Briefly: In our opinion, full (200% of the regular size of the position) speculative short positions in gold, silver and mining stocks is justified from the risk/reward perspective at the moment of publishing this alert.
In the alert that we posted last Monday, we warned that Friday’s session was likely to be volatile and tricky. This seems to have indeed been the case for silver. The white metal declined early in the day only to rally almost 40 cents from the initial low. In our previous alert, we discussed the possibility of silver topping at about $16.65 and this level was reached. Is silver about to take a dive just like it did in late November 2017?
In short, yes. That seems very likely. However, we need to supplement the above with a caveat – the decline may not start immediately, but in a few days. Why? Because of the proximity to the triangle apex reversal along with the lack of a visible rally in Friday suggest that we may still be a day or two away from the top.
Then why did you already double the size of the short position?
The key word from the above paragraph is may. Quoting from our Friday’s intraday alert:
The situation was bearish based on multiple long-term [link to additional ones] and short-term factors and we have received a strong bearish confirmation earlier this week, when silver soared and mining stocks underperformed and if that wasn't enough, we are seeing another similar confirmation today. All that at the triangle-apex-based reversal (precisely, in its near proximity).
This is the situation that could be immediately followed by a big slide. That’s how silver quite often performs right after a session during which it outperformed.
Silver Repeats Itself for Those Who Were Not Listening
November 17, 2017 and March 6, 2018 serve as good examples.
Consequently, we were and still are in a situation when the white metal could either decline sharply right away and move significantly lower or it could move up just a little and then decline sharply anyway. Waiting for even better prices seems to be a gamble in a game in which the odds are really against us. If we’re about to profit from the $1+ slide in silver, then the possibility of seeing another 10-20 cent upswing while risking missing a 50-cent initial (or so) decline just doesn’t seem to be worth it.
That’s why we decided to double the size of the short position right away.
While, we’re discussing the above chart, please note that the Stochastic indicator just flashed a sell signal, confirming our analysis.
Gold’s Seemingly Bullish Reversal
What’s particularly interesting is that gold formed a bullish reversal after breaking below the 50-day moving average. In Friday’s regular alert, we wrote the following:
The thing that we would like to add today is the comparison to the December 1st, 2017 session. That was the session that followed the breakdown below the 50-day moving average after the final top. Today is also the session that follows the breakdown below the 50-day moving average after (what’s likely to have been) the final top.
Single-day analogies are generally not very reliable (more similar cases with a certain outcome are generally needed for the implications to become important), but it’s something worth keeping in mind anyway. Especially that it fits the performance that we often see close to the release of important economic data.
Back on December 1st, gold moved higher, erasing most of its recent short-term downswing, but ended the session only a bit higher, forming a major reversal. If we see something similar today, gold could move to approximately $1,335 before declining.
As a reminder, we expect to see a turnaround not only based on the U.S. jobs report, but based on the very important triangle reversal pattern. We described it in detail on February 26th. To be precise: the turnaround based on the above is likely to happen today or in the next few trading days. Let’s say that the reversal is highly likely to be seen before the end of Wednesday’s session.
As we emphasized in Friday’s intraday follow-up, the fact that silver moved a few cents above its target level and gold didn’t even move close to it served as a strong bearish sign, as it was a clear sign of silver’s very short-term outperformance – something that often precedes big declines.
Still, we have seen a move back up in gold and a close below the 50-day MA, which makes the session similar to the mentioned December 1st, 2017 session. The implications thereof are bearish and they seem to cancel any bullish implications that could result from the reversal itself.
Moreover, please note that just as it is the case in silver, the Stochastic indicator based on gold also flashed a sell signal.
So, gold closed a bit higher and the general stock market moved higher decisively, so one might have expected gold stocks to rally as well. What happened?
Gold Stocks’ Bearish Reversal
In Friday’s follow-up alert, we wrote the following:
The general stock market moved higher today, so some may say that this is the factor behind silver's outperformance, nothing else. If this is the case, mining stocks should be reacting as well, but they are basically flat.
