Silver’s Breakdown & Gold Stocks’ H&S Invalidated!

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Briefly: in our opinion, full (250% 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.

Gold moved a bit higher yesterday, but silver and mining stocks soared. If it was only the rally in the white metal it would be easy to dismiss the entire move and call it a bearish confirmation. But, since the mining stocks rallied, and the HUI Index has clearly invalidated its head-and-shoulders pattern, it seems that the outlook has really become bullish. But is it really the case?

No. We emphasized it many times and we will continue to do so, as it’s very easy to forget about it when things get volatile on a day-to-day basis. The long-term signals are far more important than the short-term ones. In a fight, it’s not always the bigger guy (or gal) that has the advantage, but in certain circumstances it’s obvious that weight matters (please keep this picture in mind while reading about the possible counter-trend upswing in the short run – that’s the little guy while the big guy are the powerful long-term factors). That’s exactly the case with the weight and importance of long-term signals when comparing them to the short-term ones. Surely, we could get a 1-2% upswing, but so what, if a 15% decline is just around the corner? And in particular, if it could take place right away?

Yesterday’s price action was most likely triggered by market’s (most likely incorrect, but understandable) reaction to the increased Brexit tensions. Quoting finance.yahoo.com:

BREXIT: On Thursday, discord over British Prime Minister Theresa May's plan for Britain's departure from the European Union next year shook major European stock indexes and the pound. She persuaded a majority in her Cabinet to back an agreement that would allow Britain to stay in a customs union while a trade treaty is negotiated, but the deal faces an uncertain fate in Parliament and two of her Cabinet ministers, including the Brexit minister, resigned in protest.

Gold soared on the Brexit vote, and now when it’s becoming less certain that the Brexit would have a major impact on the UK and if it takes place at all… Gold and the rest of the PMs rallies again? Pointless, right? Indeed, but on a very short-term note, markets viewed this as the increase in global uncertainty and the PMs reacted to it. It is not logical, but emotional and that’s exactly what one can expect from the market in the short run.

It’s important to keep in mind that geopolitical events tend to have only a temporary impact on the gold prices. This will most likely be the case also this time. Investors will realize that nothing really changed, and what changed was actually bearish for gold as the “status quo” option in which the UK stays in the EU became a bit more probable.

Let’s take a look at the charts to check how much changed from the technical point of view.

The USD Index Changes

As far as the USD Index is concerned, nothing changed yesterday, and our previous comments remain up-to-date:

(…) we saw an invalidation of the tiny breakout above the medium-term inverse head-and-shoulders pattern, which could trigger some short-term weakness. But, such weakness is not likely to be very significant.

The USD Index is following the reflective pattern, in which the 2018 rally is a reflection of the 2017-2018 decline. The current situation seems to be similar to what happened in early August 2017. Back then we saw a zigzag, so perhaps we’ll see some king of zigzag here as well. Back then the zigzag had higher highs and higher lows, which suggests that it now should have lower highs and lower lows. Then again, the symmetry is not direct as the medium-term highs are and lows are now higher (August 2018 high is higher than the November 2017 high), which could distort the direct zigzag analogy.

All in all, it seems that the USD Index could decline to the November low at most and quite likely not lower than to the 96 level. That’s where we have the neckline of the local inverse head-and-shoulders pattern and the 50% Fibonacci retracement level based on the previous medium-term decline. The downside seems quite limited.

Precious Metals’ Corrective Upswing

The yellow metal moved a bit higher yesterday, but not significantly so and thus our yesterday’s comments remain up-to-date:

Gold moved only a bit higher and it did so on volume that was not higher than the volume that accompanied the preceding decline. The price levels that gold reached were also quite specific. Gold moved to the previous bottom and then declined once again, finally closing yesterday’s session below its 50-day moving average. It’s simply seems to be a pause within a downtrend.

Why did gold move higher at all? Most likely because it moved to the rising dashed support line that based on the August and October intraday lows. But, just like the late-May upswing didn’t change anything with regard to the trend, the current move higher is also unlikely to change anything, even given the buy signal from the daily Stochastic indicator. We saw analogous signals in May (twice), June, and July and they were followed by only brief consolidations after which the decline continued.

Yesterday’s upswing was stopped by the most recent local bottom, but we would like to stress that even if gold moves above it, and moves to $1,230 or so, it would still not change anything regarding the outlook.

