Briefly: in our opinion, full (250% 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.
Gold rallied, silver rallied, and mining stocks rallied. That’s how one can summarize yesterday’s session. The volume was huge, so it appears that a major upswing has just begun. But is this really the case? As always, just because things look encouraging and the emotions are high, it doesn’t mean that anything changed. One needs to step back from the day-to-day price and volume changes and look at the factors that are in place right now without any biases. No hopes, no “feelings toward the market”, and no worries about missing the boat. Just facts and logic. Let’s start with gold (charts courtesy of http://stockcharts.com).
Gold moved higher and the volume was significant. Right. But, what does it change? Did the price increase to the levels that imply a change? Was there an important breakout? Did we see an invalidation of a breakdown? No. Nothing like that happened. Gold moved temporarily above its 50-day moving average and it didn’t even move to its late-August highs.
The price action didn’t change anything. But maybe the size of the volume did? Nope. Price increase on big volume that takes place during a consolidation pattern quite often marks the end of the consolidation… And declines. Mid-April top (which was the 2018 top in terms of the intraday prices) was accompanied by huge volume and we saw big volume levels at practically every daily rally that preceded the big declines. The volume spikes (considering only those that took place when gold moved higher) that we saw in the second half of May, the mid-June one, and early-July one suggest that what we saw yesterday might actually be viewed as a bearish sign. Some may argue that it’s too far-fetched, and even if you choose to think that it is, it’s definitely enough to prove (!) that yesterday’s big-volume upswing was not bullish.
But gold rallied along with the USD Index!
It did, and that’s mostly interesting because of the decline in the EUR/USD exchange rate. But, is this really something major? Did it change a lot? The best way to check is to examine gold’s price in terms of the euro.
The above chart shows two important facts:
- Gold moved back to its previous support level, which now turned into resistance and it didn’t invalidate the breakdown. This means that the situation is bearish as the upside appears tiny, while the downside is still huge.
- The previous two sharp upswings (mid-June 2018, early-August 2018) in gold in terms of the euro were exactly what marked the starting points of big declines in terms of both: euro and the USD.
The implications are therefore bearish. Once again, some may say that it’s too far-fetched and no rally should be viewed as bearish and even if you choose to believe it, it doesn’t change the fact that the above proves that yesterday’s action was not bullish.
But miners soared! There is a clear inverse head-and-shoulders pattern in the GDX, and a bearish H&S in DUST.
First of all, there should be absolutely no technical analysis of assets that inherently have to provide fake signals. This includes DUST, NUGT, JDST, JNUG, and other significantly leveraged instruments that have inherent time decay (their value decreases over time if nothing happens to the price of the underlying asset).
If you had a gun that you knew shoots below the target each time, but it was off by various amounts, would you aim right at the target to hit the bullseye? No. You would know that’s pointless (I’m sure you’ll find an even better word for it) and you’d choose a gun that hits what you’re aiming at.
The values of the above-mentioned ETNs are not only based on the price changes in the underlying assets but also based on the time decay. It doesn’t matter that much in the price moves by a lot in a relatively short timeframe, but it does matter a lot when it comes to detecting price patterns and discussing whether it’s reliable or not.
One may want to look at the market from different angles to spot divergences that would provide the edge – something that other investors missed and that could be used to enter better positions ahead of the others. For instance, looking at ratios such as the one between gold stocks and the general stock market, is one of the ways in which we apply this technique.
But you have to know what you’re looking at! In case of the leveraged ETNs, the only source of divergence can be what’s not based on the market performance. Discovering a price difference between a leveraged ETN and the price of the underlying asset (here: mining stocks or unleveraged mining stock ETFs like GDX) is not a market divergence – it’s a reflection of the cost structure of the instrument that you’re looking at. It has no analytical or predictive value.
