Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Some might consider an additional (short) position in the FCX.
They say that the history rhyme and that’s generally true. Sometimes, the rhymes are almost identical. Like right now in the miners.
You see, the thing (that I let my subscribers know about in yesterday’s intraday message) is that the move higher that happened yesterday in the mining stocks is in perfect tune with what we saw during the previous topping pattern.
Back in June, when the GDXJ was correcting the April-May decline, it corrected in exactly the same way as what we see now and to the same retracement – the 38.2% one.
I added orange and green ellipses to the above chart to make the similarity even more obvious.
Let’s pause here for a moment. Why would the moves be so similar at all? They are a few months apart, and quite many important things happened in the meantime.
But you know what didn’t change? The fact that people are emotional beings, and they buy when they are greedy and they sell when they are fearful. And when do people get greedy or fearful? That depends on many factors, but ultimately, people look at the price, right? There are certain ways in which the price can move that then triggers specific – emotional – reactions.
For example, there’s nothing inherently bullish about a rally, and there’s nothing inherently bearish about a decline. Just because the price moved up or down on the previous day, doesn’t mean that the same thing will happen next. A rally or decline refers to the past, and being bullish or bearish refers to the future. Interestingly, a top can form only after a rally, and a bottom can form only after a decline, and one wants to buy at the bottom and sell at the top, right?...
And yet, most people will see rallies as bullish and declines as bearish.
Now, a rally or a decline are the simplest possible patterns, and there are more sophisticated ones. Some of them are called “price formations”, for example, the “head and shoulders pattern”. However, the self-similar rule and the entire concept behind it also applies to price moves that don’t have those distinct names – especially if we see them on the same market relatively close to each other.
Why would those two conditions be important? Because it means that it’s very likely that it’s the same group of people that is going to respond to very similar price moves. Well, has anything changed in market participant’s emotional resilience? Heh, maybe if they participated in the RISE sessions, it would, but most people haven’t. So, the thing is that given the same kind of input, the same (approximately) group of people is likely to get into the same kind of dynamics, thus causing the same kind of follow-up action in the market.
That’s why the GDXJ is now likely to move lower.
Of course, there’s also the context – what happens in other markets. If it wasn’t the case, the above mechanism would likely work all the time and not “just” most of the time.
The more similar the “context” is, the more likely the situation is to repeat itself.
Right now, the general stock market provides very interesting details.
The S&P 500 moved higher yesterday, but that wasn’t a new short-term high, and in fact, this back-and-forth trading creates the right shoulder of the head and shoulders pattern (with the mid-June top as the left shoulder).
Given this situation, it was normal for miners to move higher yesterday, and it will be very normal for them to slide in the following weeks (maybe even days).
And then, quite likely, months. You know, the world doesn’t end with U.S. stock indices, and there’s an entire index comprised of global stock indices except for the U.S. ones.
This index is like the flagship of all self-similar patterns that are currently in play. After topping at its 2008 high, the index fell and then corrected 61.8% (ok, a bit more) of the initial decline. That’s as much as it had corrected back in 2008.
And when that correction was finally over, the true carnage started. The fundamental background has been there for quite some time now – the interest rates have risen substantially in the previous months, and markets sort of pretend as if it hadn’t happened. This is a major blow to the economy as credit is much more expensive, and everyone is going to be affected, even if they aren’t affected yet.
The markets are emotional, and it was easy for people to just cling to the hopeful narrative that markets can only go up, forgetting that periodic slides are normal.
Moving back to the self-similar pattern, once the RSI (upper part of the chart) was back below 50 in 2008, it was a clear final warning. Then, the carnage unfolded.
Well, we just saw the same thing. The index is back below its 61.8% Fibonacci retracement, and RSI is visibly below 50.
Oh, and by the way, mining stocks (as seen in the lower part of the above chart) plunged along with world stocks in a truly epic manner back in 2008, and they are already declining now…
So, while it’s true that we just profited on a quick, long position in the mining stocks, it looks like the next huge move is going to be to the downside after all. And it seems that we might not need to wait for this move to begin for long, either.
