Briefly: in our opinion, full (200% 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.
In yesterday’s Alert, we discussed the invalidation of the breakdown below the key 61.8% Fibonacci retracement in the HUI Index and we summarized that the follow-up rally was not likely to be significant and it may even be over. The HUI fell like a rock yesterday, breaking decisively below the mentioned support. It seems like a no-brainer shorting signal. But, the big slide was caused by mostly one company – New Gold – due to exceptionally bad Q2 earnings report and news regarding their Rainy River project. Can one company and one report really change the technical outlook for the entire mining stock sector?
The outlook has definitely deteriorated, but the signal is not as clear as it seems at first sight as the XAU Index – another proxy for mining stocks didn’t move below the previous lows yesterday and the decline was not as spectacular in the case of the GDX and SIL ETFs. New Gold is included in the XAU, but its weight is smaller, and it’s smaller still in the case of the GDX.
The most important thing, however, is that the above discussion is only of an academic nature, because regardless of the reply, we have the same final implications. Depending on the above, the outlook could be extremely bearish or extremely bearish with an indication that the next short-term slide is already underway. In both cases, extra-large short positions are justified from the risk to reward point of view.
Let’s take a look at the charts for details (charts courtesy of http://stockcharts.com).
On the above chart, we had indicated that the implications of the invalidation of the breakdown may be short-lived. They were indeed very short-lived. The HUI plunged yesterday and closed visibly below the 61.8% Fibonacci retracement. If we see another decline today and the weekly close well below it, the breakdown will be clearly verified with very bearish implications to follow.
Silver Stocks’ Breakdown
To say that silver stocks are already after the breakdown is an understatement. Silver is after series of important breakdowns, all of which were confirmed. Well, except for the move below the most recent July lows – SIL just moved to them, not below them.
At the same time, however, SIL verified breakdowns below the December 2016, December 2017, February 2018, and June 2018 lows. There is now practically no strong support all the way to the 2016 low. This is a dream-case combination of factors for short positions.
Yes, it sounds crazy expecting that after so many months of back and forth trading around $30 - $35 silver miners are likely to have their prices cut almost in half and move to about $15, but that is exactly what the above chart implies.
GDX’s Confirmation
The GDX ETF chart seems to have verified the breakdown below the February lows and is now ready to move much lower. The implications are simply bearish.
Gold Does It Again
In the last two Alerts, we wrote the following:
Silver (SLV) outperformed gold (GLD) once again by moving to a new very short-term high, while gold didn’t. There was no new intraday high in the GDX ETF so, silver’s outperformance is quite clear even though it happened on an intraday basis. This is something that indicated local tops several times in the past and it seems quite likely that this is the case right now as well.
The intraday reversal that’s marked with black candlestick in the case of the GLD ETF definitely confirms this scenario. These candlesticks were seen right before the short-term downswings in the recent and more distant past. The implications are definitely bearish.
On a side note, if you were wondering why they are black, not red – it’s how Stockcharts marks the days that are declines in intraday terms (i.e. the closing price is below the opening price), but at the same time are rallies in terms of closing prices (i.e. the daily closing price is above the previous day’s closing price). In other words, it’s a specific kind of a reversal.
During yesterday’s session, we saw more or less a repeat of what we had seen on Tuesday, so the above remains up-to-date. This time, GLD moved to a new short-term high along with SLV, but overall, taking this week into account, GLD is 0.10% higher, SLV is 0.62% higher and GDX is only 0.02% higher. Gold moved a bit higher, silver outperformed, while miners are lagging. That’s still a bearish combination.
Regarding Tuesday’s black candlestick – we saw it once again yesterday, so the bearish implications from this signal were simply repeated.
The implication of the overall relative performance of the precious metals sector remains bearish.
The relativity plus the black reversal candlestick once again proved to be a powerful bearish combination. The entire precious metals sector declined and is once again very close to its recent lows. Just a little more weakness and we’ll see breakdowns in gold, silver, and mining stocks. And we’re quite likely to see them shortly.
Platinum’s Weekly Breakdown
In the previous Alerts, we wrote the following on the price of platinum:
When platinum plunged more than two weeks ago, it did so on significant volume and based on geopolitical news (we commented on it extensively in the July 3rd Alert) it looked very unstable and a corrective rally was extremely likely. And we saw it. But the rally that was likely to happen based on it has already taken place and platinum returned to its medium-term downtrend.
During yesterday’s session it moved (and closed) below the previous lows. This time, it was rather quiet – the volume was average and there was no direct news that would cause the decline. This makes us think that this time the breakdown will be successful. Naturally, we would prefer to wait for additional two daily closes below the previous lows and a weekly close, but the mentioned circumstances make a confirmation of the breakdown quite likely.
A slide in platinum – and one would likely follow a confirmation of the breakdown’s – is likely to translate into declines in the rest of the precious metals sector.
Since platinum moved back up on Friday [a week ago], you might be wondering, if this changed the outlook for the less popular white precious metal.
