Was That the 2018 Bottom in Gold?

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Briefly: In our opinion, full (100% 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, silver and mining stocks finally rallied yesterday. The upswing continues in today’s pre-market trading as the USD Index is testing the 90 level, moving a bit below it. That’s the first real rally that we saw this month. The key question is – have we just seen the 2018 bottom?

Most likely not. In fact, there are some signs suggesting that the rally is already over. Let’s take a closer look at the charts (chart courtesy of http://stockcharts.com).

First of all, our comments regarding the MACD and PMO indicators for gold remain up-to-date:

Long-term Gold price chart - Gold spot price

Both indicators (MACD and PMO) flash sell signals when black lines move below the red lines. If they are visibly above the middle of their trading ranges, the efficiency of the signal increases.

We marked those highly efficient signals from both indicators with black ellipses. How many of those ellipses turned out to be major shorting opportunities that followed major medium-term tops? All of them, except for the early 2016 top. It’s easy to spot it as an outlier because both indicators were sharply higher at that time. In all other cases, the implications for the following weeks and months were very bearish. Both indicators flashed sell signals while they were at normal levels. The implications are definitely bearish.

Moreover, the lower of our upside targets for gold was already reached.

Short-term Gold price chart - Gold spot price

In yesterday’s alert, we wrote the following:

If gold was to “rally” from here, then the upside would be at about $1,327 (a bit less than $10 higher). The maximum potential that we view as at least somewhat likely is $1,345. The above levels are based on the previous highs. Again, that’s a big “if”. Gold reached the previous local low (not a very important one, though) and the first Fibonacci retracement (38.2%), but without a visible buy sign, it doesn’t seem to be enough to invalidate the bearish implications of the long-term gold picture (invalidation + sell signal from the weekly Stochastic).

Today’s pre-market high is a bit above $1,325, so the local top might already be in.

After we wrote the above, gold moved higher and it closed just $0.6 below the mentioned $1,327. Is the rally already over? It certainly could be.

The volume was very low, which, compared with the increase in the price, indicates that yesterday’s upswing was just a pause within a decline, not the start of a new, powerful rally.

GLD ETF - SPDR Gold Shares

The volume in the case of the GLD ETF shows the same thing. Gold declined recently on high volume and it was correcting to the upside on relatively low volume. Yesterday’s session was just another example of the same bearish pattern.

Moreover, we noticed an interesting similarity. The tops in September and January were quite similar – they not only formed at similar price levels but were accompanied by a similar spike in volume. The following decline is not identical, but it’s still somewhat similar. The particularly interesting and useful analogy is to the first correction that we saw during the September slide. Back then, gold corrected from above the 50-day moving average and moved about $25 higher before topping. The existence of the correction was confirmed by a buy signal from the Stochastic indicator. So far, the moves are very similar – the current upswing also started just above the 50-day MA and we just saw a buy signal from the Stochastic indicator.

Including yesterday’s intraday high, the current corrective upswing took gold $20 higher. Does it mean that gold is about to move $5 above yesterday’s high? Not necessarily, as back in September gold corrected after a bigger initial decline, so the correction might be proportional. In other words, since the initial part of the decline was smaller, then the corrective upswing can also be smaller. Therefore, the top might already be in.

What about silver?

Short-term Silver price chart - Silver spot price

In short, our yesterday’s comments on the white metal remain up-to-date:

(…) or that we’ll see additional gains.

In the case of the latter scenario, it seems that the $16.70 level (approximately) has a good chance of stopping the upswing. That’s where we have the 50% Fibonacci retracement, the 50-day moving average and that’s how far silver moved higher during a correction after a similar decline. Back in June 2017, silver started its decline from similar levels (from about $17.70) and the same was the case in January 2018. Back in June, the correction starter from about $0.5 higher from the exact bottom, before the decline resumed. Once the decline resumed, it took only a few days to erase all gains and move below the previous low.

Silver moved close to the mentioned $16.70 level, but it’s just about 10 cents below it at the moment of writing these words – the upside seems very limited.

Yesterday’s session was particularly interesting, because silver outperformed gold on a very short-term basis, which could be a top-is-near sign.

We saw a buy signal from the Stochastic indicator, which could appear bullish, but please note that we saw the same thing in mid-June. We already took the similarity to this correction into account and marked it with the green, dashed line on the above chart. If the situation is alike, then the upside is very limited, which is far from being a bullish piece of information.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks moved higher, which is nothing strange given Friday’s formation, the big volume that accompanied it, and the apex of the triangle in the HUI Index. We described the details in yesterday’s alert, and we summarized that the technical picture for mining stocks had become favorable. But the daily rally is over and the implications of candlestick patterns usually don’t extend beyond the short term.

