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.
Some time ago we discussed the analogies in the silver market and the implication of the analogies was that a big decline should follow. However, we have not seen anything epic on a medium-term basis – only a local (yet powerful) intra-day slide. Was the analogy invalidated and did the outlook become bullish?
Let’s take a closer look at the silver chart (charts courtesy of http://stockcharts.com) and begin today’s analysis by reminding ourselves the analogies that we are going to discuss in greater detail.
Quoting the July 10, 2017 Gold & Silver Trading Alert:
The above chart is very rich in important data and analogies and it will take us some time to discuss all of them. Let’s start with the one that was already present before Friday’s session and then we’ll move to the one that became apparent based on what happened based on it.
The first thing is that silver’s recent, and not so recent (mid-2016 – today) performance is to a large extent a repeat of what we saw in 2008. This time, the price moves took more time, but the price levels themselves are almost identical. The 2008 and 2016 tops both formed a bit above $21 and both were followed by a decline to about $16 (marked with orange lines), which was in turn followed by a rally to about $19 (again, in both cases). Then a huge plunge followed in 2008 – why shouldn’t it follow this time if the previous price swings are so similar in terms of price? The decline in 2008 took silver below $9, so based on this analogy alone, it appears that silver is once again likely to test these levels.
Also, both rallies (the ones that ended in 2008 and 2016) started from about $14, which further strengthens the analogy between these situations.
Let’s move to the second analogy – the one that seems even more important. The three local tops in silver that we saw this year are similar to the ones that we saw in 2012 and 2013, right before the big plunge in the price of white metal. This can be seen on a stand-alone basis, but it’s even clearer when we realize that both three-top patterns were preceded by proportionately similar action.
The late-2015 and 2010 bottoms were the ones that preceded the big upswings in silver. In both cases, the initial rally was shortly followed by a consolidation (mid-2010 and Q1 2016), then a sharp rally with a quick correction in the middle (late 2010-early 2011 and Q2 2016) and then a top that formed after a very sharp upswing. Both tops were followed by a zig-zag correction and local bottoms (mid-2011, end of Q3 2011, end of 2011, mid-2012, Q3 and Q4 2016). After these bottoms (the final ones took place in mid-2012 and at the end of 2016), we saw rallies that took silver much higher and that ended below the most recent local top (the Q3 2012 rally ended below the Q1 2012 top and the Q1 2017 rally ended below the Q4 2016 top).
Both preceding actions were not identical, but quite similar. This makes the three-top similarity much more profound than if we saw it on a stand-alone basis. But wait, there’s more. The rising support/resistance lines that we can draw (red lines) based on the initial bottom and the interim one also show similarity – both final local bottoms took silver right to this line and the corrective upswing that followed was the final one (Q1 2013 and the May-June 2017 rallies) before the big dive.
With similar preceding action, similar follow-up action is to be expected. We marked the follow-up declines of the 2012 and 2013 tops with blue, dashed lines. Applying these lines to the recent 3 tops in silver provides us with a coherent price and time target. The fact that they all point to a similar price-time combination further confirms the analogy between the tops. The target based on the three tops and the analogy to the previous ones is about $9.60, which is also the 2006 bottom. So, based on the above analogy, $9.60 is the downside target and the blue ellipses mark the current moment and the moment in the past that is analogous to it. It seems that the most volatile part of the decline is just ahead.
With two analogies pointing to different price targets (and important long-term declining support lines and levels being between them), what will the final target be? It will depend on what happens in the precious metals market (not only in silver) once we get closer to these levels. If miners show significant strength and gold reaches an important support level, we may not wait for silver to decline to the lowest of targets before moving back into the precious metals market with the long-term investments.
For now, it seems that the final bottom in silver form between $8 and $10.
The question for today is whether anything from the above was invalidated based on silver’s lack of decline and did the above silver price prediction change? In short, the direct price analogy was invalidated, however, the general analogy and the implications still remain intact. Why?
Because of what happened in with the U.S. dollar in the recent months.
The silver market has its own fundamentals and it’s much more to silver than just the USD Index, however, in the past decade all big moves in the silver prices were seen at least in some tune with the value of the U.S. dollar.
The 2005 – 2006 upswing was seen with a horizontal trend in the USD and the final spike took place during the USD’s slide. Silver declined only after the USD Index stopped declining.
The 2007 – 2008 rally in silver was seen with a decline in the USD Index and the decline started when the USD stopped declining. The huge slide started when USD Index rallied back up.
The 2010 – 2011 rally in silver was also seen with a decline in the USD Index and the decline started when the USD stopped declining. The huge slide started when USD Index rallied back up in the second half of the year.
The 2012 decline took place when the USD Index did nothing initially and then moved higher.
The huge 2012 – 2013 decline in silver started when the USD Index did nothing initially and then it accelerated dramatically after USD moved higher.
There are many other less visible examples of this relationship and for the purpose of this essay, they all have one key implication:
There were no powerful slides in silver if the USD Index was declining.
Why would that be the case?
As the USD declines in value, silver priced in it becomes cheaper for investors and users from abroad and this triggers purchases. Theoretically, it shouldn’t matter that much because the price of silver can move up or down in all currencies, but in practice, it does. When investors are in this “buy mode” the sharp declines are quickly absorbed by this buying power.
Given the declining USD Index, there were only two types of reaction in silver: either moving back and forth or a rally. What we’ve been seeing in the recent weeks and months is a strong suggestion that the silver market does not want to move higher right now and it’s waiting for an opportunity to slide, just like it did in 2013. The USD Index has been refusing to provide such a signal for months now.
On a daily basis, silver may seem to respond to the action in the USD Index, but from the bigger point of view, the link is much more bearish – the USD Index is about 10 index points lower than it was at the beginning of this year and silver is more or less at the same price level (more or less the same is the case with silver stocks). If silver was able to ignore such a huge slide in the USD, then it’s very likely to respond to the USD’s rebound. In fact, it seems that even a stop in the USD’s decline would be enough to trigger a decline in silver.
Moving back to the question in the title of today’s analysis – was the bearish analogy in silver invalidated? No, silver visibly “wants to” decline, just as it’s likely to based on the analogies that we described previously, however, it is not able to do so given the continuously declining USD Index. The USD Index just reached very important support levels, so the end of the decline could be near. This means that silver could be very close to unfolding the bearish potential that it’s been holding for many weeks.
Summing up, the situation in silver continues to be bearish even though it doesn’t appear to be the case at first sight and the key reason for it seems to be silver’s link to the USD Index and the recent performance of the latter. Once the USD stops declining, silver’s bearish potential is likely to become more and more visible. Should the USD reverse in a volatile manner, silver could truly plunge.
On an administrative note, there will be no regular Gold & Silver Trading Alert tomorrow, due to your Editor’s travel schedule. If anything major happens, we will send an intra-day alert, though, so you will be kept up-to-date anyway.
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: initial target price 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
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.
=====
Latest Free Trading Alerts:
June U.S. Consumer Spending and Gold
U.S. consumer spending rose 0.1 percent in June. What does it mean for the gold market?
Uncertainty At Record Highs, Will Stocks Continue Upwards?
S&P 500 index remained unchanged on Wednesday, as investors continued to hesitate following recent rally. Will uptrend continue? Is holding short position still justified?
=====
Hand-picked precious-metals-related links:
Gold, silver slip on weak global demand
There is $300 billion worth of gold locked in the vaults of London
=====
In other news:
US considers option of arming Ukraine
ECB says wages, consumer goods holding back inflation: bulletin
=====
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
