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.
During the previous week, we wrote about the daily declines in precious metals and their implications but weekly closing prices can often be more meaningful than the daily closes. Since we now have the weekly prices we can now better estimate what’s likely to happen next in the precious metals market. Let’s start with gold (charts courtesy of http://stockcharts.com).
Gold’s Medium-term Outlook
From the long-term point of view we see that gold remains below the declining long-term resistance line and that it also moved back below the 38.2% Fibonacci retracement. The latter is of smaller importance as this level didn’t serve as support or resistance recently, but the fact that gold’s attempt to break above the declining resistance line failed is enough to view the above chart as bearish.
From the short-term point of view we see that gold closed (taking $1,266.40 as the closing price) declined and closed the week below all 3 marked rising support lines. The volume was not huge, but it was not low either – it was big enough to make the breakdown appear believable and the implications are bearish.
Gold’s Weekly Reversal
Another important factor is the shape of the weekly candlestick – a huge bearish shooting star pattern. The pattern is not perfect as there was a small move to the upside from the intra-week lows, but it seems that it’s close enough to the ideal shape to be viewed as important – and bearish.
Silver also broke below the rising support line and the Stochastic indicator also suggests low prices in the following days (just like it does in the case of gold).
USD Index and Its Implications
As far as the USD Index is concerned, we saw a short-term breakout above the declining black resistance line, which already appears to be confirmed. This appears to be the case, because it was a relatively big move and because it was confirmed with not just a daily close, but a weekly one.
Our other points about the USD Index remain up-to-date:
The cyclical turning point is just around the corner and since all recent major turnarounds took place right before the turning points, it’s likely that the turnaround will be seen shortly. Perhaps, the bottom is already in – the USD Index tested the Fibonacci retracement once again yesterday and there was no breakdown (let alone a confirmed one).
The RSI indicator remains close to the 30 level – the oversold territory, thus suggesting that the next short-term price move should be to the upside.
Summing up, Summing up, last week’s early rally was more than cancelled before the week was over and gold formed a weekly reversal candlestick. The implications are bearish, especially that we saw breakdowns below rising support lines in gold and silver and a sizable breakout in the USD Index. The outlook for the precious metals market is bearish.
On an administrative note, there will be no regular Gold & Silver Trading Alerts on Tuesday and Wednesday this week due to your Editors travel schedule. However, we will be monitoring the market regardless of the above and if anything urgent and important happens we will send out an intra-day alert anyway.
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: exit-profit-take 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
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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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