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Overview of the Upcoming Part of the Decline
- It seems that the recent – and probably final – corrective upswing in the precious metals sector is over.
- If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400 and GDXJ close to $15 . This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
- The above is based on the information available today, and it might change in the following days/weeks.
You will find my general overview of the outlook for gold on the chart below:
Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
Please post your questions in the comments feed below the articles, if they are about issues raised within the article (or in the recent issues). If they are about other, more universal matters, I encourage you to use the Ask the Community space (I’m also part of the community), so that more people can contribute to the reply and enjoy the answers. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
Summary
To summarize, the medium-term trend in the precious metals sector remains clearly down, and it seems that the corrective upswing is already over or about to be over. We just caught the 10th profitable trade in a row – congratulations. The outlook for the short positions in junior miners and in the FCX remains very favorable.
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Locking in those is a great idea not only because it’s perfect time to be ready for what’s next in the precious metals market, but also because the inflation might persist longer than expected and prices of everything (including our subscriptions) are going to go up in the future as well. Please reach out to our support – they will be happy to assist you and make sure that your subscription days are properly extended at those promotional terms. So, for how many years would you like to lock-in your subscription?
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:
Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $26.12; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding exit level for the JDST: $12.18; stop-loss for the JDST: none.
For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway.):
Silver futures downside exit price: $20.22 (stop-loss: none)
SLV exit price: $18.62 (stop-loss: none)
ZSL exit price: $24.98 (stop-loss: none)
Gold futures downside exit price: $1,812 (stop-loss: none)
Spot gold downside exit price: $1,792 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the exit price: $10.38 (stop-loss: none)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the exit price: $18.87 (stop-loss: none)
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Optional / additional trade idea that I think is justified from the risk to reward point of view:
Short position in the FCX with $27.13 as the short-term profit-take level.
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
Whether you’ve 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 we describe the situation for the day that the alert is posted in the trading section. In other words, if 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 to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).
Additionally, 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 (as 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: UGL, GLL, AGQ, ZSL, 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" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) 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 daily 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. Furthermore, 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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On a side note, while commenting on analyses, please keep the Pillars of the Community in mind. It’s great to provide points that help others be more objective. However, it’s important to focus on the facts and discuss them in a dignified manner. There is not much of the latter in personal attacks. As more and more people join our community, it is important to keep it friendly. Being yourself, even to the point of swearing, is great, but the point is not to belittle other people or put them in a position of “shame” (whether it works or not). Everyone can make mistakes, and everyone does, in fact, make mistakes. We all here have the same goal: to have a greater understanding of the markets and pick better risk-to-reward situations for our trades. We are on the same side.
On another – and final – side note, the number of messages, comments etc. that I’m receiving is enormous, and while I’m grateful for such engagement and feedback, I’m also starting to realize that there’s no way in which I’m going to be able to provide replies to everyone that I would like to, while keeping any sort of work-life balance and sanity ;) Not to mention peace of mind and calmness required to approach the markets with maximum objectivity and to provide you with the service of the highest quality – and best of my abilities.
Consequently, please keep in mind that I will not be able to react / reply to all messages. It will be my priority to reply to messages/comments that adhere to the Pillars of the Community (I wrote them, by the way) and are based on kindness, compassion and on helping others grow themselves and their capital in the most objective manner possible (and to messages that are supportive in general). I noticed that whatever one puts their attention to – grows, and that’s what I think all communities need more of.
Sometimes, Golden Meadow’s support team forwards me a message from someone, who assumed that I might not be able to see a message on Golden Meadow, but that I would notice it in my e-mail account. However, since it’s the point here to create a supportive community, I will specifically not be providing any replies over email, and I will be providing them over here (to the extent time permits). Everyone’s best option is to communicate here, on Golden Meadow, ideally not in private messages (there are exceptions, of course!) but in specific spaces or below articles, because even if I’m not able to reply, the odds are that there will be someone else with insights on a given matter that might provide helpful details. And since we are all on the same side (aiming to grow ourselves and our capital), a ton of value can be created through this kind of collaboration :).
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
