Briefly: in our opinion, full (200% 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.
Yesterday’s session was tense. There were factors supporting a reversal in gold, silver and mining stocks, but the strong, medium-term trend was in place, so it wasn’t obvious what kind of action was best to take from the risk to reward point of view. Consequently, it all depended on the confirmation that could have been seen during the session. And…
The confirmation never arrived. To be clear, the shape of yesterday’s session in gold was bullish as it was a daily reversal (hammer candlestick), but was not confirmed by high volume. Let’s take a look at the details (chart courtesy of http://stockcharts.com).
Gold’s Decline and Downside Targets
If a reversal is to be meaningful, it has to be confirmed by high volume. The reversal’s implications are in place because the high-volume session during the price reverses means that one side of the market defeated the other after a fierce battle. No big volume means no fierce battle and thus no victory, which means no implications.
So, did the short-term outlook became more bullish because of yesterday’s unconfirmed reversal? Barely.
The only really bullish thing about it was that it took place right at the triangle-apex-based reversal day, but nothing more. This factor alone doesn’t seem to be enough to justify adjusting a position during a strong medium-term decline.
Based on the long- and medium-term signals, the decline is likely to be much bigger, so not missing it is more important than catching all the small, short-term upswings. Thus, we’re waiting to see an additional confirmation and we’re prepared for both taking action and not taking action depending on what we see. So far, we have not seen a believable sign that higher gold prices are coming.
Silver’s Decline Continues
Silver formed a smaller reversal and – like the one in gold – it wasn’t accompanied by huge volume. The implications are also identical – next to none. The target at $16.10 may still be reached, but the local bottom may be in even without silver reaching this level.
If the above sounds confusing – don’t worry, it is confusing because the situation in the PM market is confusing as far as the short-term outlook is concerned. The key thing is that it has implications for the medium term, so the worst of the likely outcomes is that we’ll simply wait out the small corrective upswing and then profit much more on the upcoming slide. The “problem” is therefore practically nonexistent. We may get an opportunity to boost profits even further, but that doesn’t depend on us – we can only take what the market gives us and if it doesn’t provide us with at least a decent level of clarity, we’ll simply pass like one would do when dealt an average or bad hand in a game of poker.
On a side note, the poker analogy to trading is even better than it seems at first sight, as they are both games of probabilities. In both cases, professionals know that if they are to make money over time, they can’t play each time. And, in both cases, there are newcomers who get carried away by their emotions, use too much capital for a single game and/or insist on playing each time and end up with nothing or with sizable losses.
In the current case, we simply have to see what kind of hand the market deals us. So far, it’s nothing extraordinary.
Now, one may say that this is when the “when in doubt, stay out” rule should apply and in a way it does apply. We are staying out of the short-term trade, where the clarity is limited, while sticking to our medium-term trade, where the clarity is significant. In the end, we are holding on to the short position, while being prepared to temporarily close it or even open an opposite position (like we did on May 1st) if the situation were to become bullish.
Before moving further, we would like to address the issue of judging this decision (and investment decisions in general). This is the time to judge the decisions that are being made – in the context of the information that we have available right now. After several days, when it’s all done, it will be too late to ensure 100% objectivity in one’s judgment. More precisely, one can’t rule out being impacted by the hindsight bias and confirmation bias. Once one knows what happened, they tend to think that it was clear that it would happen, and they may even make themselves think (it’s not a conscious decision, though, it happens subconsciously) that they saw it coming. If you are interested in this topic, we highly recommend reading the book “Thinking, Fast and Slow” by Nobel prize laureate Daniel Kahneman. If you’re short on time, we also invite you to read our Russian roulette example in our FAQ section (if the section doesn’t open automatically, please click on the first question in the “Market Related” part).
If there is a temporary corrective upswing from here and we don’t profit on it, it may look like a mistake, but it will not be one, because the risk associated with changing the position now is too high as we don’t see bullish confirmations that would be strong enough. Regardless of what happens later, based on the information that we have now, the above seems justified from the risk to reward point of view. If you don’t agree and/or you think the situation should be approach differently, we would be happy to hear from you and discuss the reasoning.
Let’s move back to the market.
As far as the relative valuations are concerned, we didn’t see outperformance in mining stocks relative to gold, which would serve as a strong bullish confirmation. Conversely, we saw subtle outperformance in the case of silver, which is the opposite of what we would like to see as a bullish sign.