In short, the outlook improved, but remains bearish anyway. Friday’s comeback was less profound than the early-July one and – most importantly – it didn’t cause platinum to invalidate the breakdown in terms of the weekly closing prices. In other words, platinum just closed below the previously lowest weekly close of 2016 for the second week in a row.
So, while on a short-term basis, we saw a reversal, from the bigger point of view, we are seeing a verification of the breakdown.
In early July the implications of platinum’s reversal for the rest of the precious metals sector were bullish, but it’s not the case this time.
The week is ending today and at the moment of writing these words, platinum futures are trading at $827.90, which means that platinum is a bit lower this week, thus confirming the breakdown. The week is not over yet, but the odds already are that we will have the breakdown’s full confirmation and very bearish implications going forward.
Forex Implications
In yesterday’s Alert, we wrote the following and since the USD moved temporarily lower yesterday and then came back up with a vengeance, it remains up-to-date:
The situation in the USD Index is quite bullish as it reached its short-term support line. This line is the lower border of the rising wedge pattern. The implications of this pattern will depend on the way in which the USD Index breaks from it. If the breakout is to the upside, then we’ll likely see a rally. If it’s to the downside, it will likely herald a decline.
During yesterday’s session, the USD Index moved to the lower border of the wedge and bounced from it. Since the index value is closer to the lower border, it may seem more likely that a breakdown will be seen. But that is not the case. A breakout is much more in tune with the long-term USD picture, so it’s quite likely that we saw a bottom yesterday. This means that even though the HUI Index invalidated its breakdown, there may be no rally in it at all.
Moreover, the breakout from the rising wedge pattern would likely be followed by a rally as big as the height of the wedge. We marked it with red dashed lines. Interestingly, this technique provides us with a target of approximately 98, which we’ve been featuring for many weeks. This level is (approximately) the 61.8% Fibonacci retracement level that’s based on the entire 2017 – 2018 decline.
In the last two months, gold managed to decline over $70 without the USD’s help and it still seems that gold is magnifying the USD’s rallies while somewhat ignoring its weakness. In such an environment we can say that gold is on bearish fire and a rallying USD would be like gasoline.
You may be wondering if the USD Index shouldn’t decline, because it might be forming a reverse head-and-shoulders pattern, with the September 2017 bottom being the left shoulder and the early 2018 bottoms being the head. This would imply that a right shoulder should be formed and thus that the USD Index should decline to approximately the dashed line around 91.0 - 91.5.
In short, this is not likely. In fact, we commented on this issue several weeks ago, but we dropped this scenario as it became unlikely in the meantime. We even mentioned 91.0 – 91.5 as a potential downside target.
On July 2nd, we wrote the following:
So far the April – June rally is symmetrical to the November 2017 – January 2018 decline in terms of the overall pace at which the moves took place and – more or less – the price levels that were reached.
If this symmetry continues to a big extent, then we may see a move to or a bit below 91.5, or – if the symmetry continues to a limited extent – a move to about 92.75 (approximately the June bottom).
The latter scenario seems more likely because of two factors:
Gold was a bit above $1,300, when USD bottomed in June.
The analogy to 2014-2015 rally remains in place and a bigger decline seems unlikely in its light.
It turned out that the USD’s correction was not even as big as the more bearish of the mentioned scenarios had suggested. The long-term signals are more important than the short-term ones, after all, and the long-term implications for the USDX are very bullish.
The most important thing due to which the reverse head-and-shoulders pattern does not have any implications whatsoever is that it is not completed. The partial formation doesn’t have any implications. If it had, it would be a formation by itself and it would be likely to have some kind of name of its own. Viewing incomplete patterns as patterns that already have implications is a big logical error. We explained it more thoroughly in September, 2017, when discussing the lack of bullish implications of the potential reverse head-and-shoulders pattern in gold.
All in all, the outlook for the USD Index remains bullish and the implications for the precious metals sector remain bearish.
Summary
Summing up, the outlook for the precious metals sector is extremely bearish and it seems that based on the confirmations that we’re likely to get from mining stocks and platinum today, it’s about to get even more bearish.
The extra-large short positions in gold, silver, and mining stocks are definitely justified from the risk to reward point of view. It’s likely that the profits on the short position that we opened only several days ago will increase much more before this trade is over, even if they correct temporarily first.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (200% 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: $1,142; stop-loss: $1,272; initial target price for the DGLD ETN: $63.96; stop-loss for the DGLD ETN $46.38
- Silver: initial target price: $14.42; stop-loss: $16.46; initial target price for the DSLV ETN: $32.97; stop-loss for the DSLV ETN $24.07
- Mining stocks (price levels for the GDX ETF): initial target price: $19.12; stop-loss: $23.64; initial target price for the DUST ETF: $37.97; stop-loss for the DUST ETF $20.87
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: $28.10; stop-loss: $34.82
- JDST ETF: initial target price: $74.83 stop-loss: $42.78
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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