Long-term Invalidations in Gold and Silver

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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.

The precious metals sector declined yesterday and while a decline by itself is not necessarily bearish (just as a rally is not necessarily bullish), yesterday’s downswing took gold and silver below two very important lines (both starting at the 2011 tops), thus invalidating the earlier breakouts. The USD Index, however, did not break out. What are the implications?

In short, they are clearly bearish. Not only did gold and silver invalidate their long-term breakouts, but they managed to do so almost without the USD’s help. We previously wrote that gold and silver’s breakouts should not be trusted, that the impact of geopolitical events, such as the tensions regarding North Korea is only temporary, and that gold rallied recently only because it virtually had to, given the weakness in the USD. The ease with which both gold and silver invalidated the breakdowns (no rally in the USD was necessary), confirms that the above was correct.

Let’s take a look at the charts for details (chart courtesy of http://stockcharts.com).

Long-term Gold price chart - Gold spot price

Gold closed yesterday’s session visibly below the declining long-term support/resistance line and since it’s trading at about $1,308 today, it seems that yesterday’s close was not accidental. Breakouts usually need confirmations before they can be trusted, but for the invalidations of breakouts, the implications are usually bearish right away.

Long-term Silver price chart - Silver spot price

Silver is known for fake breakouts, so we didn’t make much of its recent “strong” performance and a move above the upper green resistance line. We didn’t have to wait long for the market to agree with us – silver closed well below the mentioned line based on the 2011 and 2016 tops. The breakout above the dashed line has not been invalidated so far, but it seems to be only a matter of time (silver was below $17 on an intraday basis yesterday). The dashed line is based on the weekly closing prices and it’s currently at about $16.80. With 4 sessions until the end of the week and only about 30 cents to go, it seems that a move below this line is well within reach.

Still, for now, the implications are already very bearish as most investors focus on the intraday highs instead of the weekly closes and thus the invalidation that has already taken place has already changed the picture for many investors. You knew that silver’s breakout shouldn’t be trusted, but for many investors and traders, what happened now is a new and shocking sign of weakness. Once they capitulate, the decline should accelerate.

HUI Index chart - Gold Bugs, Mining stocks

As far as gold miners are concerned, we wrote the following yesterday:

Meanwhile, gold stocks once again reversed after moving into the 200-220 area. The HUI Index is not yet below 200 at this time, but the reversal action is very similar to all cases when it started declines from this area: early 2015, once in 2016 and 2 times this year – this was the third attempt of mining stocks to break above the 50% Fibonacci retracement level (the same level that gold miners reached in 2012 before declining more than 300 index points) and it seems that it was once again failed. The Stochastic indicator flashed a sell signal also in this case, confirming the bearish indications from the gold market.

The above remains up-to-date with the exception that the index closed just a little above 200 yesterday (202.53). The sell signal from the Stochastic indicator is now even more visible – it declined not only below its signal line, but also below the 80 level (both lines are used to determine sell signals).

Mining stocks are already below their 2015 high and let’s keep in mind that it took miners only 3 months to move from above 200 to about 110.

GDX - Market Vectors Gold Miners - Gold mining stocks

On a short-term basis, we see that mining stocks declined on increasing volume, which serves as a short-term bearish confirmation.

Summing up, at the moment of writing these words, gold is trading at about $1,308 and it seems that the analogy to the Labor-Day worked once again. Still, we would like to emphasize that the downswing that we saw in the past week or so is nothing compared with the size of the decline that’s likely still ahead. The outlook remains bearish and the invalidations of breakouts in the case of gold and silver serve as confirmations.

Please note that if the USD Index does indeed start a major rally (and we expect it do to so), then gold’s decline could be sharper than the decline that we saw in 2012 and 2013, as back then the USD Index didn’t rally substantially. Consequently, the 1:1 analogy between them could work for prices, but not necessarily in terms of time.

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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