Basing investment decisions on leveraged ETNs’ analysis is like looking at the above-mentioned broken gun analyzing how it missed the target and thinking “ooh, so now the guns are starting to shoot lower than they used to, I better shoot below the target from now on with all my guns”.
If you see anyone providing signals based on the ETNs instead of using the unleveraged instruments, or – even worse – discussing divergences between the ETNs and unleveraged instruments (like gold, silver or GDX, for example), you might want to reconsider reading the rest of their analyses.
Based on the above, we will not provide you with DUST chart to show the head-and-shoulders pattern, because whatever might be on the DUST chart that’s not present in the unleveraged instruments, is irrelevant.
Consequently, let’s take a look at the GDX ETF.
The GDX ETF closed the day at $19.05 and the neck level of the inverse head-and-shoulders pattern is at $19. Since the GDX closed 5 cents above the neck level, we saw a breakout.
A-ha! You said it yourself! A breakout! And breakouts are bullish!
Yes, they are, but if the breakout is so tiny as the one that we saw in GDX yesterday, then it has to be confirmed, before one can really speak of bullish implications. So, sorry, but the outlook didn’t really improve based on the above-mentioned breakout. And since the GDX ETF just moved to the previous highs, there’s really nothing else that we can say about the above chart – not much changed.
But, before moving to silver, let’s consider the fact that the GDX ETF is just one of several proxies for the mining stock sector. Let’s see how the others performed yesterday – maybe there were impressive breakouts above the neck levels in head-and-shoulders patterns somewhere else?
The HUI Index – the most popular index for gold stocks. No breakout.
The XAU Index – the index that covers both: gold stocks and silver stocks. No breakout.
GDXJ – the GDX ETF’s counterpart for junior miners. No breakout.
The SIL ETF – the proxy for silver stocks. No breakout; not even close.
Out of all the popular proxies for the mining stocks, we only saw a breakout in the GDX ETF and it was very small. The odds are that it was rather accidental and not the true representation of what’s going on in the market.
In fact, if we look at miners’ performance relative to gold, we can see it as well.
Even the GDX to GLD ratio shows that there was no breakout.
We wrote about the above charts several times in the past, but it’s worth repeating once again, as analysts keep making this mistake even though we explained it over a year ago. An incomplete pattern is no pattern on its own. If it was, it would have a name and its implications would have been widely described. Without a move above the neck level, there simply is no inverse head-and-shoulders pattern. And without a confirmation of the move, there are almost no implications.
Having said that, let’s move silver.
The white metal rallied and on a very short-term basis it outperformed both: gold, and mining stocks. Gold and miners didn’t move to their late-August highs, but silver did. And then it declined, closing a bit below the September 28th closing price. Overall nothing really changed, but at the same time we have once again seen “the silver signal”, when silver outperformed on a very short-term basis.
As always, many investors (as indicated by significant volume) think that this is bullish. We marked several cases, when the SLV ETF rallied on huge volume – they were all the final chances to get on the short side of the market, not the starting points of a new rally.
Besides, looking at silver’s very long-term chart makes it clear that the “strength” that we saw recently is nothing more than just a verification of the breakdown below the red dashed line. The verification seems to be completed and the implications remain bearish.
Speaking of long-term breakdowns and verifications, let’s take a look at platinum and gold stocks to other stocks ratio.
The platinum price is once again verifying the breakdown below the 2016 lows. That’s a breakdown below the long-term support level, so using weekly price levels as decisive ones appears justified. Despite intraday and intraweek attempts, there was no invalidation of the earlier breakdown in terms of the weekly closing prices. The week is far from being over and the platinum price is currently very close to the previous 2016 low. It seems that the upside is very limited and that we’ll see a decline shortly.
We can say something very similar about the HUI to S&P 500 ratio and the breakdown below the 2015 low. The previous attempt to move back above it was invalidated shortly and since the invalidation is not confirmed by weekly closing prices, it appears that something similar is about to take place also in the following days. Perhaps even today.
