Briefly: In our opinion, speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold moved higher yesterday along with mining stocks. This seems to be an important bullish sign, but let’s keep in mind that all moves in gold have to be analyzed in the proper context. Does gold’s previous rally have bullish or bearish implications given yesterday’s move higher?
Most likely bearish. The medium-term outlook remains bearish and there was no invalidation thereof. The short-term trend remains bearish as well, whereas the very short-term indications are neutral, however they are more bullish than it was the case yesterday. Let’s take a closer look at the details (charts courtesy of http://stockcharts.com).
First of all, the comments that we made yesterday remain up-to-date:
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.
Gold moved above the upper border of the triangle pattern, but there was no confirmed breakout above it. It turns out that our previous estimate of the upper border was too conservative as there was no breakout even though gold closed above $1,224.
The volume that accompanied yesterday’s move higher was not huge, but it was not extremely low either – it was low taking the previous sessions into account. The above has mildly bearish implications.
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.
What’s the most important thing to keep in mind?
The big picture. Gold is very close to the upper border of the declining trend channel and as long as there is no confirmed breakout above it, it’s very likely that the next big move will be to the downside.
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.
Silver closed the session below the 50-week moving average. The outlook remains bearish.
Mining stocks moved a bit higher yesterday but since the move was accompanied by low volume (miners didn’t do much on Monday so the fact that yesterday’s volume was higher than on Monday doesn’t imply anything), it doesn’t have bullish implications. It actually has bearish implications as the size of the rally was somewhat significant and the size of the volume was quite low.
Summing up, the triangle pattern seems to be over and it’s unclear whether today’s pre-market rally can be viewed as a real breakout. Gold once again moved to the 61.8% Fibonacci retracement level, just like it was the case after previous major tops. Moreover, taking into account the fact that gold moved rather independently from the USD after major tops, today’s move higher in both gold and USD is not necessarily bullish. Since mining stocks are now higher than they were previously and gold is not invalidating the bearish outlook, the price at which we would automatically close the current position in mining stocks moved higher and thus we are adjusting the stop-loss in case of mining stocks as well.
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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