Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks is justified from the risk/reward perspective at the moment of publishing this Alert.
Yes, you have read that right. Rallies are not necessarily bullish, and declines are not necessarily bearish. If it was the case, it would be possible to make a living by going long every time a market moves higher on the previous day, and going short when it declines. But the market is much more complex than that. Besides, if you want to make money, you have to buy low and sell high, right? And what happens before the price is high? That's right, it rallies. So, perhaps all daily rallies are bearish, and all daily declines are bullish? Things are not so simple either. Let's dig deeper.
The precious metals sector moved higher on Friday, most likely based on the surprisingly good employment numbers. Silver actually spiked up, while miners lagged behind. While this relative performance may not seem important at first sight, especially to those who are new to the precious metals market, it's actually an excellent combination of signals that make the outlook for the next several days quite clear. It's also a perfect example of what the markets do when they really want to move lower, but something forces them to move higher instead.
In the May 1st Alert, we wrote the following:
(...) the USD Index's rally might be the trigger for the decline, but actually no trigger is required. The trigger might speed things up, but if one is absent, PMs and miners will likely decline anyway, only a bit later. The "bit later" means several days later, not months. It might mean weeks, if something bullish surprises the markets, though.
Something bullish has indeed surprised the markets - the jobs report was very bullish. The improving situation should theoretically make the Fed less likely to hike the interest rates - at least that's the prevailing interpretation. Over the long run, gold tends to shine when the US economy is in big trouble, the above positive link between jobs and gold price shouldn't hold for long. On the short run, however, the interest-rate decision mechanism seems to prevail. Regardless of whether the market interprets the jobs report correctly or not, we can agree that we just saw a bullish surprise.
As it's usually the case, it's not the news that was particularly informative - it was gold, silver and mining stocks' reaction to it that was the key to understanding what's really happening right now.
Let's take the markets one at a time and then discuss their relative performance.
Getting Right Into the Precious Metals Sector
Gold's reaction was rather average. It moved somewhat higher, but it didn't erase Thursday's decline. Gold didn't close above the Wednesday's close, let alone the neck level of the previously completed head-and-shoulders formation. Consequently, it didn't really change anything. The very bearish implications of the breakdown below the neck level of the H&S formation remain in place. As a reminder, this formation alone suggests that gold should slide to about $1,220. While other techniques point to higher targets, but their implications are still bearish.
Silver moved sharply higher, which - at first sight - appears bullish. Let's put it in the proper context. The only similar situation from the recent past is what we saw in late July and early August 2018. That's when silver was also within a decline that lasted (so far) more than 2 months. The back-and-forth action was very volatile, which was a good indication of what was about to follow. When silver finally broke to the downside, it truly plunged.
Just because silver moved sharply higher for one day, doesn't change the overall trend, which remains down. And, given the similarity to what happened in the middle of the previous year, we know that one-day rallies are something normal. Friday's upswing was not a game-changer - far from it.
Let's recap what we just saw in the precious metals market. Gold and silver suggest that nothing really changed so far. In other words, Friday's move higher was not bullish. Gold's and silver's price action doesn't make Friday's action bearish on its own, either.
It's the miners' reaction that does.
The HUI Index moved higher by mere 2 index points. This is bearish for two reasons. We'll move to the more important one in a few paragraphs. The other one is that this small upswing wasn't enough to even take gold miners back above the rising support/resistance line. This was the second day when the miners closed below this line, so the move is now almost confirmed.
On Friday, we wrote that despite the multiple bearish signs, it was still possible that the 61.8% Fibonacci retracement in the HUI would trigger a small correction. It was unlikely, but based on the surprising employment numbers, that's exactly what happened. The key is that the move was small and didn't manage to invalidate the technical breakdown despite the bullish news, the rally in gold, and the rally in the general stock market.
And it was not a coincidence that the GDX ETF, another popular proxy for the miners, has barely moved higher.
The move higher was tiny and in case of the GDX, the move - by itself - was a daily bearish reversal. The rally that took place based on the surprisingly good fundamental news is likely over.
The volume marking the upswing was relatively low, which is yet another confirmation that up is not the way in which the precious metals market is likely to move next.
Several paragraphs above, we promised to get back to the key bearish thing about Friday's small move. The most important thing is what we already wrote in the opening paragraphs of this analysis - the relative performance.
Clear Signs from the Relative Valuations
Declines in the precious metals sector often start with silver's very short-term outperformance of gold. Another bearish sign comes from the mining stocks that underperform gold during both: daily rallies and daily declines. The most profound signal, however, is when gold rallies and miners refuse to do so, or they rally only slightly (i.e. they underperform).
We saw both bearish conformations: silver's outperformance, and miners' underperformance.
This is a clear sign showing that the precious metals didn't form any major bottom on Friday, but rather did what it virtually had to do in light of the bullish surprise. It moved higher. But, at the same time, it provided us with a very important last-minute confirmation - it moved higher in the most bearish way imaginable. The move higher is likely to be reversed shortly - most likely we'll see decline's continuation (and perhaps the next short-term bottom) this week.
Friday's upswing has merely delayed the slide, nothing else. The downside targets remain unaffected and the same goes for our gold price forecast for 2019.
Summary
Summing up, Friday's upswing in the precious metals market is not a bullish sign, but - based on miners' poor performance - a bearish one. The price action is a perfect example of how the market reacts when it really wants to move lower, but something unexpected gets in the way and prevents that decline. The slide to next near-term bottom is likely to start shortly and this bottom might be reached as early as this week - in a volatile manner. This upcoming bottom might be a good opportunity to go long, but we are definitely not in this kind of situation right now. Conversely, in our view, short positions are likely to generate sizable profits.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,241; stop-loss: $1,357; initial target price for the DGLD ETN: $51.87; stop-loss for the DGLD ETN $39.87
- Silver: profit-take exit price: $13.81; stop-loss: $15.72; initial target price for the DSLV ETN: $39.38; stop-loss for the DSLV ETN $26.97
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $18.41; stop-loss: $24.17; initial target price for the DUST ETF: $34.28; stop-loss for the DUST ETF $15.47
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: $26.42; stop-loss: $35.67
- JDST ETF: profit-take exit price: $78.21 stop-loss: $30.97
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
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.
=====
Latest Free Trading Alerts:
"The US dollar will collapse or it will be replaced by another currency" - we hear such statements all the time. Are they true? We decided to check these claims - so we invite you to read our today's article about the US dollar's international supremacy and find out whether the greenback's demise is likely in the foreseeable future. Let's also draw implications from the analysis for the precious metals market.
Will Yuan Replace US Dollar and Make Gold Shine?
Stocks rallied on Friday, as they retraced their Thursday's decline following the monthly jobs data release. The S&P 500 index got closer to the record high again. But the broad stock market will sell off today following renewed fears of a trade war.
S&P 500: Friday's Rally was a Bull-Trap, What Next?
It looks like crude oil is set for a sizable weekly decline. After yesterday's plunge, the market looks to have stabilized today. But is it really so? In today's analysis, we're bringing you the details. We objectively reveal what to expect next. Either the bulls or the bears won't like it. Who do you think it'll be?
Looking At Today's Corrective Upswing, Is the Oil Bottom In?
=====
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
