Quiet Breakdown and Visible Invalidation

tools spotlight

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 breakout in the S&P 500 Index that we described yesterday was already invalidated in a clear way and the implications are already in place. However, there’s something more important that went unnoticed by most precious metals investors. Let’s jump right into the details by starting today’s analysis with silver (charts courtesy of http://stockcharts.com).

The Quiet Breakdown

Long-term Silver price chart - Silver spot price

Silver didn’t slide in a major way on any single day recently, but if we add the small daily declines, we get a decline that’s big enough to take silver below the rising medium-term support line based on 2 major lows – the late 2015 and late 2016 ones. Silver was already below this important line earlier this year and managed to recover, so it could be the case once again, but a breakdown itself is still a bearish sign.

SPX - S&P500 Large Cap Index

As indicated earlier, the general stock market just invalidated its previous breakout, which by itself is a very bearish sign for the short term. It doesn’t have to result in a major slide, but it’s nonetheless likely to trigger at least a temporary decline. Such decline could push mining stocks lower, just as it likely was the reason behind the miners’ lack of decline on Monday.

Implications for Mining Stocks

HUI Index chart - Gold Bugs, Mining stocks

If the above does indeed materialize and gold stocks decline significantly, it should make things much more interesting in the following days and weeks.

So far the mining stocks’ movement can be described as back and forth swings around the 200 level. Without a breakdown below the 180 level (previous lows), nothing will change in the above regard. A confirmed move below it, however (which is something a decline in the main stock indices could trigger), would likely result in a quick move to the next significant support – the late 2016 low (160). At that time, we could see a pause, followed by a breakdown and a move to the next strong support, which is all the way down at 100.

Long-term Gold price chart - Gold spot price

The Stochastic indicator in gold (the one based on the weekly closing prices) has already flashed a sell signal, suggesting that the corrective upswing is already over. Naturally, we have yet to see a confirmation from the weekly closing price itself (the current signal is based on yesterday’s closing price, which is obviously not the weekly closing price) and from the MACD indicator, but it’s fair to say that the implications are already somewhat bearish.

Summing up, the outlook for the precious metals market remains bearish and the breakdown in silver along with the unconfirmed sell signal from the weekly Stochastic indicator in gold serve as confirmations. The invalidation of the breakout in the S&P 500 could trigger a slide in the general stock market and in mining stocks, which could lead to a much bigger decline. Still, let’s keep in mind that the outlook will likely remain bearish even without the influence of stocks.

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: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
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

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 always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.

The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.

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:

Last week, a few important U.S. economic reports were released. What do they imply for the gold market?

May Retail Sales, CPI, Other Data and Gold

=====

Hand-picked precious-metals-related links:

PRECIOUS-Gold edges up on falling equities, easing dollar

As sowing begins, rural gold demand falls 40%

Metals Focus: Growth In Gold-Mine Supply To End In 2017

Metals Focus expects lower US Silver investment this year

UPDATE 1-Russian gold reserves up at 54.9 million ounces as of June 1

=====