In my opinion, it’s now justified to take profits off the table, and close the current long positions in junior mining stocks.
Additionally, I think that re-opening short positions in junior mining stocks GDXJ (or buying JDST if you seek leverage) is now justified from the risk to reward point of view. (300% of the regular position size is justified from the risk to reward point of view, just as I had mentioned in my regular Gold & Silver Trading Alerts recently.)
Why? Gold didn’t change much today, the USD Index didn’t change much either, but the general stock market moved higher, and it moved very close to the neck level of the previously broken head and shoulders formation (based on the closing prices).
This means that stocks might be reaching their resistance here. And if this is the case, then junior miners (which are more correlated with stocks than gold is) might suffer if stocks decline.
This means that even though gold didn’t do much today, the risk to reward situation for the current long position in junior miners deteriorated, and at the same time it became more favorable in case of short positions.
Remember the Wall Street saying that the last few pennies are often most expensive? That’s because traders tend to focus on picking the exact top or bottom instead of focusing on the risk to reward ratio. All right, I did pick the last bottom practically exactly when it formed (May 12), but my intention was to switch the position when the risk to reward changed dramatically, and the fact that it was right at the bottom was an “add-on” to this approach.
Yes, miners might move even higher. But if they do, they are unlikely to hold those gains for long, and their next move lower can be truly epic, so the most important thing in my view, is not to miss that gargantuan move lower.
Speaking of which, you just managed to make money on a correction within a powerful downtrend that’s so far similar to how (fast) miners declined in 2008! That’s no small feat – congratulations!
For now, the downside target for the GDXJ is at $28, but I’ll get back to this in the following analyses, and I’ll provide you with a more precise exit price.
Also, if I had any long positions in gold or silver here, I would also close them, taking profits off the table. And (if I didn’t have the possibility to short junior miners), I’d consider opening short positions in gold and/or silver. Of course, individual decisions are up to you – the above is just my general opinion, not an individual investment advice.
Congratulations on your profits once again!
As always, we’ll keep you - our subscribers - informed.
Przemyslaw Radomski, CFA