The GDX moved higher by only a little more than 1% - that’s not a spectacular rally that one might expect after the huge downswing that we saw recently. Mining stocks had help from both gold and the general stock market yesterday and yet they managed to move only somewhat higher. This doesn’t look like a start of a major upswing, but like a pause.

Speaking of the general stock market, in the following paragraphs we examine yesterday’s closing price and the changes that it caused.

SPX - S&P500 Large Cap Index

But first, let’s provide context, by quoting our yesterday’s comments on the S&P 500 Index chart:

The decline in mining stocks was a reflection of a decline in the general stock market and as the latter reversed its course on Friday, it’s no wonder that mining stocks did the same.

(…) we see that stocks reversed with a vengeance gaining about 1.5% and that it happened after stocks reached their 200-day moving average. So, there are good reasons to think that the decline in the stock market is over, but there are also reasons (the first of the classic Fibonacci ratios has not been reached yet) to think that we can see another wave down. Another bearish factor is that stocks broke below the rising, long-term green support line, so Friday’s reversal could be simply a form of verification of this breakdown.

The interesting factor regarding the precious metals market is that since gold and silver didn’t do much and the general stock market actually rallied by 1.5%, then one might expect mining stocks to rally as well. Instead, GDX only erased the intraday declines (in a rather tricky way), while both key indices for mining stocks: the HUI and XAU ended the Friday session lower.

Mining stocks therefore showed weakness relative to both the underlying metals and the general stock market. Is this bullish? Not at all.

The closing price is important in light of the recent breakdown below the rising, green, support / resistance line. We previously wrote that the line was at about 2650, but since the S&P closed the day only 6 index points above this level, it’s important to get into the details.

As you can see on the above chart, there are actually 2 support lines. One is based on the February 2016 low and the November 2016 low (solid line), while the other is based on the February 2016 low and the August 2017 lows (dashed line). It’s a tough call to say which line is more important, but we’re leaning toward viewing the solid line as more important. The reason is that the November 2016 bottom seems more prominent than the August 2017 one.

The distinction is important, because the S&P closed below the solid line, but above the dashed line. Since the former is more important, the implications are more bearish than bullish and we don’t view the breakdown as invalidated.

This is especially the case as stocks reached their 38.2% Fibonacci retracement based on the decline and then closed below it. At this time, the rally that we saw in stocks could still be a correction within a bigger decline.

If this is the case, then we can expect the decline in mining stocks and the rest of the precious metals market to resume shortly.

We can say the same thing based on the current position of the USD Index.

Short-term Gold price chart - Gold spot price

During Friday’s session, the USD moved to 90.45 and in today’s pre-market trading it moved to 89.83 (Bloomberg data). The 90.45 level is close to the lower border of our target area, so the correction could have already started, but it’s also possible that we’ll see another move higher before the USD rests for a bit.

Long-term US Dollar price chart - USD

However, our yesterday’s comments on the nearby support for the USD also remain up-to-date:

From the broader point of view, we see that the USD Index just invalidated the breakdown below the declining support line and this line is currently at about 90. The invalidation is by itself a bullish factor for the USD and a bearish one for the precious metals sector. Moreover, the line serves as a support level and since the USD was just a bit above the 90 level, the very short-term bottom might have just been formed.

All in all, if we look at gold, silver and the USD Index, there is very little reason to adjust the current short positions. We may or may not see corrections from here (in both the USD and PMs), but if we do, it’s not likely to be anything to call home about.

The above, plus all the long- and medium-term factors that we described in the previous alerts makes us think that the potential size for the rally is likely limited and the potential size for the following decline is huge.

Summing up, in yesterday’s alert (we strongly encourage you to read it, if you haven’t had the chance to do so previously) we thoroughly described the situation in the precious metals sector and our reasoning for decreasing (but not exiting) the speculative short position and partially taking profits off the table, and based on yesterday’s and today’s pre-market price developments, these comments remain up-to-date. In light of multiple bearish signs for the medium term, no meaningful short-term signs for the precious metals and somewhat bullish short-term signs for mining stocks, we think that short position in gold, silver and mining stocks are still justified from the risk to reward point of view, but we don’t think that an extra-large position size is appropriate.

On a side note, on this page (its second half) you can see a small simulation of how much the overall rate of return changes with position size and how dangerous too big positions could be.

As always, we will keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short 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:

Gold: initial target price: $1,218; stop-loss: $1,382; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $37.68
Silver: initial target price: $14.63; stop-loss: $17.82; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $20.88
Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $26.14; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $15.78

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: $27.82; stop-loss: $38.22
JDST ETF: initial target price: $94.88 stop-loss: $37.78

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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