Briefly: we are taking profits and closing the long positions and re-opening the short ones in the mining stocks.
Just a quick update as things are moving quite fast in the PMs and – most importantly – related markets.
The USD Index just moved to the mid-February highs (precisely, slightly below them), which I originally wrote as being the likely downside target. As I wrote previously, back in 2018, the USDX continued to decline until it reached previous highs – that’s what just happened. There is a possibility that the decline will take place for longer, but the easy and medium-hard parts of the decline are over.
The general stock market was likely to rally, perhaps as high as to the rising line that’s parallel to the neckline of the hypothetical 2021 head and shoulders pattern. That’s exactly the line that it reached today.
Moreover, if this head-and-shoulders pattern is to be upheld, stocks (S&P 500) shouldn’t rally above its previous high and they just moved very close to it. Consequently – while it’s far from being certain – we might have just seen a top or one might be formed shortly.
This means that the previously favorable conditions for a rally in the precious metals market are no longer present.
Earlier today, I wrote about gold’s relative strength toward the USD Index. Over the several hours that followed by observation the situation has actually reversed. Now, gold is relatively flat even though the USD Index is after a 0.37% decline. This is not bullish, but bearish.
The GDX ETF moved to its mid-November low, which was not my primary target, but it’s still a resistance that could (!) stop the rally.
The RSI based on the GDX ETF is almost at the 50 level (49.43), which means that it could be topping here.
Moreover, I previously wrote that this upswing – at least its easy part – is likely to take place for about a week. Well, we opened this position one week ago – last Thursday.
On the other hand, silver didn’t outperform yet, so this might not have been the final top. Moreover, mining stocks have not yet reached their upside target of the mid-February highs and the neck level based on the previous (broad) head and shoulders pattern, so – again – this might not be the final top.
Still, based on the action in the USD Index, general stock market, based on gold’s relative weakness compared to what’s happening in the USDX along with the other more minor clues from the GDX, it seems that the easy part of the upswing is already behind us. In other words, the risk that’s currently associated with keeping the long position open is too high in my view. And since the current long position is no longer justified from the risk to reward point of view (and I wouldn’t open a long position here, if I didn’t have one), I think that the current long position in the mining stocks should be closed and profits should be taken off the table. The same goes for long positions in other parts of the precious metals market (if one had any).
At the moment of writing these words the GDX ETF is trading at $32.96 – about $2 higher than it was trading last week, when we were opening this long position. The profits are not as spectacular as they are likely to be on the next short trade, but it seems that 6% gain in just one week (or about 12% in case of the 2x leveraged NUGT, or about 18% in case of the 3x leveraged GDXU) is not that bad either.
And speaking of the short position, since the medium-term downtrend remains intact, I think that it’s justified to open speculative short positions in the mining stocks.
Since it seems likely that the general stock market will decline shortly, I’m going to focus on shorting GDXJ at this time (or going long JDST if one seeks 2x leverage; or going long GDXD if one seeks 3x leverage – the latter is something that only more advanced traders should consider). The size of the position is 300% of the regular size of the position (again, that’s not 300% of one’s capital, but 300% of the position size that one would generally have for an average trade) – of course, that’s only if one is fine with a position that’s as big. If not, of course, it should be lowered.
So, again, I currently think that having a speculative short position (300% size of the regular position) is currently justified in case of the GDXJ ETF. Alternatively, if one seeks 2x leverage, one might consider going long the JDST, and if one seeks 3x leverage, one might consider going long the GDXD (which is not recommended for most).
I will provide you with target prices in tomorrow’s regular Gold & Silver Trading Alert – timing is crucial today, so I want to send this message to you as soon as possible.
As always, we’ll keep you - our subscribers - informed.
Przemyslaw Radomski, CFA