Gold - Continuous Contract

Back in 2013, after the February plunge, gold moved higher, then once again lower, back to the previous low in terms of the daily closing prices and then once again higher, a bit above its previous local high. Then it declined more visibly in April, but before the big slide took place, gold moved higher once again.

That’s similar to what we saw in the past several weeks:

Earlier this year, after the mid-2018 plunge, gold moved higher, then once again lower, back to the previous low in terms of the daily closing prices and then once again higher, a bit above its previous local high (this time it was not only a bit, but it was caused by surprising “crazy” comments from Trump about the Fed). Then it declined more visibly in November, but before the big slide, gold moved higher once again (this is the current move up).

It looks like a boring back and forth movement that’s very discouraging, but that’s exactly what happened before the biggest shorting opportunity of the decade. It seems to be clearly justified to keep prepared for the big decline, even in light of a possibility of seeing a very temporary upswing.

Silver - Continuous Contract

Silver has just invalidated the breakdown below the previous 2018 low, which could trigger a very quick upswing. But, the next triangle-vertex-based reversal is on Monday, which means that the local top is most likely at hand.

The possible upside in silver is at about $14.65 – at the declining medium-term resistance line. Of course, it doesn’t mean that silver will get there – it might dive below $13 even today. We’re simply providing the above target as something that – unless broken – will not change absolutely anything with regard to even the short-term outlook. In fact, it would take a confirmed breakout above the October high to really change anything as far as medium-term outlook is concerned.

Mining Stocks – Confirmation vs. Invalidation of the H&S Pattern

In case of the mining stocks we have an interesting situation, where the bearish head-and-shoulders pattern was clearly invalidated in case of the HUI Index and where it wasn’t clearly the case in case of the GDX ETF.

The GDX ETF closed yesterday’s session slightly above the neckline of the pattern that’s based on the intraday lows, but visibly below the line that’s based on the daily closing prices. Consequently, the short-term outlook didn’t improve dramatically and it’s still quite possible that we will see the precious metals prices plunge shortly.

After yesterday’s session we took another look at the possible price target for the mining stocks and the possible (not very likely) price target that would have to be broken in a meaningful way for us to consider that the outlook changed is the $20 level in the GDX and about 153 in the HUI Index.

Both levels would mean that the head-and-shoulders formation would get another right shoulder. It’s not uncommon for this pattern to have more than one shoulder, and since there were actually two left shoulders, it seems more likely that the right part of the formation would take a similar form. The second right shoulder could form below the first one, at it, or even above it, since all the shoulders so far were higher highs.

Still, please keep in mind that the next cyclical turning point is just around the corner – precisely on Thanksgiving. Since it’s not a trading day in the US, the implications could come into effect right before Thanksgiving or shortly thereafter. This means that whatever rally we see here, it’s likely limited to about one week.

Summary

Summing up, the outlook remains strongly bearish for the precious metals sector and there are increasingly more signals that confirm it. There is a huge opportunity in taking advantage of the upcoming slide and then taking on big positions close to the final bottom, when others will be too scared to do so. It seems that another big decline in gold, silver and mining stocks has already begun and that the huge profits on our short positions will become enormous shortly. We may, however, get a one final very short-term (weekly) upswing in the PM and mining stock prices before the big plunge. The key word here is “may” – the big plunge could take place any day, so we are not adjusting our positions based on the above possibility. The risk to reward ratio continues to favor short positions in gold, silver, and mining stocks because of all the long-term factors that remain in place and that we discussed recently. Also, if you haven’t had the chance to read our Wednesday’s analysis where we discuss some of the long-term factors (and your Editor discusses his why), we strongly encourage you to read it today.

As always, we’ll keep you – our subscribers – informed.

To summarize

Trading capital (supplementary part of the portfolio; our opinion): Full short positions (250% 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 profit-take price levels:

Gold: profit-take exit price: $1,062; stop-loss: $1,257; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $49.27
Silver: profit-take exit price: $12.32; stop-loss: $15.11; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $28.37
Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $20.83; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $27.67

Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find a more detailed explanation in our August 1 Alert. 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 target prices:

GDXJ ETF: profit-take exit price: $17.52; stop-loss: $31.23
JDST ETF: initial target price: $154.97 stop-loss: $51.78

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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