USD’s Flag Pattern and Its Implications

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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.

Gold and silver didn’t do much yesterday, but both remain close to their previous highs, even though the USD Index is close to its previous lows. What are the implications of this relative outperformance?

From the fundamental point of view, the likely reason for the lack of decline in gold are the dovish comments from the ECB (in particular, its minutes). They didn’t feature any real changes, but that didn’t stop the market from interpreting them as dovish. That’s something that weakens the euro and that strengthens both gold and the USD. The echo of the tensions regarding North Korea also seems to be a factor – likely a temporary one. Again, nothing really changed here.

From the technical point of view, our comments remain up-to-date:

The USD Index turned south yesterday and it seems to us that the traders are simply not believing that a bigger rally in the USD Index can truly be underway. So far, the August upswing in the USD was quite in tune (with regard to the size and time) with the previous corrective upswings that didn’t manage to change the downtrend.

Since people are not taking the USD rally seriously yet, they are not reacting to it in a normal way. Still, if the USD rally continues (it is likely to continue based on the weekly reversal that we saw at the beginning of this month) and it becomes obvious that this upswing is something more than just a correction within a decline, traders are likely to catch up with their reaction – and precious metals are likely to catch up with their declines.

Short-term US Dollar price chart - USD

The USD Index is currently in a flag pattern, which is usually a sign of a continuation of the previous trend. Based on the recent weekly reversal this is not likely to be the case, but it seems natural for traders to assume that. The sell signal would come after a breakdown below the flag, close to the 93.2 level. Consequently, it’s no wonder that traders react when the USD gets closer to this level – something that happened also in today’s pre-market trading.

Will the USD Index break lower? Naturally, all is possible, but the decline that we’ve seen this year already made it extremely oversold and since it already reversed (weekly reversals are generally more important than daily ones) after reaching a very important weekly support, the odds are that the bottom is indeed in. What does that mean for the gold market? That the strength is temporary and short-term.

There is also the possibility that the market will need to move even higher before it starts to slide (given a confirmed breakout above the April and June highs), but that doesn’t appear likely.

Summing up, precious metals returned to their recent price levels as it doesn’t seem that traders believe in the USD’s rally and they get overly excited when the USD moves to the lower border of the short-term flag pattern. Still, the latter’s weekly reversal suggests that what we are seeing is something more than just another corrective upswing and thus metals are still likely to catch up with their decline in the coming days and weeks. The move back to the previous levels confirms the previous observation of the volatility in the precious metals market (the lack thereof from the medium-term point of view) and the implications remain as we discussed them yesterday – the metals and miners seem to be preparing for a big move. It’s likely that we won’t have to wait much longer for the final downswing and THE bottom.

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 initial target price levels / profit-take orders:

Gold: initial target price level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; 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 initial target prices:

GDXJ ETF: initial target price: $14.13; stop-loss: $45.31
JDST ETF: initial target price: $417.04; 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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