USD's Breakdown? What Breakdown?

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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.

In the previous alerts, we emphasized that the key action is taking place in the USD Index. The USD Index moved much lower recently, but the last two days showed exceptional strength and invalidation of the breakdown below the 2016 lows. What are the implications?

Naturally, these implications are bearish and everything that we wrote yesterday remains up-to-date. We’ve been expecting to see a big reversal after the temporary move below the 2016 lows and that is what we’re seeing right now. The declines in the precious metals market were not significant yesterday and not much changed on the charts (they are moving lower in today’s pre-market trading, though), so in today’s alert we’ll focus on the USD action.

The key quote on which we would like to follow-up is:

What about the USD Index? It’s below its major support level that’s based on the weekly closing prices. Consequently, even though the USD Index moved lower, it’s still likely to move back above it before the end of the week, thus forming a major reversal. (…) There was no major breakdown and thus a reversal and a rally are likely to be seen this week.

Shortly after we wrote the above, the USD Index moved to about 91.5, and it might have appeared unlikely that it would close the week back above the key weekly support, which is at 93.03.

Long-term US Dollar price chart - USD

As you can see on the above chart, the USD Index closed yesterday’s session at 92.82 – very close to the above-mentioned 93.03 level. At the moment of writing these words, the USDX is trading 93.01, but the intraday high so far was 93.074, so the breakdown was already invalidated in intraday terms. Naturally, it will be most important to have the USD close the week above this level, but since it was there just a few hours ago and the immediate-term trend is up, it’s now very likely that this invalidation will be indeed seen.

What are the implications? It’s becoming increasingly more likely that the final bottom in the USD Index has formed and the opposite is consequently the case for the precious metals market.

Summing up, in the summary of Tuesday’s alert, we wrote that if USD confirms the breakdown below its long-term support, the big slide in the precious metals market could be delayed once again, but we stated that for now, this didn’t appear to be the likely outcome – the reversal was. The breakdown below the intraday low was reversed almost immediately and the breakdown below the previous weekly lows is being invalidated right now. The odds are that the USD breakdowns will be completely invalidated before the week is over and this should serve as a strong signal indicating rallies in the following weeks. Exactly the opposite is likely for the precious metals market – the outlook for the latter is bearish and it appears that the big decline is already underway.

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: $1,346; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $39.94
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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