Gold & Silver Trading Alert: The Odd Rally

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Briefly: In our opinion no speculative positions in gold, silver and mining stocks are currently justified from the risk/reward point of view.

In the past several months we saw a few breakouts and rallies in gold and mining stocks. There were similar, in a way, as we saw the same kind of confirmation in almost all cases. The current upswing, however, is quite “specific” as the mentioned confirmation is absent so far – will the history still repeat itself and will metals rally nonetheless?

It is possible, but it could be the case that gold is forming a double top pattern and a big decline will follow. What is so different about this rally that suggests caution? The volume. The volume and price are 2 key details that we can use to look for similar price patterns, analogies and apply them to detect probable market movements in the future. At this time half of them doesn’t support higher prices in the short term, so caution is warranted. Let’s take a closer look (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold approached its previous high yesterday and – as indicated earlier – the volume was small and, generally, we can see a declining trend in volume in the past several days (yesterday’s volume was a bit higher than on Monday, but it was still low and much lower than what we saw in the final days of July).

On the other hand, the Stochastic Indicator moved over 90 indicating an overbought condition.

GDX - Market Vectors Gold Miners - Gold mining stocks

On the above mining stock chart, we marked the previous breakouts above preceding highs – please note that they were accompanied by huge daily volumes. The current breakout (“breakout”) was accompanied by relatively low volume – there was no huge upswing in volume that would confirm the direction in which the market was moving. Besides, the size of yesterday’s upswing was rather limited if we compare it to the big downswing in the USD Index and we saw an intra-day reversal before the session was over and that’s also something that was not seen before previous rallies. Consequently, the breakout that we just saw simply looks doubtful, to say the least – we don’t view it as reliable enough to make the short-term outlook really bullish.

Summing up, the precious metals market moved higher yesterday, but this rally doesn’t appear believable – the volume in both gold and mining stocks was low and the reaction to a big slide in the USD Index was not very significant for mining stocks. The intra-day price action in mining stocks also doesn’t support higher PM values in the coming days. Overall, the outlook for the precious metals sector remains bearish for the medium-term, but the situation is unclear with a bullish bias as far as short term is concerned. We’ll keep monitoring the situation and once we see more bearish (or bullish) confirmations, we’ll let you know. Until that time, it seems that staying on the sidelines with the speculative capital is justified from the risk to reward point of view.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): No positions

Long-term capital (core part of the portfolio; our opinion): No positions

Insurance capital (core part of the portfolio; 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 signs 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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