Gold & Silver Trading Alert: Volume Increases - Especially in Miners

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Briefly: In our opinion speculative short positions (half) are currently justified from the risk/reward perspective.

Yesterday’s session was quite significant in terms of volume. It was the first session in many days during which gold and mining stocks moved lower on increased volume. What are the implications?

In short, it means that the situation became more bearish, but the size of the signal is not huge. It didn’t make the situation bearish enough for us to consider doubling the size of the current speculative short position.

Generally, what we wrote yesterday remains up-to-date, so in today’s alert we’ll focus on 3 charts that feature some changes: USD Index, gold and mining stocks. Let’s start with the USD Index (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

The target price based on the long-term chart remains at 96.2, and the above chart tells us that this target could be reached in a week or so. The other possibility is that we will see a decline for an additional week and then another move up. Whatever the outcome for the next week is, it seems likely that the following week will bring a change in the short-term trend.

The direct implications for gold are unclear at this time, but it seems that if the USD index moves in one direction and then reverses, we will be able to see how gold currently reacts to the changes in the index. In other words, perhaps the euro-QE factor is already in the price and we will see the return to the "normal" negative correlation between the USD Index and gold, which will allow us to once again use the USD Index chart to estimate the future changes in the price of gold.

Short-term Gold price chart - Gold spot price

Speaking of gold, the yellow metal moved lower yesterday and the move materialized on volume that was higher than what accompanied Tuesday’s move higher. The difference is not huge, so the implications are not strongly bearish here, but still, that’s a bearish sign.

Our previous comments remain up-to-date:

Will gold fall further? If we see a close back below the declining support line (based on the March and July 2014 highs) it will be a sign that we will see further declines without an additional move higher before that. At this time, the situation is not extremely bearish for the short term.

GDX - Market Vectors Gold Miners - Gold mining stocks

The strength of the bearish price-volume signal in mining stocks is much more significant. In this case, the volume was much bigger than what we saw on Tuesday, so the implications are bearish. However, before we can say that the situation is much more bearish (and, thus, that perhaps increasing the size of the speculative short positions is a good idea) we will need to see a breakdown below the rising red support line. Miners closed more or less at it, so we need to see only a little more weakness in order to see this.

Overall, the situation changed only slightly yesterday and we can summarize it in the same way as we did yesterday:

Summing up, based on the announcement of the QE program in the Eurozone, the situation in the precious metals market improved for the medium and long term, but based on the gold’s, silver’s and – most importantly – mining stocks’ reaction, the outlook deteriorated for the short term.

It seems that keeping the short positions in the precious metals is justified from the risk/reward perspective at this time as the profits on them are likely (in our opinion) to become even bigger. The trade is risky, so we are still using a limited amount of capital. We will likely increase it if we see additional bearish confirmations in the coming days.

We will be re-evaluating these positions on a daily basis and if we think that the situation no longer justifies keeping small short positions, we’ll let you know. As always, we’ll keep you – our subscribers – informed.

To summarize:

Trading capital (our opinion): Short positions (half) in gold, silver and mining stocks with the following stop-loss orders and initial (!) target prices:

Gold: initial target level: $1,245; stop-loss: $1,318, initial target level for the DGLD ETN: $64.60 ; stop loss for the DGLD ETN $55.00
Silver: initial target level: $16.73 ; stop-loss: $18.63, initial target level for the DSLV ETN: $55.63 ; stop loss for DSLV ETN $41.94
Mining stocks (price levels for the GDX ETN): initial target level: $20.40 ; stop-loss: $24.23, initial target level for the DUST ETN: $15.55 ; stop loss for the DUST ETN $9.28

In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:

GDXJ: initial target level: $25.43 ; stop-loss: $32.17
JDST: initial target level: $10.50 ; stop-loss: $5.19

Long-term capital (our opinion): Half positions in gold, half positions in silver, half position in platinum and half position in mining stocks.

Insurance capital (our opinion): Full position

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 automated tools (SP Indicators and the upcoming self-similarity-based tool).

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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