Gold & Silver Trading Alert: Gold Stocks Stop at Key Resistance

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Briefly: In our opinion no speculative positions are currently justified from the risk/reward perspective. Being on the long side of the precious metals market with half of the long-term investment capital seems justified from the risk/reward perspective.

In yesterday’s alert we wrote that it was too risky to bet on lower values of gold, silver and mining stocks even though they were quite likely to decline because the intra-day volatility could get one quickly out of their positions due to a stop-loss level being reached. Gold moved a bit lower yesterday and miners moved lower more visibly. Was that enough to justify opening short positions?

In short, the answer to this question is “perhaps, but that’s not the point.” The point is that we’re still ahead of the European Central Bank’s announcement, which means that a lot can change today or tomorrow. The market is expecting a massive QE program (which would explain gold’s recent rally) and perhaps announcing a moderate one would actually cause the euro to rally, and trigger a decline in the USD and gold. It’s too early to say what the impact will be.

The changes could be significant on a short-term basis and we could see, for example, a big intra-day rally followed by another decline (it could also be the other way around). At this time it still seems best to take the wait-and-see approach.

There were practically no changes in the USD Index and in gold from the long-term perspective, so in today’s alert we feature just 2 charts: gold from the medium-term perspective and gold stocks. Let’s start with the former (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Yesterday gold moved back and forth around the 61.8% Fibonacci retracement and the psychologically-important level of $1,300. The breakout above this level was not confirmed. It was not invalidated either, so we don’t have a clear sell signal. The RSI Indicator still suggests that lower values for gold are just around the corner, but since this signal was not very precise previously (gold was close to the top but not at the top when we previously had the RSI above 70), we might need to wait for the top a few more days.

All in all, the technical situation supports the wait-and-see approach based on the upcoming ECB announcement.

HUI Index chart - Gold Bugs, Mining stocks

In yesterday’s alert we wrote the following:

Gold stocks corrected about half of their recent decline, but the strongest resistance was not reached. The 3 important resistance levels intersect close to the 210 level: the 61.8% Fibonacci retracement, the 50-week moving average, and – most importantly – the declining long-term resistance line. If gold stocks manage to break and confirm the breakout above this level, it might serve as a confirmation that another major upswing is underway. For now, the current rally looks similar to the corrections that we saw in July 2013, in late-2013 to early-2014, and in June 2014.

This resistance (combination of resistances) was reached yesterday. The HUI Index is either about to break out or about to decline once again. Since there has been no breakout so far, the odds are that it will decline once again.

We already saw a decline yesterday (which was more visible than the one seen in gold), so we have a small indication that we’ll see another decline shortly. To be honest, that’s not a strong indication. Since gold stocks reached a strong resistance after a visible rally, then a pullback is to be expected and is not necessarily a sign of big weakness. It is more bearish than not, though.

All in all, we can summarize the situation today in a way that’s similar to our yesterday’s comments.

Summing up, while there are some signs that this rally might be the beginning of another major upleg in the precious metals market, it’s still more likely than not that it’s just a correction. Gold seems to be once again responding very positively to the signs from the bond market, but if the USD Index keeps rallying, the yellow metal might give up its recent gains and decline once again. Whether it declines significantly or not, it could be the case that we’re just one decline away from the final bottom before the next major rally.

Will gold, silver and mining stocks decline in the short term? That’s quite likely contrary to what one might think based on the most recent price action. However, gold stocks are at their key resistance level so if the trend is to be resumed, it has to be resumed from these levels or levels that are insignificantly higher. However, we don’t think that opening short positions at this time is a good idea just yet. The reason is that even if a decline is to follow, we could still see a volatile turnaround today or tomorrow (given the news from the European Central Bank), which could quickly close the positions given a reasonable stop-loss order. In other words, opening positions now seems too risky without stop-loss orders (in case we see a major breakout) and with them (big risk of intra-day volatility). It seems to be a better idea to wait for the initial turnaround and enter the short positions after the risk of another intra-day upswing has become smaller.

The important thing here is that things will probably not become much clearer immediately after the euro-QE is announced – it was quite often the case that the market moved one way immediately after some announcement only to reverse the direction after an hour or so. It seems best to wait with estimating the impact (unless it is really clear) of the ECB comments until the session is over. We’ll keep you – our subscribers – informed.

To summarize:

Trading capital (our opinion): No positions

Long-term capital (our opinion): Half positions in gold, half positions in silver, half position in platinum and half position in mining stocks.

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.

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 sings 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 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.

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