Briefly: In our opinion, a speculative short position (half) in gold, silver and mining stocks is justified from the risk/reward point of view.
Mining stocks are acting very strong this week. First they refused to move much lower when gold and silver declined and yesterday they even managed to close higher despite a visible decline in the underlying metals. Is this strength a sign of something much bigger?
Not likely. The volume that accompanied miners yesterday was weak and there was no breakout above the medium-term declining resistance line, so the strength in miners could be just a coincidence and / or a temporary phenomenon – not a sign of true strength. Let’s take a closer look (charts courtesy of http://stockcharts.com).
Yesterday we commented on the above chart in the following way:
The above chart shows that not all is bearish. Mining stocks moved just a little lower yesterday and the volume was low as well. Yesterday’s session looks like a pause within a rally.
However, there was no breakout above the declining medium-term resistance line, so the situation didn’t really improve. Still, the above is enough to keep the overall outlook for the precious metals sector in the “bearish but not extremely bearish” territory and to keep the risk/reward ratio at the level that favors only half of the speculative short position. If we see mining stocks moving strongly lower in today’s session or later this week, we’ll consider doubling the size of the (already profitable) short position, but we think it’s to early for that at this time.
Mining stocks still remain below the resistance, so the outlook remains bearish. The only new thing that we can report is that the volume during yesterday’s move higher was low, which is a bearish sign as it suggests that this was not the true direction of the market and that we will likely see a reversal shortly.
The situation in the gold market deteriorated further as gold declined on significant volume. The breakdown below the lower of the rising support lines is now almost confirmed (only one additional daily close is required).
In the case of silver, we saw a breakdown below the intra-day-based support line, but the move is not confirmed. In the case of silver, 2 additional closes below this level are required to confirm the breakdown. The situation deteriorated here but not significantly.
Summing up, we realize that it may sound boring, but we think that once again nothing changed in the precious metals market and that the outlook remains bearish but not very bearish. We will probably see some kind of bearish confirmation shortly, but until that happens, only small speculative short positions are justified, in our opinion.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short (half position) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:
- Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $17.63, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $44.97
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $12.23
In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:
- GDXJ: initial target price: $21.17; stop-loss: $27.31
- JDST: initial target price: $14.35; stop-loss: $6.18
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.
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 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
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