Assuming that the reason behind silver's and miners' performance is the general stock market, we have lagging mining stocks, which is bearish.
Assuming that the general stock market is not the reason for silver's and miners' performance, we have outperforming silver, which is bearish anyway.
After the closing bell, it turned out that gold mining stocks actually moved lower. There was an initial upswing, but it failed to hold ground despite the strength and the continuation of the rally in the S&P 500. That’s exactly what weakness looks like – miners only had the strength for the initial rally. The buying power was gone before the end of the session and the price fell.
It’s kind of funny to see reversals in both gold and gold stocks but in the opposite directions. Yet, that’s exactly what we saw and this is another reason not to take gold’s reversal at face value.
The sell signal from the Stochastic indicator is present also in the case of the HUI Index, so it seems that we can view it as confirmed (gold, silver and mining stocks all feature the same signal).
In case you are wondering, the red ellipse on the above chart doesn’t mark the likely short-term target for gold stocks, but the maximum likely one in case we see another small move higher before the bigger slide.
Overall, based on the precious metals’ and mining stocks’ price movement, it seems that we should see much lower values shortly (perhaps even immediately).
The currency sector, however, doesn’t provide crystal-clear indications and it’s something that could postpone the decline.
Two Heads, Four Shoulders, One Uncertainty
The biggest factor determining the prices of precious metals in the near term is usually the USD – after all, how could something move independently from the currency that it’s priced in. This observation is critical as the USD Index itself is in a rather specific place and whichever way the USD Index breaks out/down will determine the next move in the currency and in the precious metals market.
In our previous analyses, we emphasized that the USD Index was above a combination of very strong support levels and the big picture remained bullish. Consequently, the surprises were likely to be to the upside. Thursday’s price action was indeed a surprise to the upside. The USD Index could have declined all the way to our triangle target area, but instead it moved higher sooner. But, does it mean that the final bottom was already formed?
No, there’s still a chance that we’ll see another downswing before the corrective downswing is over. This chance decreased as the jobs report was already released and the uncertainty regarding it is now gone.
Still, let’s keep in mind that a breakdown below the 89.30 level (the red support line), would complete a short-term head-and-shoulders pattern (marked in red) and this would open a way to a move back to the February lows. Technically, it would mean that 87.70 is the next target, but the strength of this technique is much smaller than the strength of the multiple long-term resistance levels that are present around the January and February lows.
Still, on a short-term basis, a move below 89.30 would very likely be followed by a decline to about 88.70 – the declining black support line and the bottom part of our red triangle target area. This is the less likely outcome.
The more likely outcome is the one in which instead of a decline, we see a rally above 91.15 or so (depending on when the USD breaks the rising green resistance line) is likely to be followed by a big rally to almost 94 (to 93.80 or so). This move will be extremely important and it’s not because it will be the first big rally in several months. It will be critical because it will be a crystal-clear sign that the small breakdown below the very long-term declining support / resistance line is invalidated. The implications will be bullish for the following months.
We discussed the details in our Tuesday’s Alert, so we don’t want to repeat them here, but for reference, we’re adding the mentioned chart.
Summary
Summing up, a major top in gold, silver and mining stocks is probably in, and based on the way silver and gold stocks performed on Friday, it seems that the big decline is just around the corner. We already saw the key short-term signs: silver’s outperformance and miners’ underperformance on Tuesday, and the fact that they were repeated on Friday makes the bearish outlook even more bearish, especially that our last week’s upside targets for gold and silver were already reached. Consequently, it seems that an extra-large short position is currently justified from the risk to reward point of view, even though we could see slightly higher PM prices in the next few days.
As always, we will 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: $1,218; stop-loss: $1,382; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $37.68
- Silver: initial target price: $14.63; stop-loss: $17.33; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $21.48
- Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $23.54; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $21.46
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: $27.82; stop-loss: $36.14
- JDST ETF: initial target price: $94.88 stop-loss: $41.86
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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