Briefly: In our opinion, no speculative short positions in gold, silver and mining stocks is justified from the risk/reward perspective at the moment of publishing this alert. This time we took all the profits from the table instead of just limiting the exposure.
The USD Index broke above three resistance line earlier this week and just when everything seemed well, we saw a massive reversal after the USD touched its 38.2% Fibonacci retracement level. Gold, silver and mining stocks all reversed and since it was accompanied by big volume and happened at a major cyclical turning point, the implications were very bullish. Quite a lot changed in final part of yesterday’s session and we even sent out a second Gold & Silver Trading Alert, in which we substantially changed our trading position. In today’s alert, we discuss the details behind this decision and the outlook for the upcoming days and weeks.
Let’s start with gold and the scenarios that we outlined for the yellow metal yesterday (chart courtesy of http://stockcharts.com).
Connecting the Golden Dots
In yesterday’s alert, we wrote the following:
The question that you may have at this time is: “What are the implications of gold’s cyclical turning point?”, as the most recent medium-term move was up and the most recent short-term move was down.
There is no easy answer, especially that gold is between the rising support line and the 38.2% Fibonacci retracement that adds to the short-term uncertainty.
One possibility going forward is for gold to slide today and tomorrow in a volatile manner and reverse from one of the support levels, for instance from the 61.8% Fibonacci retracement at $1,287 or from the psychologically important $1,300 level. Then it rallies for a week or so (perhaps correcting to the current levels or even the $1,330 - $1,340 range, while silver outperforms) and tops in tune with the triangle apex reversal pattern that we discussed thoroughly on Monday.
Another possibility is that gold invalidates the breakdown and rallies right away and then tops at about $1,340 - $1,350 in a week or so (again, based on the triangle apex reversal).
Of course, there’s a possibility that the Monday reversal was the early way in which the current turning point already worked and we should be expecting a week of volatile declines right away, followed by a pause or a corrective upswing from $1,287 or $1,268 at the triangle apex reversal.
Overall, the very short term is rather unclear, but with so many long-term factors in play, it doesn’t seem that it should concern us, as however the situation will play out, a bigger decline is still likely to follow.
So, instead of guessing, which is the most likely scenario, we’ll wait for signs and confirmations and we may adjust our position based on them. If we see a buying opportunity, we may limit, exit or even reverse the short position and if we see a meaningful sell confirmation, we may add to the current position.
Based on the signals that we received right before the end of yesterday’s session, the possibility that became most probable is the one that we put in bold. Gold didn’t move to $1,300, but $1,303 is definitely close enough to view this level as “reached”.
The closing price level on the above chart does not truly represent what happened, so we’ll supplement it with intraday data below.
As you can see, the price of gold erased the entire intraday decline and closed the session almost right at the previous day’s closing price.
What we can see on the previous chart is the big level of volume that accompanied the reversal and the cyclical turning point. Both have bullish implications but only for the short term.
Silver and Its Analogy
The action in silver was similar to the one in gold. The white metal soared and ended the session invalidating the entire intraday decline and then rallying some more.
By the way, we sent yesterday’s intraday alert when silver was at about $16.40 – we made the decision to close the position sooner (at lower prices), but it takes some time before we write the alert, put it in our mailing system and test the email’s deliverability.
The Stockcharts’ chart doesn’t show it, but the lower intraday chart proves it. Based on this strong-volume reversal, we may expect another very short-term rally before the decline resumes.
We hope that silver outperforms gold during the corrective upswing as that would confirm the analogy to the November fake rally and it would serve as a sell signal on its own. In other words, it’s something that can help us re-enter our short positions at higher prices, further increasing the profits from the bet on lower precious metals prices in the coming months.
But was silver’s outperformance yesterday not a sell sign on its own?
That could have been the case, but it’s not very likely as it was a reversal that we saw after a decline, not something that we saw during a (fake) breakout or after a rally. Plus, mining stocks performed very well, so things don’t add up. It seems that yesterday’s daily outperformance was not a bullish sign.
Relative Performance
The above chart illustrates our comments from the previous paragraph. Silver may have outperformed gold, but mining stocks were even stronger. The miners performance relative to gold is a bullish sign for the short term.
Mining Stocks Invalidation – Bigger Than It Seems
In yesterday’s analysis, we commented on the above GDX ETF chart in the following way:
(…) in the past cases, when miners bounced for the second time before rallying, they mostly bounced from the price levels that were considerably above the previous lows. There was only one exception (November 2016) and that was also the case in which the following upswing was the smallest out of analyzed cases. Back then only a bit more than half of the preceding short-term decline was erased before the big decline continued.
If this 1-out-of-4 analogy prevails, we may be looking at a counter-trend rally that takes GDX to 22.5 or so. If, however, the 2-out-of-4 analogy prevails (we’re leaving out the March 2017 action as there was no 2-day breakdown below the initial low), we can see a sharp decline right away.
The strength of the somewhat bullish implications of the above chart that were present before yesterday’s session is definitely smaller based on yesterday’s decline.
Yesterday’s reversal made the analogy to the two-bounce cases more likely. Plus, a reversal on significant volume is generally a bullish phenomenon.
However, there is something even more important that happened yesterday and in order to see it, we need to zoom out.
Gold stocks just moved below the very important support level created by the 61.8% Fibonacci retracement that’s based on the most important tops of the past years – the 2016 bottom and 2016 top. Both price extremes are very important and the same can be said about the 61.8% retracement, so the invalidation of the breakdown is indeed something very important.
The last time gold stocks invalidated their breakdown below this level, they rallied over 220 relatively quickly. We don’t think that this will be repeated, but some of the bullish implications remain in place.
Based on the above chart, 190 can be reached once again, but we hope for mining stocks’ underperformance and a smaller rally as that would serve as a confirmation sign and decrease the risk of opening new short positions.
Naturally, regardless of what we hope for, we’ll work with whatever the market provides us with and we’ll report to you accordingly.
USD’s Pause
In yesterday’s alert, we commented on the USD Index’s short-term picture in the following way:
Based on yesterday’s rally, the USD Index broke above the previous February highs. The implications are bearish [that was an error, it should have said “bullish”] as it shows that this attempt to move higher is stronger than the early-February one.
The 38.2% Fibonacci retracement is just around the corner, so if the USD pauses for a while, it will not be surprising.
The USD Index indeed paused after reaching the combination of the 38.2% retracement and the 50-day moving average. There was a small attempt to break above it and it was invalidated shortly. This means that USD could now decline some more before gathering strength to rally above the retracement.
Decline to the February low could be seen, but we doubt it. After all, the USD is after breakouts above the declining support / resistance line, so a move back to one of them seems more likely. This means the USD could decline to about 89 or so before the rally resumes.
Summary
Summing up, the major top in gold, silver and mining stocks is probably in, but based on yesterday’s big-volume reversals and invalidations in thecase of the USD and gold stocks, it seems that we are likely to see yet another small upswing before the big decline continues. The above perfectly fits into the scenario that we outlined in Monday’s extensive alert, in which gold tops at the apex of the triangle that’s based on intraday prices. This means a top in gold is likely to be seen in a week or so.
Also, Monday’s alert and the multiple bearish signs of long-term nature that it covers, explain why we didn’t open a long position in light of the short-term buying signals.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): No positions in gold, silver and mining stocks are justified from the risk/reward perspective (in other words: cash and/or positions based on our other alerts)
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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