How High Can Silver Rally This Month?

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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.

In the recent alerts, we wrote about gold’s possible upside price target and about the level, to which gold stocks could move to and remain in tune with the previous price patterns. In today’s analysis, we discuss the analogous price levels in silver. Let’s jump right into charts, starting with white metal’s short-term picture (chart courtesy of http://stockcharts.com). For easier comparison to GDX ETF, we’ll use the SLV ETF chart.

Short-term Silver price chart - SLV ETF - iShares Silver Trust

In general, price tops in precious metals are often preceded by weak performance in mining stocks and strong – yet temporary – performance of silver. There’s no doubt that mining stocks showed strength this month, in particular at its beginning. However, it seems that we are already seeing the transition from them being the leader to being a laggard. Namely, mining stocks (GDX) were higher by 0.64% yesterday, but the SLV ETF was higher by 1.07%.

In today’s pre-market trading gold is up (at the moment of writing these words) by $3.10 (0.24%) and at the same time silver is up by $0.11 (which is 0.62%). That’s yet another sign showing that the white metal is outperforming on a short-term basis.

The reason that we are focusing on such short-term outperformance signs, is that it is a very short-term rally that we see and a very short-term top that we are aiming to estimate. The fractal nature of the market means that the same phenomenon can be observed in different perspectives. If we are discussing major tops at the end of a major rally (for instance, the mid-2016 top), then we can expect the silver to gold ratio to move higher for weeks before the signal is significant enough to confirm a top. However, if we are discussing a relatively small rally, then a relatively small show of outperformance could be enough to confirm that the top is in or at hand.

So far, we’ve seen some signs which suggests that the end of the upswing is near. How high could silver move before it reverses? That’s the tricky part, because the awareness of silver’s likely outperformance doesn’t by itself tell us how significant the outperformance will be. So, let’s look at silver’s chart for directions.

Short-term Silver price chart - Silver spot price

In the September 26 Gold & Silver Trading Alert, we wrote the following:

Please note that silver moved back and forth around the $17 level for more than 2 weeks in August, so it wouldn’t be surprising to see some back and forth action also this time.

The moves are quite wide, but that’s exactly what we’re seeing. The white metal was below $17 and is currently back above it. The nearby resistance levels are created by the combination of moving averages (at about $17.10), the rising red support line and the mid-August intraday high at $17.32. Which of these levels is most likely to be reached and trigger a reversal? We’d say that the $17.10 - $17.25 area as that’s where the most daily highs are located. At the moment of writing these words, silver is trading at $17.06, so the above target area is just around the corner.

Summing up, gold, silver and mining stocks all seem to be very close to their upside targets for this short-term corrective upswing. The price of gold moved to $1,289 in today’s pre-market trading, while silver moved to $17.17 and gold stocks already moved very close to their important short-term resistance yesterday. Consequently, it seems that the rally will be over sooner rather than later. Those who engaged in day-trading and aimed to profit on the short-term upswing in the precious metals sector may want to close their long positions at this time or prepare to do so shortly and switch to short ones.

The outlook for the precious metals sector for the following months remains bearish.

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: initial target price level: $1,063; stop-loss: $1,366; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $38.74
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

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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