Briefly: In our opinion, full (150% of the regular size of the position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
It’s not a huge achievement to move to a yearly extreme if there have only been 5 sessions in the year so far, but still, GDX and HUI ended yesterday’s session well below all the previous closes this year. This, by itself, is not that important, but when we consider that gold declined by less than $2 yesterday, it becomes a major signal. A sell signal.
Let’s take a look at gold’s performance (chart courtesy of http://stockcharts.com).
As we indicated above, very little changed in the gold market. Consequently, our yesterday’s comments remain up-to-date:
On the above chart, we see that gold is almost at its short-term turning point. This has bearish implications as the preceding move has definitely been up. Both useful indicators: RSI and Stochastic, point to lower gold prices in the upcoming weeks.
Silver declined more visibly and it ended yesterday’s session at the same level at which it had ended the previous year. The entire 2018 rally was therefore erased. In consequence, the sell signals form the RSI and Stochastic indicators are now more visible and the short-term bearish implications are now stronger.
It’s not surprising – silver’s turning point was just in and the preceding move was up. Silver was very likely to reverse its course and the decline seems to have just begun.
Mining stocks moved lower by almost 2% and while the HUI Index didn’t move below the rising support / resistance lines (closing right at them), there are clues suggesting that the decline will continue.
The clues are visible in the indicators and the particularly interesting development can be seen in the case of the RSI. It is not only the move below 70 that’s important by itself. The time factor and analogy to the previous top also play a key role.
In terms of the position of the RSI, there was only one similar case to the recent performance. In late August and early September 2017, the RSI indicator moved above 70 and stayed there for about a week. It was then that the decline started and the visible move below 70 confirmed it. We have just seen the same thing. The RSI stayed above 70 for about a week and it just moved visibly below this level.
The implications are bearish. If the HUI Index is about to decline as much as it did during the decline that started in September, then we are likely to see the HUI below 160 in the upcoming weeks. Based on other charts that we’ve been discussing recently, we are likely to see it much lower in the coming months, but a move below 160 is definitely a reasonable way to start an even bigger downswing.
The above GDX ETF chart confirms the points made regarding the HUI Index chart and it also provides us with a bearish confirmation. The latter comes from the increase in the daily volume levels along with a decline in price.
Summing up, the medium-term outlook for the precious metals market remains bearish as confirmed by multiple factors, and based on the most recent short-term factors, it seems that the corrective upswing in gold, silver and mining stocks is either over or close to being over. The mining stocks’ underperformance of gold, along with the fact that the GDX topped during the first session of the year, suggest that the decline is already underway.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full 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:
- Gold: initial target price: $1,218; stop-loss: $1,343; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $40.28
- Silver: initial target price: $14.63; stop-loss: $17.62; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $21.78
- Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $26.14; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $19.78
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: $27.82; stop-loss: $38.22
- JDST ETF: initial target price: $94.88 stop-loss: $37.78
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
Important Details for New Subscribers
Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.
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 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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