Last Week’s Rally in Gold Stocks Erased

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Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

Gold, silver and the USD Index didn’t do much in yesterday’s trading, but that was not the case with mining stocks. The divergence between gold stocks and gold was particularly visible and the implications are once again particularly important.

Let’s take a look at the charts, starting with the HUI Index (gold stock chart chart courtesy of http://stockcharts.com).

HUI Index chart - Gold Bugs, Mining stocks

The gold stocks’ reaction to the recent USD weakness and gold’s previous move higher has been weak for many days, but Monday’s session took the weakness to the extreme. Gold ended the session more or less unchanged and this lack of a continuation of the rally was enough for the HUI Index to erase almost the entire previous week of gains.

This could have been understandable if the general stock market had also declined substantially, pushing all stocks – including miners – much lower. However, that was not the case. Miners had no good reason to decline – and yet they did. It doesn’t get much clearer than that as far as the degrees of underperformance and weakness are concerned.

Please note that gold stocks declined right after the move to the combination of strong resistance lines and their reversal triggered a sell signal from the Stochastic Indicator. The implications are clearly bearish.

GDX - Market Vectors Gold Miners - Gold mining stocks

If the above wasn’t enough, the decline took place on big volume, while the previous daily upswings took place on low volume. The price-volume analysis clearly confirms that the July upswing was a counter-trend correction and that down is the true direction in which the market is heading.

Let’s keep in mind that the additional significant confirmation comes from the weekly volume readings (the text below is a quote from yesterday’s Gold & Silver Trading Alert), but it’s impact is present also today – and it will likely continue to be present in the following weeks:

GDX - Market Vectors Gold Miners - Gold mining stocks

The volume that we saw last week was extremely low, especially when compared to the sizes of previous volumes. Theoretically, it’s a strong bearish sign as it shows that the buying power is next to non-existent.

We marked similar situations with red arrows – as you see, the weekly upswings that took place on very low volume were usually followed by huge declines. The only exception that we can see on the above chart (1 out of 5) is not quite comparable as it was the session right at the bottom and the current one is the second after the bottom, which changes a lot – the volume should be picking up right now, but it isn’t. Back in December 2013 it was the first candlestick of the rally – so the sellers might have given up and the buyers simply were able to push the market higher. Besides, trading is generally limited in the second half of December each year as it’s the holiday season.

So, it seems that in all comparable cases, huge declines followed the low-volume rallies in mining stocks – will this time be any different? It doesn’t seem likely. The efficiency of this signal alone is something that makes the outlook very bearish for the following weeks.

Summing up, the implications of the (lack of) action in mining stocks in the previous days and their decline yesterday are bearish. In fact, yesterday’s decline theoretically shouldn’t have taken place as no decline was seen either in either gold or the main stock indices. Yet, it was seen and it serves as a strong bearish confirmation of multiple other medium-term bearish signals that we’ve been discussing in our alerts. The medium-term outlook remains bearish and any strength here – if we see it at all – is likely to be only temporary.

As always, we will keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:

Gold: initial target price level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37

In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:

GDXJ ETF: initial target price: $14.13; stop-loss: $45.31
JDST ETF: initial target price: $417.04; stop-loss: $43.12

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)

Insurance capital (core part of the portfolio; our opinion): Full position

Important Details for New Subscribers

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.

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 signs 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 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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