The above chart is the one of the two main reasons due to which we are not adjusting our current short position at this time.
Mining Stocks – No Strength and No Invalidation
Mining stocks moved insignificantly lower and the decline in the GDX ETF was less visible than the one in the HUI Index. The cyclical turning point is still several days away, so while it could be the case that the price reverses in a few days, but it could also be the case that it already formed a short-term bottom yesterday.
The most important thing on the above chart is not what we have on it. It’s what’s missing. We didn’t see any meaningful strength yesterday, which means that the confirmation that we were waiting to see was absent. Consequently, adjusting positions doesn’t seem justified (just like what we discussed earlier), especially in light of the confirmed breakdown below the key support line in the HUI Index.
The implications of the confirmed breakdown remain bearish for the following weeks, but on a short-term basis, as a comeback to the mentioned line can’t be ruled out.
Having said that, let’s take a look at the forex charts.
Forex
When we commented on the above chart yesterday, the USD Index was visibly above its previous day’s close. It turned out that it was the intraday top and the USDX declined shortly thereafter. Yesterday’s session turned out to be a shooting star candlestick, which is a bearish development for the short term, especially that it was an invalidation of a breakout above the May high.
Yet, gold didn’t rally despite the daily move lower in the USDX and it’s only $2 higher (at $1,269) despite the USD’s 0.34 move lower in today’s pre-market trading.
This is a weak type of reaction and it’s the opposite of a bullish confirmation and it’s the second of the two main reasons due to which we are not adjusting our current short position at this time.
The USD Index may be correcting, but with a weak reaction in gold, it doesn’t seem that adjusting positions in gold is a good idea. If gold doesn’t want to respond to the USD’s bullish signals, it’s likely to respond to the bearish signals that are likely to follow.
And they are indeed likely to follow. Yesterday’s session might have triggered today’s pre-market decline and it caused the USDX to move back to this week’s early lows, but if the analogy to 2014 is to be upheld (and we haven’t seen anything proving otherwise, only more and more signs confirming the analogy), then we shouldn’t be expecting a meaningful decline here.
There was one corrective upswing in late 2014 and we have definitely seen one in the past few weeks. While the above analogy doesn’t rule out another few-week long decline entirely, it does make it quite unlikely. Since the USDX didn’t even move to new weekly lows, it seems best to keep the current positions intact and focus on the bigger move. If we see an invalidation of the analogy to 2014 or other major bearish signs for the USDX, we’ll likely close the current forex positions at least temporarily, but at this time it seems too early to do so.
As a reminder, we view the following positions as justified from the risk to reward point of view: short in the case of the EUR/USD with the stop-loss level at 1.186 and the initial target price at 1.1203, and long in the case of the USD/JPY with the stop-loss level at 107.78 and the initial target price at 113.88.
On an administrative note, this week’s alerts include more forex details than usually. For the next several days (today may be the last day of this change, but it’s not certain), your Editor will be providing the crude oil and forex analysis and we thought that it would be a pleasant surprise to include the latter right into our Gold & Silver Trading Alerts. So, while we’re not going to include forex trading positions into the normal summary of positions for this type of alert as it might be confusing for some subscribers, we are going to provide additional information regarding any positions in the forex sections, just like we did today.
Summary
Summing up, the very short-term outlook for the precious metals sector is rather unclear. A few reversal indications are not accompanied by strong confirmations, but rather by a few signs pointing to a continuation of the decline. Gold stocks didn’t show strength relative to gold during yesterday’s trading and gold didn’t show strength relative to what happened in the USD Index. Conversely, both relative valuations pointed to the continuation of the decline in the PMs. We may see additional signs and confirmations during today’s session, and if that happens, we’ll let you know.
As always, we’ll keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (200% 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: $1,251; stop-loss: $1,382; initial target price for the DGLD ETN: $48.88; stop-loss for the DGLD ETN $37.48
- Silver: initial target price: $15.73; stop-loss: $18.06; initial target price for the DSLV ETN: $27.58; stop-loss for the DSLV ETN $19.17
- Mining stocks (price levels for the GDX ETF): initial target price: $21.03; stop-loss: $23.54; initial target price for the DUST ETF: $28.88; stop-loss for the DUST ETF $21.16
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 – but 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: $30.62; stop-loss: $36.14
- JDST ETF: initial target price: $59.68 stop-loss: $40.86
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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