the fact that gold rallied yesterday without a decline in the USD Index is not a bullish divergence – it’s the normal way in which gold corrects after the initial sharp slide. Therefore, it is not currently bullish that gold rallied without the USD’s help.

Gold declined yesterday as the USD Index rallied, which shows that gold can and does react to bullish moves in the USD. Gold didn’t move below the previous lows, though, and without such move it seems that many market participants think that the decline from above $1,260 is just a pause (there are even a few articles on finance.yahoo.com that describe this move as a pause – by the way, gold being a hot topic right now is actually a bearish factor for the next few weeks). This (plus a move above the previous high in terms of daily closing prices in the case of the general stock market) could explain why mining stocks didn’t decline yesterday.

The recent daily highs and lows form a triangle pattern, and if it’s broken to downside (the breakdown was not confirmed yesterday) the gold price would be likely to slide quickly. However, if we see a breakout and a daily close above the upper border of the pattern (currently at about $1,224), the very-short-term outlook could change (but not the short-term one or the medium-term one). In other words, a re-test of the previous high would become more likely should we see a confirmed breakout. If the very-short-term outlook changes (there are also other factors that have to be considered, not only the price of gold), we’ll let you know.

Long-term Silver price chart - Silver spot price

Silver declined once again and is visibly below the 50-week moving average. The outlook remains bearish.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks moved a bit higher yesterday (while other stocks soared) but since the move was accompanied by low volume (very low on a relative basis), it doesn’t have bullish implications. It can even be viewed as a bearish sign.

Summing up, the mining stocks “outperformance” relative to gold seems to be rather insignificant because the volume was very low, gold didn’t move to new lows and we saw a breakout in the S&P 500 Index (the latter was a reason for miners to rally). In today’s pre-market trading GDX moved only 4 cents higher while gold is $10 higher, which appears to confirm that investors didn’t really believe in gold’s decline yesterday and are waiting for a decisive breakdown below the previous lows. Based on the medium-term factors discussed yesterday, such a breakdown appears to be in the cards. However, at the same time, we are monitoring the very-short-term outlook for gold, which could change based on the triangle pattern that was just formed. The outlook didn’t change and it remains bearish, but if it changes we will keep you informed. Unless we see a combination of bullish factors or a bigger move to the upside (again, this is not likely), we will wait for the market to close before saying that the triangle pattern has been broken or not and before discussing the implications.

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: $19.63, initial target price for the DUST ETF: $17.31; stop-loss for the DUST ETF $4.14

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: $26.53
JDST ETF: initial target price: $36.46; stop-loss: $8.34

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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