The precious metals sector moved higher yesterday, but the question is if the move was significant enough to change the outlook. Let's examine the situation.
The GDX:GLD ratio moved higher, but it was not a breakout. The ratio still trades in tune with what we saw in the previous months during post- and pre-decline consolidations.
The volume was relatively small during yesterday's decline in case of the GLD ETF and SLV ETF. Here are the few recent times, when the market conditions were similar: April 11 (the day before the plunge began), May 6 (followed by declines), May 13 (decline accelerated after that day). The implications are, therefore, bearish.
The volume was significant in case of the GDX ETF, but this signal wasn't reliable (in the past several months at least) when not accompanied by analogous ones from the GLD and SLV ETFs.
Speaking of mining stocks, the HUI Index moved higher, but not high enough to take the index back above the 61.8% Fibonacci retracement level based on the 2000 - 2011 rally.
The GDX ETF moved higher, but until this ETF moves back above the declining resistance line (created by the November 2012 and March 2013 bottoms; currently at $29.50), these moves should be considered as counter-trend pullbacks.
Yesterday we wrote about the return of the negative correlation between precious metals and the USD Index, and this tendency seems to be indeed in place. If we recall the last 2-week consolidation in the USD Index, the flag pattern, then we just saw the index move to its lower border without breaking it. The flag pattern is a continuation pattern, which is confirmed by declining volume. The volume has been indeed declining in the UUP ETF, which confirms the pattern. Therefore, USD Index is likely to rally once again soon, and given the strong negative link between the dollar and the precious metals market, this has bearish implications for gold, silver and mining stocks.
In other news, we've had a buy signal for gold from our self-similarity tool for some time now, but we just saw a sell signal for silver. The signals for individual mining stocks vary. So, all in all, the overall outlook for the precious metals sector deteriorated based on yesterday's closing prices. Plus, we still have a breakout in the DOW:GOLD ratio.
The cyclical turning point in silver is just around the corner and we can say the same about the long-term cyclical turning point in case of gold. It seems that we will see some kind of significant move shortly.
Meanwhile, gold is currently at (or even slightly above in the pre-market trading) the declining resistance line created by the April and May 2013 highs. If it breaks successfully above it, we will have a short-term buy signal.
Given the above two points - and yesterday's strength in the mining stocks - we've decided to tighten the stop-loss levels.
Summing up, we continue to believe that betting on lower values of gold, silver and mining stocks is justified from the risk/reward point of view. In other words, we suggest having speculative short positions in gold, silver and mining stocks (half of the regular position).
However, we've decided to move the stop-loss levels much closer, which means that they will be triggered if precious metals continue to show strength.
The stop-loss levels for the current short positions are:
- Gold: $1,428
- Silver: $23.55
- GDX ETF: $30.2
- HUI Index: 282
We currently think that gold will temporarily move below $1,285, but pull back soon and close that week (the one in which it moves below $1,285) around this level. How low gold will temporarily go is unclear - perhaps it will form an intra-day bottom close to $1,200 or even $1,100.
Here's the up-to-date version of our trading/investment plan:
- When gold moves to $1,305 close the speculative short position in gold and get back in the market with half of your long-term gold and platinum investments.
- When silver moves to $18.20 close the speculative short position and in silver get back in the market with half of your long-term silver investments.
- When the XAU Index moves to 84, close the speculative short position in mining stocks and get back in the market with half of your long-term mining stock investments.
We will send a separate confirmation to get fully back in.
As far as trading capital is concerned we currently think that placing distant bids is appropriate. They may not get filled, but if we place them too high, we risk being thrown out of the market via stop-loss orders or margin calls if the volatility gets too high (and it's unpredictable how volatile the markets will get as gold is in a reverse parabola right now). If they don't get filled, we plan to go long after gold has pulled back significantly on an intra-day basis on huge volume (thus creating a bullish candlestick - probably a "hammer candlestick").
The distant buy price levels are:
- Gold: $1,120 (stop-loss: $970)
- Silver: $16.20 (stop-loss: $14.4)
- $HUI: 155 (stop-loss: 137)
As we wrote, these levels are distant and will probably not be reached, but if they do, they will present a great buying opportunity, one that will likely disappear almost immediately - that's why we we think that placing orders in advance is appropriate.
As always, we'll keep you updated should our views on the market change. We will continue to send out Market Alerts on a daily basis (except when Premium Updates are posted) at least until the end of June, 2013 and we will send additional Market Alerts whenever appropriate. We have prolonged the time in which you - our subscribers - will receive Market Alerts daily for another full month.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
