There are several things that we would like to comment on today. In short, we suggest opening speculative short positions in the precious metals sector if the price of gold moves to/below $1,750. You will find details/reasoning below.
In last week's Premium Update we wrote the following with regard to the general stock market:
"We will have an invalidation of the breakout if prices close the week below the level of the 2008 high."
The S&P 500 didn't really decline below 2008 lows last week and it holds up quite well also this week. At this time the move above the 2008 high appears to be verified. Additionally, the DIA ETF touched the neck level of the previously-completed reverse head-and-shoulders pattern, which is a bullish development as it further verifies the breakout.
The Transportation Average and financials don't confirm the above bullish developments, but their impact is not short-, but medium-term. So, it seems that a rally in stocks is in the cards. The situation is now more bullish than not.
The USD Index is right at the cyclical turning point. It has been rallying for 2 weeks so the implications are bearish at this time. The bounce in the value of the USD Index was quite small - it didn't even correct the Fibonacci 38.2% of the July - September decline, so we could simply see a small move lower (based on the turning point) that would be followed by another rally. This would mean that we are right at the beginning of the B part of the ABC correction pattern (a.k.a. zigzag) in the USD Index.
Gold was making headlines after having rallied strongly and almost without corrections. This is a contrarian bearish sign that has short- to medium-term implications - it seems that everyone who could get in the market are already in it, so the only thing left for the prices to do is to decline as there has to be fresh buying power for the prices to move even higher. Yesterday, we also saw a bearish reversal candlestick on relatively big volume in the SLV ETF and today miners (GDX ETF) declined over 1% (so far) even though gold didn't really move. These are short-term bearish signs for metals.
The situation is not easy here. Gold "should" correct based on the size of the previous rally and the fact that it recently become "temporarily too popular". However, the cyclical turning point in the USD Index and the verification of the breakout in the S&P 500 suggest that gold will move at least temporarily higher soon.
What should traders do? Risk-seeking and risk-neutral traders could open a short position in the precious metals market now, but this is not our official suggestion. What we suggest for risk-averse traders (most traders fall into this category) is to place an order to short the metals market that is triggered if gold moves to (below) $1,750. If such a move is seen, then a decline (most likely to $1,680 - $1,700) will become quite probable - 75%. Right now we estimate the probability of it taking place at 60%. The short order could be opened for gold, silver and mining stocks. Our target for silver is $30-$31 and 450-460 for the HUI Index.
Will you be missing the boat if gold rallies strongly without correcting at all? (we just received this question) No, because it is the investment part of your capital that you need to have invested most of the time not to miss the boat - and right now we suggest being invested with the long-term capital. The part dedicated to trading is by default not in the market and it is not a goal to capture all the moves with it. In general, such a goal is not realistic and leads to overtrading (costly fees) and - what's more dangerous - taking on too much risk. So, if gold, silver and miners rally, you will not be missing the boat.
On an administrative note (if you have already updated your account or subscribed this/last week - thank you, you can safely ignore the following part of this message), we would once again like to ask you to update your account - along with introducing the new website, we had to move to a different payment processor and we are not able to properly work with the previous payment processors. That's why moving to the new payment processor (fully integrated with the new website) is necessary for each premium account. Actually, this is good for you because for instance the PayPal system didn't allow us to give someone an extra week of access as a small thank-you for sending us some suggestions regarding our services. Naturally, the next payment will be made when it's due, not when you update card details (technically, you may see an authorization - not a payment - for $1). So, please take a few seconds to update your account here:
We will individually check each premium account to see if everything was updated successfully and if so, we will take care of cancelling the subscription that you had using the previous payment system - so you don't need to worry about it.
On a side note, this may be a good moment to switch to a quarterly or yearly plan - it's convenient, because you will need to select a payment plan anyway to update your account, so you can simply choose the bigger plan and save some money with no extra hassle (technically there is no difference between signing up for the same or bigger plan on the selection screen). This will also allow us to provide you with more features faster, so it seems beneficial for everybody.
Przemyslaw Radomski, CFA