Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
The mining stocks moved higher yesterday and this move can be explained neither by a move higher in gold or silver, nor by a substantial rally in the main stock indices. Does the miners’ strength indicate a looming turnaround?
Quite likely yes, but the emphasis should be put on “looming” and on the fact that any turnaround here is not likely to be very significant. Let’s take a look at the charts for details (charts courtesy of http://stockcharts.com) and check the outlook for gold price in May.
That wasn’t the first day when mining stocks showed some strength, so the corrective upswing could be just around the corner. However, as you will see on the following charts, it has probably not begun yet.
Moving back to the above chart, please note that yesterday’s upswing was accompanied by relatively low volume (higher than the last 2 days, but still low compared to what we’ve seen on average in the past weeks), so it’s not a major buy signal on its own. The buy signal from the Stochastic indicator is clearly visible, but based on how it performed in the recent past (fake buy signals in November 2016 that were followed by a decline in mid-December), it doesn’t necessarily indicate anything major.
Besides, we already discussed it several times that a corrective upswing in mining stocks could be seen shortly, but that it is unlikely to be significant.
The reason for the above is the proximity of the strong resistance lines (breakdowns below them have been confirmed), the 50-day moving average and the 50% Fibonacci retracement level that coincide at about 200. Consequently, it could be the case that the rally is halfway done.
So, any resulting rally is not likely to take miners much higher. But has the rally really started? After all, gold and silver have not seen any serious price increases lately – the small upswing is only visible in mining stocks.
Both gold and silver moved only a little higher and the volume that accompanied these moves was low. Moreover, gold and silver didn’t reach any substantial support level that could generate an upswing. The RSI indicator in gold moved to 30, but that’s not the level from which gold started its rallies recently – the RSI moved even lower before that, reaching the red horizontal line.
All in all, it seems that metals have further to fall before a bounce becomes likely. To be clear, the medium-term trend remains down and is likely to remain down, but the markets usually don’t move up or down in a straight line and if we get enough signs that a turnaround is in the cards, we’ll temporarily change our short-term outlook.
The levels that could stop the decline for a while are: the 2016 bottom ($15.70 - $15.80) in the case of silver and the March 2017 bottom in case of gold.
The thing that could (!) trigger the correction in the precious metals mining stocks is a correction or a pause in the USD’s rally.
While the USD’s breakdown’s invalidation, along with the long-term charts continue to support higher prices in the following weeks and months, the proximity of the declining red support line could indicate that another pause is just around the corner, especially that the cyclical turning point (marked with vertical lines) is just a few days away.
Naturally, there’s the risk that the USD will rally right through the red resistance line, but if this is the case, then we are still likely to see a pullback to it – possibly at or shortly after the turning point.
Summing up, the outlook for the price of gold in May is bearish in general, but – based on the strength in the mining stocks and the proximity of support levels in gold and silver – it could temporarily (!) change in the following days. Whether the short-term outlook changes or not will depend on the signals and confirmations that we get once metals move lower. As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:
- Gold: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
- Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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: $45.31
- JDST ETF: initial target price: $417.04; stop-loss: $43.12
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)
Insurance capital (core part of the portfolio; our opinion): Full position
Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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