Briefly: In our opinion no speculative positions in gold, silver and mining stocks are now justified from the risk/reward perspective. However, day-traders might consider a small speculative long position in silver.
Gold, silver and mining stocks reversed their direction yesterday and so did the USD Index. These moves were not surprising, but they were not significant. Did they actually change anything? Today’s session will quite likely be determined by the news coming from Europe. What are the charts saying right before the QE-related announcement?
In short, they are not saying that much. Yesterday’s price moves were too small to change anything. Gold’s and silver’s breakdowns below the previous lows were not invalidated and we didn’t see one in mining stocks so the overall situation didn’t change.
The most important thing (and it was not that significant either) was seen in the USD Index. Let’s take a closer look (charts courtesy of http://stockcharts.com.)
The small (but still most important) thing that we saw yesterday was the daily reversal after a huge rally right at the cyclical turning point. The intra-day rally and the subsequent decline were small, so the bearish signal is not that significant, but still – it was a reversal. It serves as a slight confirmation of what we wrote yesterday:
The RSI indicator suggests an extremely overbought condition and the cyclical turning point is upon us. The combination of the above suggests that a corrective downswing has become very likely.
The breakout indeed materialized yesterday, but it has not been confirmed yet (only 1 daily close above the Sep. 2013 high and we would like to see 3 of them before saying that the move is confirmed), which means that this makes the situation only a little more bullish. The combination of these factors seems more important than the unconfirmed breakout, so it seems quite likely that we will see a move lower shortly.
In yesterday’s Forex Trading Alert we commented on the possible reversal in the currency markets this week:
Please note that we will have a decision or at least more information regarding the European QE on Thursday - perhaps this will be the day when currencies reverse their direction for some time. We will keep our eyes open and report to you accordingly.
It could be the case that even if the decision that will be made on Thursday is bullish for the USD Index (big QE in Europe), we could see a “sell rumor but buy the fact” type of reaction. In other words, given the significantly overbought situation in the USD Index and the proximity of the turning point, we could see a reversal no matter what the officials say on Thursday.
The USD Index didn’t invalidate the breakout yesterday, but it was close to doing so. The move could still be invalidated tomorrow and it seems quite likely.
The long-term gold chart features a visible medium-term downtrend, but at the same time it also shows that the long-term support is relatively close. This means that we could see some kind of a pause even if gold is to move a bit lower in the short term. The support is currently at $1,250.
On a short-term basis, we see that gold hasn’t moved back above the rising support/resistance line, but at the same time the breakdown is not confirmed yet. Consequently, what we wrote yesterday remains up-to-date:
The decline in gold took place on huge volume which is a bearish factor, but, just as it was the case with the USD Index, until we see a confirmation of the breakdown, we shouldn’t get too excited. Yes, in our opinion the medium-term trend remains down, so the surprises will be to the downside, but at this time it’s not that certain that the decline has already begun. The breakdown (below the previous lows and the rising medium-term support line) is not confirmed at this time and gold hasn’t moved below the declining support line (the upper of them, based on the daily closing prices).
In other words, if the USD Index corrects, then we will be likely to see gold move higher in the short term. If, given the correction, gold stays below the rising support/resistance line, we will have a good possibility that the next big downswing will already be underway and it will probably be a great time to enter a short position.
Generally, silver’s reaction has been similar to the one of gold – not much happened so far. Our previous comments remain up-to-date:
(…) the move lower might not be the thing that was likely to take place based on the turning point – since silver is still before it, we could actually see a sharp upswing based on it. In fact, it still seems quite likely given the situation in the USD Index. Also, please note that the RSI indicator is once again oversold, which has previously meant that we were at a local bottom or a very close to one.
Our yesterday’s comments are also valid:
The most interesting thing about the turning points in the USD and silver is that the one in silver is several days behind the one in the dollar. This paints a picture in which the USD Index declines first, causing silver and the rest of the precious metals sector to rally, perhaps sharply, but then silver’s turning point “kicks in” and metals and miners reverse and start declining. Let’s keep in mind that silver tends to outperform in the final part of a given upswing, so we could see a jump in the price of the white metal right before a downturn. Naturally, there are no guarantees that the above scenario will be realized, but it seems quite likely in our view.
What can we infer from the mining stocks chart?
Exactly the same thing as we did yesterday – not much. Tuesday’s decline didn’t take mining stocks below the declining support line, which means that there was no breakdown. Wednesday’s small rally didn’t change anything. Therefore, the situation didn’t really change based on yesterday’s decline.
Since miners generally top and bottom at the same time as metals (at least in the short term), we could see a corrective upswing (bigger than what we saw on Wednesday) relatively soon.
Summing up, while the medium-term has been down, the short-term outlook for the precious metals sector seems rather favorable based on the extremely overbought situation in the USD Index. The latter is likely to correct sooner rather than later based i.a. on its cyclical turning point and it’s quite likely that it will cause a move higher in PMs and miners.
It seems that today’s session could be quite important for the currency and precious metals investors – we’ll keep you informed.
To summarize:
Trading capital (our opinion): No positions
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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.
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 automated tools (SP Indicators and the upcoming self-similarity-based tool).
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.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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