Briefly: In our opinion, full (100% of the regular size of the position) speculative short positions in gold, silver and mining stocks is justified from the risk/reward perspective at the moment of publishing this alert.
The USD Index moved decisively higher yesterday and the price of gold fell a few dollars. This might seem to be a sign of strength, but the real deal was seen in mining stocks. The latter declined initially, but ultimately managed to move back up, erasing the entire daily downswing. Are miners indicating another short-term bullish wave?
In short, it’s rather unclear. It’s not the reply you wanted to read and it’s not the one that we wanted to write, but that seems to be the case. We don’t have meaningful confirmations of an either bullish or bearish scenario for the very short term (the following hours). Let’s take a look at the details, starting with gold (chart courtesy of http://stockcharts.com).
Another Small Upswing in Gold?
In the case of the yellow metal, the situation is still just as we described it previously, so we’ll start with quoting our yesterday’s comments:
On Monday we argued that gold could move to the $1,340s before the rally is over and we marked this level with the red ellipse. Why there? That’s where we have the previous intraday high and the rising resistance line. The combination of these short-term resistance levels and the pace at which gold usually rallied both fit a scenario in which gold forms the next local top about $20 higher at the end of the week or very close to it.
But, gold has already moved to the middle of the target area, so is there any point in waiting an additional few days before viewing the outlook as bearish? After all, gold shouldn’t rally much higher from here if the rising resistance line is to hold.
In short, the above is mostly true – yesterday’s rally made the situation already somewhat bearish, but at the same time it’s not certain if the final short-term top for this week is already in. We could have a daily pause or so and another upswing before the final top is in. Still, it seems that we are already close to the top.
The most important bearish signs, however, don’t come from the gold market, but from the confirmations that we saw in other parts of the precious metals sector.
Gold has already declined after we wrote the above and our short positions became profitable practically immediately, but it could still be the case that the yellow metals moves higher today, tomorrow or on Monday. Our guesstimate (it’s impossible to know for sure) is that the big decline will start on Friday, close to the release of the jobs report. In particular, let’s keep in mind that there were many cases when the tensions preceding the report pushed the precious metals sector higher and once they subsided, the price fell. This could be the way in which the next big decline starts.
But, will it start from the levels higher than yesterday’s intraday high? It’s rather unclear. Both options: the one in which gold moves higher just a bit, and the one in which gold moves above the previous March high (to $1,345 or so) seem probable. It’s also possible that the decline resumes right away, as we saw important bearish signs already on Tuesday (the way gold, silver, and mining stocks rallied).
Overall, in our opinion keeping the short position in its current form (100% of the regular position) and adding to it once the risk to reward ratio becomes more favorable is a good way to go. Naturally, we’ll keep you informed.
The thing that we would like to add today is the comparison to the December 1st, 2017 session. That was the session that followed the breakdown below the 50-day moving average after the final top. Today is also the session that follows the breakdown below the 50-day moving average after (what’s likely to have been) the final top.
Single-day analogies are generally not very reliable (more similar cases with a certain outcome are generally needed for the implications to become important), but it’s something worth keeping in mind anyway. Especially that it fits the performance that we often see close to the release of important economic data.
Back on December 1st, gold moved higher, erasing most of its recent short-term downswing, but ended the session only a bit higher, forming a major reversal. If we see something similar today, gold could move to approximately $1,335 before declining.
As a reminder, we expect to see a turnaround not only based on the U.S. jobs report, but based on the very important triangle reversal pattern. We described it in detail on February 26th. To be precise: the turnaround based on the above is likely to happen today or in the next few trading days. Let’s say that the reversal is highly likely to be seen before the end of Wednesday’s session.
Silver Confirms Gold’s Signs
On Monday, we described silver’s similarity to the post-September 2017 decline, so we won’t get into the details again here, but quoting yesterday’s analysis seems particularly useful:
(…) we want to emphasize that that the pattern continues with remarkable accuracy.
The sudden jump in the price of silver that we saw yesterday is most likely the analogy to the November 17, 2017 daily rally. The rally that preceded the big daily downswing and that was shortly followed by a decline of over $1.50. The implications here are bearish, not only in light of this specific analogy, but because silver outperformed gold on a very short-term basis right before declining multiple times in the past.
We wrote that silver was likely to rally above its short-term declining resistance line and the 50-day moving average and to top close to its mid-February high, likely outperforming gold. This is exactly what we saw yesterday when silver moved to our target area and thus it seems that a bearish outlook is once again justified.
The action that followed the mentioned November 17, 2017 session is almost the same action that we saw on Wednesday. Silver erased almost the entire daily upswing. The analogy is indeed remarkably accurate.
