Gold & Silver Trading Alert: Verification of Breakdown

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

In yesterday’s alert we discussed the breakdown in gold and the importance of its verification. So far it hasn’t been invalidated, so the bearish implications remain in place. Is gold’s decline really imminent?

No. It’s likely, but not imminent, and – in light of the upcoming FOMC meeting – it still could be the case that we will have to wait for the decline for additional several days, during which gold could rally sharply higher.

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

Short-term US Dollar price chart - USD

In yesterday’s alert, we wrote the following:

The USD Index rallied substantially on Friday, which is generally a bearish development for the precious metals sector, but it doesn’t seem to be the case this time. Why? Because the rally in the USD was huge and the decline in gold, silver and miners was small. That’s a big warning sign, suggesting that precious metals may not be ready to decline without an additional (probably small, but still) upswing beforehand.

The signal is being repeated today – the USD declined by only 0.20 or so and gold managed to rally to $1,319.50, more or less erasing Friday’s decline. Gold’s strong performance relative to the USD Index is quite an important bullish sign.

Gold didn’t start to underperform the USD Index again, so caution is still warranted. However, we would like to point out that the outlook for the USD Index improved based on what happened yesterday. The reason is that the USD Index moved back to the declining blue support / resistance line and didn’t close the session below it. Consequently, the breakout was verified – not invalidated. Ideally, we would like to see a third consecutive daily close above the broken line, to say that the move is truly confirmed, but yesterday’s action already has bullish implications.

Short-term Gold price chart - Gold spot price

Just as the USD Index didn’t invalidate the breakout, gold didn’t invalidate its breakdown. In yesterday’s alert, we wrote the following:

On the short-term chart, we can see that gold broke below the rising red support line and closed below it on a weekly basis. That’s a bearish sign for the following weeks. Still, let’s keep in mind that the breakdown is not yet verified and with the move to $1,319.50, gold was very close to invalidating the breakdown.

Invalidations of breakdowns are strong bullish signs and if we see one, it would likely be followed by a quick rally. The problem with this week is that we can see all sorts of odd market behavior related to the FOMC meeting. Consequently, it could easily be the case that the breakdown is invalidated, followed by a sharp rally and only then would a sustained decline continue.

The above remains up-to-date – the FOMC could trigger a rally, which makes holding short positions at this time too risky despite a rather negative outlook for the short term.

GDX - Market Vectors Gold Miners - Gold mining stocks

The situation in mining stocks doesn’t seem to imply anything as miners moved only slightly higher and the volume was quite average. However, let’s keep in mind that in early June, late June and the second half of July miners behaved in a similar way before rallying sharply. The above – on its own – is not a bullish sign, but in light of the FOMC meeting, its something that should make one concerned about holding any type of trading position at this time.

Summing up, the outlook remains bearish for the precious metals market for the coming weeks, but in light of the bullish signs that we saw recently and the looming FOMC meeting, it seems that staying out of the market and waiting for a better risk to reward scenario is justified.

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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