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.
Yesterday’s price action in gold, silver and gold stocks was nothing to call home about – they moved higher rather insignificantly. However, there is one thing in the precious metals market that has just broken above a declining support line – silver stocks. What does it mean? Should one drop everything and buy them or is this a signal for the entire market? Or perhaps it’s not really a big deal after all?
Before moving to the analysis of silver miners, let’s take a quick look at the charts that we analyze more regularly (chart courtesy of http://stockcharts.com).
Gold moved a few dollars higher, but the upswing took place on relatively (!) low volume and it didn’t cause gold to close the session above the upper border of the triangle pattern. Consequently, yesterday’s session didn’t change anything and the outlook remains bearish.
The same is the case with silver and gold stocks – the rally was small and in the case of the former, it took place on relatively small volume. The previous bearish implications remain in place.
The same is the case with silver and gold stocks – the rally was small and in the case of the former, it took place on relatively small volume. The previous bearish implications remain in place.
Silver stocks, however, moved higher and closed above the declining short-term resistance line. Is this an important bullish phenomenon? We don’t think so due to two reasons.
The first reason is that the breakout is very far from being confirmed. It’s small and accompanied by small volume. Let’s recall what we wrote about breakouts and their confirmations yesterday:
As we’ve often emphasized, invalidations of breakouts are effective immediately and are quite strong signals that the move in the other direction is about to follow.
If you’ve been wondering why this is the case, here’s an explanation. If the market moves over a given resistance then this move could be accidental or it could be a true show of strength. What we want to see are signs that would confirm that there has been a “battle” for a given breakout and that the bulls have won this battle. A fierce battle means that a lot of capital was used and we would see high volume levels as a confirmation (that’s why a huge volume reading can confirm a breakout or breakdown on its own). But, what if the market was somehow forced to move higher (for instance gold could rally given a big plunge in the USD as the latter would make it cheaper in terms of other currencies and if the demand didn’t change overall, lower prices would attract more buyers), but it really doesn’t want to rally? That’s why we use the 3-day confirmation rule. If the move was artificial in some way, the market participants are likely to push the price in the original direction. Naturally if the markets that usually confirm each other’s moves all break out or break down at the same time it further increases the odds that the move is true.
However, in the case of invalidations things are different. Invalidations are not just breakouts / breakdowns in the opposite direction. The preceding action is important. Before a breakout/breakdown, the investors and traders know that it would take an effort and a “battle” for the market to move above/below a certain level – the market is therefore before the “battle”. In case of the invalidation, the market is already after (!) the “battle” where the “bullets have already been shot” (trades have been made and capital has been used) and the invalidation shows that the supposedly winning side wasn’t able to hold the new ground even though the price was already above/below the key price level. This immediately (!) means that the entire “battle” was not real or it wasn’t really won as if it were, the winning side would be able to hold its ground. So, any bullish implications that the breakout might have had are invalidated.
But why is this bearish on its own? Because it shows that even though the supposedly winning side had everything in their favor (the price moved above the certain level) it turned out to be weak and the capital that was used to push the market higher can’t be used push it up again as it’s already in the market.
Silver stocks were the only part of the PM market that broke out yesterday, the move was insignificant and the volume was relatively low. The odds for an invalidation of the breakout are very high.
The second reason is connected with the first one. Namely, the levels of volume are weak not only by themselves but also compared to the previous somewhat analogous cases. We marked the latter with black arrows. In each case where the breakout was followed by higher silver stocks’ prices, the volume accompanying the breakout was big. The only exception is what we saw in mid-May, but even though the volume was not huge on a standalone basis, it was big relatively to the preceding readings (about twice what had been seen previously). We don’t see the same thing this time. Conversely, the volume was about half of what we had seen during previous daily rally.
So, why did silver miners break out at all? In the quoted part we put “what if the market was somehow forced to move higher” in bold as that’s what was likely the case yesterday.
The general stock market rallied and once again broke above the previous highs. That’s a very good and believable explanation for the silver stock’s move. Consequently, it’s very likely that the silver stocks’ breakout does not represent or indicate strength in the precious metals market, but is a rather a weak reaction to a rallying stock market. The general stock market’s impact is usually short-lived, so the invalidation of the silver miners’ upswing is likely to be seen and – as explained yesterday and quoted above – the invalidation will serve as a bearish confirmation and a sell signal.
Summing up, the silver stocks’ rally may seem encouraging and bullish but there are multiple factors due to which it’s not a bullish development and it seems that it will become a bearish factor shortly. It continues to be likely that the short-term decline in PMs is already underway. We might see a more visible upswing in metals and miners once the USD Index moves close to the 96 level, but in light of the most recent changes, it seems that it is be best to wait and see what kind of signals we get when the USD Index is higher (say at 95.5 or so) and then to decide whether the corrections are likely to be tradable.
Naturally, the medium-term outlook remains bearish, especially that the analogy to the 2012-2013 decline remains in place and the previously discussed long-term signals remain in place: gold’s huge monthly volume, the analogy in the HUI Index, the analogy between the two most recent series of interest rate hikes, and the RSI signal from gold priced in the Japanese yen.
On an administrative note, the markets in the U.S. will be closed on Thursday and we expect the trading activities to be limited on Friday as well. Consequently, there will be no regular Gold & Silver Trading Alerts (the same goes for other alerts from us) on Thursday and Friday. However, if something urgent happens, we will provide you with a quick alert anyway. The alerts will be posted normally beginning on Monday, November 27.
Moreover, since there will likely be no additional analysis this week, we have prepared an extra essay in advance. It’s about Harry Dent’s predictions for the gold market (30-year cycle and expectation that gold will not rally significantly anytime soon, but that it will top around 2038-2040). In short, we disagree and you will find our reasoning in this article.
Finally, on behalf of the entire Sunshine Profits Team, I would like to wish a Happy Thanksgiving to you and your loved ones.
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 exit price levels / profit-take orders:
- Gold: exit price: $1,218; stop-loss: $1,366; exit price for the DGLD ETN: $51.98; stop-loss for the DGLD ETN $38.74
- Silver: exit price: $15.82; stop-loss: $19.22; exit price for the DSLV ETN: $28.88; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): exit price: $21.23; stop-loss: $26.34; exit price for the DUST ETF: $29.97; 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 exit prices:
- GDXJ ETF: exit price: $30.28; stop-loss: $45.31
- JDST ETF: exit price: $66.27; 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.
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Latest Free Trading Alerts:
Harry Dent’s analysis of the 30-year cycle in gold suggests that we can expect gold to peak again somewhere between 2038 and 2040 and the indirect implication is that gold is not likely to soar much sooner and that it’s likely to decline for a relatively long time. Is this really the case? We don't think so and in this essay you'll read why.
Harry Dent's Gold Prediction Invalidated
The stock market flashes gloomy signals. What does it mean for the gold market?
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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