This gives us a good chance that the analogy will continue further. So, let’s look at what happened in late November 2017. Silver moved higher once again, but there was no new spectacular daily upswing. After a few days, silver started to decline without looking back.
How does this fit the current situation? It fits it very well. If gold is to reverse today, then that’s when silver can reverse and start its huge decline as well.
Silver ended yesterday’s session 1 cent higher, so nothing really changed. The white metal could still rally today or in the next few days, perhaps to $16.65 or so and decline from there. It seems that this level would correspond to the $1,335 target for gold and it would fit the analogy to late November 2017.
Gold Stocks’… Strength?
Despite gold’s daily decline, gold stocks managed to close yesterday’s session a bit higher, thus showing strength relative to the yellow metal. But does it really indicate that we have seen a major bottom?
In light of the long- and short-term factors that we covered in the previous alerts, the above seems unlikely. Yesterday’s strength and reversal could signal a very short-term upswing, but it could be the case that this upswing will be over before the end of today’s session.
Based on the size of the previous March rally, we estimated the maximum target for the rally, but it seems more likely that miners would show weakness during the upswing and not reach it.
Adding to Uncertainty
The biggest factor determining the prices of precious metals in the near term is usually the USD – after all, how could something move independently from the currency that it’s priced in. This observation is critical as the USD Index itself is in a rather specific place and whichever way the USD Index breaks out/down will determine the next move in the currency and in the precious metals market.
In yesterday’s alert, we emphasized that the USD Index was above a combination of very strong support levels and the big picture remained bullish. Consequently, the surprises were likely to be to the upside.
Yesterday’s price action was indeed a surprise to the upside. The USD Index could have declined all the way to our triangle target area, but instead it moved higher sooner. But, does it mean that the final bottom was already formed?
No, there’s still a chance that we’ll see another downswing before the corrective downswing is over. The jobs report could be the trigger for another move.
Moreover, if the USD Index breaks below the 89.30 level (the red support line), it will complete a short-term head-and-shoulders pattern (marked in red) and this would open a way to a move back to the February lows. Technically, it would mean that 87.70 is the next target, but the strength of this technique is much smaller than the strength of the multiple long-term resistance levels that are present around the January and February lows.
Still, on a short-term basis, a move below 89.30 would very likely be followed by a decline to about 88.70 – the declining black support line and the bottom part of our red triangle target area.
On the other hand, a rally above 91.1 or so (depending on when the USD breaks the rising green resistance line) is likely to be followed by a big rally to almost 94 (to 93.75 or so). This move will be extremely important and it’s not because it will be the first big rally in several months. It will be critical because it will be a crystal-clear sign that the small breakdown below the very long-term declining support / resistance line is invalidated. The implications will be bullish for the following months.
We discussed the details in our Tuesday’s Alert, so we don’t want to repeat them here, but for reference, we’re adding the mentioned chart.
Moving back to the short term, do the above head-and-shoulders-based possibilities add to the clarity regarding the outlook for today or the next few days? Not really. They do however, show that the USD Index has huge potential to move higher and a very limited downside. Consequently, if the USD Index moves lower, it might be a good idea to take advantage of it by betting on higher USD values and/or lower values of precious metals and mining stocks.
In order to gain extra insight into the USD Index’s movement, we analyzed the situation in the euro, but unfortunately, this provides us with the same implications – the rather limited upside for the euro along with a sizable downside.
You see, the euro quite often ends rallies with triple tops with an extra upswing that sometimes is too temporary to be called another top. We marked those cases with red rectangles and we marked those “extra upswings” with red arrows. The temporary nature of the latter can be seen particularly clearly in September 2017.
The problem with this analogy and the reason why it doesn’t add clarity to the current outlook is the January 25th intraday high. Should we count it as one of the major local tops?
Yes, because ultimately a high was indeed reached. No, because in terms of the closing prices, nothing really happened on that day.
Depending on how we classify this session, the March top was either the third of the tops and we can now expect the additional “extra” rally, or we can view the entire March upswing as the “extra” rally with immediate bearish implications.
The overall implications are unclear for the short term, but they are bearish for the medium term.
Summary
Summing up, a major top in gold, silver and mining stocks is probably in, and based on the U.S. jobs report that’s going to be released today, we could see another attempt of precious metals to move higher. We already saw the key short-term signs: silver’s outperformance and miners’ underperformance on Tuesday, so a short position is already justified from the risk to reward point of view, but we might get the additional bearish signs shortly. We might see them at higher prices, which would allow us to add to the short position on better terms.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (100% 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: $1,218; stop-loss: $1,382; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $37.68
- Silver: initial target price: $14.63; stop-loss: $17.33; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $21.48
- Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $23.54; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $21.46
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: $27.82; stop-loss: $36.14
- JDST ETF: initial target price: $94.88 stop-loss: $41.86
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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