Gold & Silver Trading Alert originally sent to subscribers on January 5, 2015, 8:08 AM.
Briefly: In our opinion no speculative short positions in gold, silver and mining stocks are currently justified from the risk/reward perspective.
The USD Index soared much higher on Friday, well above the previous high. With the USD Index being so high, it seems odd that gold managed to close higher and the same went for mining stocks, which even outperformed the yellow metal. Is the rally in gold around the corner?
Actually, it could be the case. We have been aiming to profit on the next decline in the precious metals market after a confirmation of the market’s weakness, most likely after a correction and continuation of a rally in the USD Index. However, the USD Index is already very high – well above the 90 level and relatively close to the resistance at 92.33. Since gold is not declining, it could be waiting for a bigger sign of weakness in the USD Index in order to start at least a short-term rally. This means that we might see an opportunity to go long very soon.
Let’s see why, starting with the USD Index chart (charts courtesy of).
The USD Index moved much higher and is now approaching its medium-term rising resistance line. The cyclical turning point is also just around the corner, which means that we will likely see a turnaround shortly.
The resistance is just above the 92 level and the above chart is not the only one that tells us that this is the case.
The 2005 high (92.33) is the next major horizontal resistance and this level is more or less where the rising green resistance line is. There are two very important reasons for which we could see a corrective downswing or a decline after the USD Index reaches this level.
Naturally, the USD Index could rally even higher, to the 96.11 level, but even if this is going to be the case, a corrective downswing after a move to 92.33 (or close to this level) is likely.
All in all, a short-term decline seems to be likely for the USD Index, but not necessarily right away. The USD Index will probably need to first rally once again by approximately as much as it rallied last week.
Our previous comments for the long-term gold chart remain up-to-date:
The events of the last three weeks didn’t change much as gold ended the previous week below $1,200 and – more importantly - well below the declining resistance line. The medium-term trend remains down.
Please note that the long-term turning point will come into play in a few months – it may be the case that this is when the final bottom will form.
However, another visible thing is that gold didn’t move below the previous lows while the USD Index was rallying. It seems likely that gold needs to move higher once again before it’s ready to move much lower.
As far as the short term is concerned, we see that the head-and-shoulders was completed but immediately invalidated and at this time there are no bearish implications. The target based on this formation is at about $106 for the GLD ETF, which corresponds to about $1,100 in spot gold. This target will become very probable only once we see a confirmed breakdown below the neck level of the head-and-shoulders pattern.
For now, we can say that gold has been showing strength lately by refusing to decline in spite of the U.S. dollar’s rally.
The situation in the GDX ETF is rather tense because of 2 things. The first thing is the fact that the 50-moving average was broken only insignificantly. As we wrote previously, that’s the average that has been stopping local rallies since late November. We now see a 5th attempt to move above it. The implications are bearish.
The other important thing is that mining stocks moved higher by over 3% on Friday, which is significant as gold rallied only a little and the USD rallied strongly. This is bullish. The only reason that it’s not very bullish is that the volume that accompanied Friday’s rally was relatively low – it was not a huge-volume rally that would confirm the strength of the move.
Since all the recent attempts failed and history tends to repeat itself, we are quite likely to see another local top relatively soon.
Please note that even if miners rallied from here – say to the $20 level or so – it would not really change the bearish outlook for the medium term.
Summing up, if gold and mining stocks continue to show strength relative to the USD Index and the latter moves to the 92.33 level or very close to it, we will strongly consider (after examining other factors) opening speculative long positions in the precious metals sector. We are not at this point just yet. If, however, we see a confirmed breakdown below the head and shoulders formation in the GLD ETF, we will probably open a short position in the precious metals sector. Either way, we will be monitoring the market for additional signs and confirmations and report to you – our subscribers - accordingly.
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 onin the 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 section. Additionally, our preferred ETFs and ETNs can be found in our .
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 (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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Przemyslaw Radomski, CFA