Gold & Silver Trading Alert: Weekly Breakdown

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March 16, 2015, 7:46 AM

Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are keeping the stop-loss levels at their current levels, which means that we are effectively keeping some gains locked in and at the same time we’re allowing the profits to increase.

Last week we did not experience the great turnaround some gold investors wanted to see. The decline kept going on, in spite of a within-a-trend correction in gold, silver, and mining stocks. Will the decline in mining stocks and metals really continue?

Quite likely – after all we saw a major breakdown last week. Gold closed the week visibly below the lowest weekly close of 2014. Let’s take a look at the long-term gold chart (charts courtesy of http://stockcharts.com).

Long-term Gold price chart - Gold spot price

A breakdown below the previous lows is an important bearish indicator, especially that we saw it in terms of weekly closes. Signals based on weekly prices are more long-term in nature than the ones based on daily closes and intra-day extremes. Consequently, there implications are bearish for the following weeks, but not necessarily for the following days.

Our previous comments on the above chart remain up-to-date:

(…) we clearly see a move below the 2013 lows and the proximity of both the 2014 lows (in terms of price) and the long-term cyclical turning point (in terms of time). The implications of the former are that we can expect to see some kind of corrective upswing, but also a sharp slide when these lows are broken, and the implications of the latter are that the above is likely to take place quite soon (a few weeks or months away).

Short-term Gold price chart - Gold spot price

On a short-term basis, we also saw more of the same. Gold didn’t rally – it moved lower but at a slower pace. Overall, gold remains in a declining trend, which means that it’s very likely to continue to depreciate, even if we see a corrective upswing this week. Our previous comments remain up-to-date:

The lower border of the declining trend channel was reached, so we would not be surprised to see a corrective upswing soon (perhaps to the $1,180 level or so). However, just like it was the case in the final part of February, the move higher doesn’t have to happen and betting against the trend is usually a bad idea as the surprises will be in the trend’s direction. At this time it seems that keeping the current positions intact is still justified from the risk/reward perspective (it’s unlikely that they would become unprofitable – after all, we opened them about $150 higher).

The next interim target for gold is at about $1,120 and the final one is at about the $1,000 level.

Once again, nothing changed in the case of silver (and the outlook remains bearish), so let’s move on to the situation in mining stocks.

Global X Silver Miners - SIL long-term

We previously commented on silver stocks in the following way:

Silver miners broke below their 2014 lows, which is a major bearish development. The breakdown is not confirmed („the dam is not broken“), but the first and most important step was just made („there’s a crack in the concrete“). Will other parts of the precious metals sector follow? Most likely, even if that doesn’t happen right away.

Silver miners rallied on Wednesday, but is this really a bullish development? Not really. The move only took silver stocks to the previously broken low – not above it. Consequently, there was no invalidation. If silver miners continue to move lower, we will have a confirmed breakdown. If silver stocks move higher, the breakdown will be invalidated and we will have bullish implications (and likely a short-term rally in the following days). Which is more likely? The former, as we are after a breakdown and in a downtrend. The more important thing here is that even if we see some strength, it’s not likely to be very significant.

While we would prefer to see silver miners at lower levels to say this, technically, the breakdown was just verified. There is still a possibility that this breakdown might be invalidated, but it doesn’t seem likely, especially that we’ve also seen a confirmation of the breakdown in terms of weekly closing prices. Again, even if a move up materializes, the following rally would not likely be large.

Now, as far as the situation in gold stocks is concerned, we also see a bearish picture.

HUI Index chart - Gold Bugs, Mining stocks

The HUI Index declined by more than 3.5% last week and approached the 2008 and 2014 lows. We haven’t seen a breakdown below them just yet, but given this month’s volatility, we could definitely see a move below these lows relatively soon. Of course, no market moves up or down in a straight line, so a corrective upswing will likely be seen sooner or later, but it doesn’t seem that the decline will end at the current prices.

Summing up, we are likely to see a small corrective upswing sooner or later, but it doesn’t seem that we will see a more visible correction until we see gold close to its 2014 (intra-day) low. Gold stocks are now once again underperforming gold, which serves as a confirmation that the correction is over and the decline will now continue.

Even though the size of the profits on the current short position may suggest that’s it’s worth taking them off the table (we opened the short position on Jan. 23 when gold was at about $1,300), it seems that the risk/reward ratio still favors keeping the position open as it doesn’t seem that the decline is over. Even though gold has already fallen significantly, it’s still likely to decline even more in the coming weeks and it is this outlook that makes us think that the short position remains justified at this time.

As always, we’ll keep you – our subscribers – informed.

To summarize:

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

Gold: initial target level: $1,135; stop-loss: $1,234, initial target level for the DGLD ETN: $85.48; stop loss for the DGLD ETN $65.45
Silver: initial target level: $15.10; stop-loss: $17.23, initial target level for the DSLV ETN: $74.05; stop loss for DSLV ETN $48.36
Mining stocks (price levels for the GDX ETN): initial target level: $17.13; stop-loss: $21.17, initial target level for the DUST ETN: $23.49; stop loss for the DUST ETN $11.35

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: $22.13; stop-loss: $27.38
JDST: initial target level: $14.58; stop-loss: $7.10

Long-term capital (our opinion): No positions

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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