Reversals, Invalidations and Little-Known Signals

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Briefly: In our opinion, full (100% of the regular full position) speculative long positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert. In other words, we are closing the speculative short position and opening a long position in its place.

Yesterday’s price action in gold (the sudden pre-market $20 slide) can be described in many ways – such as manipulation, volatility, flash crash, anomaly etc. We’ll call it a blessing. Why? Because it revealed several important signals that changed everything regarding the short-term outlook.

Let’s jump right into the charts (charts courtesy of http://stockcharts.com).

Gold’s Price Changes

Short-term Gold price chart - Gold spot price

Gold declined yesterday, so one might be wondering what can be so significantly bullish about it. The key word here is “invalidation”. Gold’s price was strongly pushed below 2 important support levels – the rising red support line (based on the 2016 bottom and the May 2017 bottom) and the declining black support line, which is also the neck level of the head-and-shoulders pattern (the late-May consolidation being the left shoulder and the most recent upswing being the right shoulder). Gold moved temporarily below these 2 levels and quickly invalidated both breakdowns. Additionally, gold moved to new short-term lows and invalidated this move as well.

Invalidations are strong signals that the market wants to move in the opposite direction, at least in the short term. Why? Because if the market was able to show enough strength to move above the previously broken levels, even though it was supposed to slide based on the breakdown, then it very likely has the strength to move higher. In analogy, if your car is powerful enough to drive with the parking brake on, it is certainly able to drive even faster without the parking brake.

The above is true in general, but based on our experience, in the case of the precious metals market, invalidations of head-and-shoulders patterns are particularly reliable – and that’s what we’ve just seen.

The daily Stochastic indicator has recently flashed a buy signal and it wouldn’t be a big deal if it hadn’t been accompanied by the same signal from silver and mining stocks as well – but it was.

Short-term Silver price chart - Silver spot price

In the case of silver, the Stochastic indicator has been very effective lately (6 out of 6 cases were followed by at least a short-term rally), especially after it was below 20 and then moved back to this level. That’s what we’re seeing right now.

Silver’s attempt to break below the previous lows and the big daily reversal are also bullish factors.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks have been showing strength previously and it appeared accidental initially, but it does no longer appear to be the case. Yesterday, miners had a very good reason to decline – after all gold ended the session over $10 lower – and they didn’t. That’s a clear sign of strength and it can’t be explained by the performance of the general stock market.

The Stochastic indicator flashed a buy signal also in this case – it wouldn’t be a big deal on its own, but we saw the same in gold and – especially (given its performance in the silver market) – in silver.

The volume during yesterday’s session was lower than what we’d seen in the previous several days when miners moved higher. Consequently, it seems that “up” is the current real direction for the short term and yesterday’s tiny move lower was a correction.

The True Seasonal tendencies of the precious metals market suggest that a short-term rally is about to be seen (about 2 weeks).

True Seasonal charts for silver

This tendency appears to be strongest in silver, which tends to rally about 4% in the first 10-14 days of July. The strength actually begins in the final days of June, but the most visible part thereof is likely to be seen in early July.

Naturally, that’s just a tendency and not a law or regulation and silver doesn’t have to move in the above way, but since there are several factors pointing to higher silver prices anyway, the above can be seen as a confirmation.

Speaking of confirmations and little-known signals, here’s how the SP Indicators have recently performed:

SP Short term Gold Stock Bottom Indicator

In case of the above indicator, buy signal is seen when the indicator is below the dashed line for 3 days and then starts to rally and in the case of the below indicators, the buy signal is given when the indicator crosses the dashed line in any direction.

SP Gold Stock Bottom Indicator

SP Gold Stock Extreme Indicator

SP Gold Stock Extreme Indicator #2

As you can see, we’ve just seen a series of buy signals – the previous ones were followed by rallies more significant than what we’ve seen so far, so the upside potential seems to be intact for the short term.

Summing up, yesterday’s – likely artificial – decline in gold showed strength in the precious metals sector – gold’s small breakdown below support levels was immediately invalidated, the miners showed significant outperformance and silver reversed in a meaningful way. The above has strongly bullish implications, especially in light of the current True Seasonal tendencies and the signals from the Stochastic and SP indicators. Consequently, it seems that at this time speculative long positions are justified, not short ones.

Please note that the above implications are only for the short term (the next 1-2 weeks) and do not change the bearish outlook for the medium term. We expect to close the long positions and to re-enter the short positions shortly – likely at higher prices.

As always, we will keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Long 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 / profit-take orders:

Gold: initial target price: $1,289; stop-loss: $1,227; initial target price for the UGLD ETN: $11.15; stop-loss for the UGLD ETN $9.64
Silver: initial target price: $17.29; stop-loss: $15.94; initial target price for the USLV ETN: $13.33; stop-loss for the USLV ETN $10.45
Mining stocks (price levels for the GDX ETF): initial target price: $23.57; stop-loss: $21.43; initial target price for the NUGT ETF: $37.13; stop-loss for the NUGT ETF $27.81

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: $35.57; stop-loss: $31.68
JNUG ETF: initial target price: $22.48; stop-loss: $15.79

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.

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