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.
Yesterday’s session was not the most exciting one this week (unless one focused on the USD Index). Gold and mining stocks were more or less unchanged, while silver moved higher. Does silver’s outperformance indicate a looming top?
It could be the case, but it seems that the strength of silver’s outperformance was not significant enough to really indicate a sudden massive participation of the general public (it is very often the case that the white metal outperforms sharply right before a local top). Consequently, we don’t view yesterday’s $0.14 upswing in silver as a bearish sign.
Let’s take a look at the chart for details (charts courtesy of http://stockcharts.com).
Gold’s Price Changes
Gold moved only a bit higher, but high enough to stay at the rising red support/resistance line, so basically everything that we wrote about the above chart yesterday remains up-to-date.
Gold once again closed more or less at the rising support line and the buy signal from the Stochastic indicator was not invalidated. Consequently, our Tuesday’s comments on the above chart (and the implications) remain up-to-date:
Gold declined [on Monday], 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.
As far as gold’s price in the euro is concerned, we have also seen no changes and thus our yesterday’s comments on the above chart remain up-to-date:
Gold price in the euro showed a major development yesterday – it broke below the neck level of a quite clear head-and-shoulders formation and this serves as a sell signal from this perspective (in terms of the euro). However, the breakdown is not yet confirmed, which means that it’s vulnerable to an invalidation and if we see one, it will be a very bullish development (as discussed earlier today).
Silver moved higher, as we discussed earlier. It’s not that surprising, given that the Stochastic indicator was most reliable in the case of the white metal and also because the True Seasonal pattern suggests a big rally in silver in the coming days.
Time will tell, but since silver tends to end rallies with sharp (!) outperformance, we plan to take advantage of such a move to switch from the long position to the short one – so far we have not seen such a confirmation. Yesterday’s move seems too small to be significant.
Mining stocks attempted to move lower yesterday, but managed to reverse and ultimately they ended the session almost unchanged. All in all, the session was rather not very meaningful.
The decline does provide us with something, though and that is the possibility of a zig-zag pattern that would take GDX to the lower of the declining resistance lines. Why is this interesting? Because the zig-zag patterns (where the first part of a given move is very similar to the second part) are quite common in the precious metals market, especially in mining stocks and gold. This possibility doesn’t make it extremely likely by itself, but since two techniques point to the same target price, the latter becomes more likely to be reached than other price targets (such as the upper declining resistance line at about $24).
The regular link between gold and the USD Index doesn’t appear to apply at this time, as it is not a U.S.-based piece of news that was the most important one recently, but an EU-based one (Draghi’s hawkish comments). Consequently, the regular analysis of the USD’s strength vs. gold’s strength doesn’t really apply at this time. Still, let’s take a look at the index (today we’ll use the UUP ETF as a proxy for the USD Index, as it seems that Stockcharts’ data for the index itself might not be correct –it’s about 0.25 below the prices reported by Bloomberg and kitco.com).
The big trend for the USD Index remains up, however, the above chart shows that we could still see some additional weakness in the short run. The declining support lines are based on the lines created by connecting the previous important tops (they are parallel). The support provided by the mentioned lines is not far away, but it’s not just below yesterday’s close either. So, the USD could move lower in the short run (before starting another powerful upleg) and PMs could react to this by rallying. Still, let’s keep in mind that the gold-USD link doesn’t work in the usual way right now and thus the above scenario for the USD doesn’t have strong implications for the prices of metals.
Summing up, Monday’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, and the following (Tuesday’s and yesterday’s) lack of action in the precious metals sector didn’t change anything. Even though it seems that gold failed to rally despite the USD’s slide, it was also the case that gold didn’t slide (in USD terms) despite hawkish remarks by Mario Draghi. Overall, it seems that the implications of Monday’s session remain in place.
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: $23.27; stop-loss: $21.43; initial target price for the NUGT ETF: $36.54; 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.
=====
Latest Free Trading Alerts:
On Sunday, the Bank for International Settlements published its annual report. What can we learn from the report?
87th BIS Annual Report and Gold
S&P 500 index gained 0.9% on Wednesday, as it completely retraced its Tuesday's move down. Will uptrend continue? Is holding short position still justified?
Stocks Rebounded Off Tuesday's Low, New Uptrend?
=====
Hand-picked precious-metals-related links:
PRECIOUS-Gold Steady As Dollar Hovers Near 10-Mth Lows
Eldorado Gold risks missing 2017 guidance over issues with Turkish mine
=====
In other news:
Pound on Hot Streak as Carney Hints at Higher Interest Rates
Euro-Area Confidence Hits Decade High as ECB Debates Exit
Investors Scramble to Keep Pace With New Market Outlook
End of easy money? Euro surges, bond yields advance
Modi set to launch India's biggest tax reform amid protests
=====
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