Reversal Timing
The next triangle-vertex-based reversal is just around the corner. It’s theoretically on October 9th, but it might be the case that given the size of the above chart, the date reading was not very precise and either because of that, or because turning points can work on a near-to basis, we could expect a turnaround shortly.
Until recently it seemed likely that the early-October reversal will be the major bottom, or at least the initial major bottom, but since gold is after a relatively small short-term upswing and the turning point is almost or practically here, it appears more likely that what it marks is the start, not the end of the next big wave down. Naturally, we could still have a daily or 2-day price slide to $1,050 or so in gold, but it could also be the case that the decline is “only very steep” instead of being extremely steep.
The next reversal date can be seen on gold’s short-term chart – gold’s cyclical turning point is on October 24th. Unless we see a dramatic plunge now, then this date is most likely to be the next bottoming target in terms of time. The same applies to silver and mining stocks as well.
Important Analyses
Before summarizing, we would like to emphasize that we have recently posted several analyses that are very important and that one should keep in mind, especially in the next several weeks. If you haven’t had the chance of reading them previously, we encourage you to do so today:
- Dear Gold Investor - Letters from 2013 - Analogy to 2013, which should make it easier to trade the upcoming sizable upswing (if enough factors point to it, that is) and to enter the market close to the final bottom.
- Gold to Soar Above $6,000 - discussion of gold’s long-term upside target of $6,000.
- Preparing for THE Bottom in Gold: Part 6 – What to Buy - extremely important analysis of the portfolio structure for the next huge, multi-year rally in the precious metals.
- Preparing for THE Bottom in Gold: Part 7 – Buy-and-hold on Steroids - description of a strategy dedicated to significantly boosting one’s long-term investment returns while staying invested in the PM sector.
- Gold’s Downside Target, Upcoming Rebound, and Miners’ Buy Plan - details regarding the shape of the following price moves, a buying plan for mining stocks, and a brief discussion of the final price targets for the current decline.
- Gold: What Happened vs. What Changed - discussion of the latest extreme readings from gold’s CoT report
- Key Factors for Gold & Silver Investors - discussion of key, long-term factors that support the bearish outlook for PMs. We are often asked what makes us so bearish – this article is a reply to this question.
- The Upcoming Silver Surprise - two sets of price targets for gold, silver and mining stocks: the initial and the final one.
- Precious Metals Sector: It’s 2013 All Over Again - comparison between 2013 and 2018 throughout the precious metals sector, the general stock market and the USD Index. Multiple similarities point to the repeat of a 2013-style volatile decline in the PMs.
Summary
Summing up, it seems that the next big downswing in the precious metals sector is already underway. We saw the repeat of silver’s short-term outperformance, which is a bearish sign on its own, and it’s particularly bearish because of the analogy to what happened in 2013 right before the big price slide. All in all, it seems that the huge profits on our short positions will soon become enormous.
As always, we’ll keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (250% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,062; stop-loss: $1,226; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $53.67
- Silver: profit-take exit price: $12.72; stop-loss: $15.16; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $31.37
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $19.61; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $33.37
Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find a more detailed explanation in our August 1 Alert. 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 target prices:
- GDXJ ETF: profit-take exit price: $17.52; stop-loss: $29.43
- JDST ETF: initial target price: $154.97 stop-loss: $64.88
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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Bitcoin has been moving up for some time now. The path to higher values has been a rocky one and Bitcoin bulls might be getting some encouragement. Whether this translates to a bullish outlook is another question entirely.
The intent of this page is to show you the simulated (hypothetical) returns of precious metals portfolios for the past decade,* in order to check how all of them performed individually, and how a portfolio consisting of them would have fared. We will then check how changing the positions according to our signals (as described in Gold & Silver Trading Alerts and Premium Updates – which is how the former used to be called in the past) for the long-term investment capital would have impacted the results.
Gold & Silver Trading Alerts - Trading Performance
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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