Briefly: In our opinion a small (half of the regular size) speculative short position in gold and mining stocks is justified from the risk/reward perspective.
The precious metals market moved lower today (in the pre-market trading) after yesterday’s small upswing. Taking the last 2 days into account – gold and silver moved lower. Interestingly, the USD Index moved lower yesterday and moved a bit higher in today’s pre-market trading. However, the move on average (taking the last 2 trading days into account) was also to the downside. The precious metals market simply refuses to react to dollar’s short-term decline. What are the implications? Are things really as bad as they appear to be?
Let’s jump right into charts (charts courtesy of http://stockcharts.com.)
Starting with the USD Index, we have a very similar picture that we had just yesterday and what we wrote in yesterday’s alert remains up-to-date:
The USD Index rallied but it hasn’t moved above the resistance line based on 2005 and 2010 highs (the line is currently at approximately 85.35). The 2013 high is at 84.97 - only a bit higher than we see the USD Index today.
At this time we can’t rule out some more strength, but it’s not likely to be significant before the USD Index finally corrects.
Please note that the space between the 2013 and the upcoming high is a huge U-shaped bottoming pattern, something that could be the base for the cup-and-handle pattern. After the USD corrects we could see some sideways movement (the handle would be formed), which could correspond to a sideways trading in the precious metals sector very close to its 2013 lows – perhaps verifying the breakdown below them.
Either way, the odds are that the situation will finally clarify and that we will have another great risk/reward case for entering new speculative positions.
The USD Index moved higher in the first part of yesterday’s session, almost reaching the 2013 high, but it doesn’t seem likely to us that this was the final top for this rally. Why not? Because individual currency pairs (most of them) such as the EUR/USD have not yet reached their support/resistance levels yet. Consequently, the 85.35 target seems to be a more likely target than the 84.97. In other words, the rally in the USD Index and the decline in the precious metals sector (even the short-term one) are likely not over yet.
Gold reversed yesterday and the daily reversal looks bullish, especially that the volume was significant (it wasn’t significant in case of the GLD ETF) and the RSI indicator is oversold. However, no significant support line or level was reached yesterday, so we think we will see a move to $1,200 before the current short-term decline is over. Then we will be looking for a reversal followed by an even bigger decline.
Our yesterday’s comments on the silver market remain up-to-date:
The silver market confirmed the breakdown below the May low as well and the next support – a very strong one – is at the 2013 low: $18.17. At the moment of writing these words silver is at [$18.40], so it’s just 23 cents above the 2013 lows.
We would not be surprised to see silver moving to this level even today (tomorrow or the following week seem more probable, though) and then moving back up or stopping the decline for some time (a week or a few of them).
The biggest change that we’ve seen yesterday, materialized in the mining stocks sector. Miners moved below the important medium-term support – the rising support line base on the Dec 2013 and May 2014 lows – and they have done so on significant volume.
More importantly, they have done so without gold’s “help” – gold has actually closed a bit higher yesterday. Moreover, the move in the USD Index was to the downside, so miners had 3 important reasons to rally (move lower in USD, move higher in gold, and being on the medium-term support line) and instead – they declined once again. This is a clear sign of weakness in our view and a bearish sign.
Summing up, while the USD Index and the precious metals sector are still likely to correct their most recent moves, it now seems likely that they will move “just a little” before they do indeed correct. The move lower in silver is likely to be very small, so it doesn’t seem worth betting on (keeping the risk/reward perspective in mind).
Yesterday, we wrote that the mining stocks were at a support so in their case, the move lower could also not be that significant. Based on yesterday’s price action, the above changed. Miners showed weakness and it now seems quite likely that they will move to their May lows before they correct. Consequently, it seems to us that opening small short positions in the miners might also be a good idea.
To summarize:
Trading capital (our opinion):
Short position (half of the regular size of the position) in gold with stop-loss at $1,246 and the target price at $1,204 (it seems that placing an exit order at this time at this level is a good idea in most cases)
Short position (half of the regular size of the position) in the mining stocks with stop-loss at $24.40 (in case of the GDX ETF) and the target price at $22.23 (GDX ETF; it seems that placing an exit order at this time at this level is a good idea in most cases)
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.
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.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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