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przemyslaw-radomski

Upcoming Rally in Gold and Silver: Price and Time Targets

May 1, 2018, 7:37 AM Przemysław Radomski , CFA

Briefly: In our opinion, small (50% of the regular size of the position) speculative long positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert. In other words, we are entering small long positions just a day after taking profits from the big short ones.

In yesterday’s first alert, we wrote that it could be the case that the precious metals market would drop further before forming a temporary bottom this week. That’s exactly what happened and we took profits on our short position as one of the key reasons for which we hadn’t closed them before ceased to exist. Namely, until yesterday, gold and silver hadn’t moved to any important support level. During yesterday’s session, however, we saw an important change in the above as gold and silver moved to their previous lows. The situation changed and so did our trading position and profits (which increased). What’s next? When are gold and silver likely to turn south again?

In about 2 weeks.

Before explaining the above, let’s take a look at the changes that we saw yesterday, starting with gold (chart courtesy of http://stockcharts.com).

Gold short-term price chart - Gold spot price

Gold’s reversal day is today, but since it works on a near-to basis, it’s no wonder that gold reversed yesterday. Today’s pre-market move lower is not that surprising, though. The volume during yesterday’s session was not huge, but it was not low either, which means that it doesn’t confirm the reversal, but it doesn’t invalidate it either. If it wasn’t for the cyclical turning point, we wouldn’t put a lot of weight to the reversal candlestick, but since we do have it at hand, the shape of the session adds to its bullish implications.

We saw a small buy signal in the Stochastic indicator, which has bullish implications as the last several times when we saw it, a visible rally followed.

Before moving further, let’s consider how high gold could go, if it does indeed rally from here. There are generally only two resistance levels that appear significant from the short-term point of view. Both are based on the rising line that’s created using the December and mid-March bottoms. One line is based on intraday lows and the other is based on daily closing prices.

Based on these lines and assuming (we’ll explain shortly) that it will take about 2 weeks to reach them, the price target area is approximately between $1,340 and $1,350. There is no clear single price that would determine that a top is in – it will be necessary to look for confirmations from other signals and markets. Naturally, we’ll keep you – our subscribers – informed.

Silver short-term price chart - Silver spot price

The reversal was even more profound in the case of silver as the white metal had further to fall before reaching the previous lows. To be precise, silver was very close to the previous lows ($16.23 on the above silver continuous futures chart, while the previous lows were a few cents below $16.20) but didn’t reach them.

This means that: it was justified to close the short position, and it is also possible that silver will move even lower today.

It’s still likely that the decline is ending from the very short-term point of view (and only from this point of view – the medium-term outlook remains very bearish) and we’ll show you one additional factor supporting the above in the following part of the alert.

For now, let’s discuss how high silver will be likely to rally if the upswing does indeed materialize.

In general, its usually difficult to predict silver’s short-term highs in advance, due to silver’s tendency to rally strongly right before the end of the move, even to the point of breaking above important resistance levels only to invalidate the breakout with vengeance in the following days, hours or minutes. Still, if gold rallies to the previously broken rising support / resistance line, then perhaps silver will do the same. This line is marked in red and it will be close to $16.90 in about 2 weeks. That’s when we saw previous silver highs, which adds credibility to this target.

GDX - Market Vectors Gold Miners - Gold mining stocks

The cyclical turning point supports a reversal not only in gold, but also in mining stocks. Since the entire precious metals market is likely to move together, it’s likely that silver will move along if both above rally shortly.

The move lower and the breakdown below the short-term rising support line appears bearish, especially that we saw it on significant volume. The turning point nullifies this implication. One could even say that it makes the outlook bullish for the following days, but not for today as the shape of yesterday’s session seems to be a more important factor in the immediate-term and since it looks like GDX was not done declining yesterday, it’s likely to continue lower at least in the early part of today’s session.

GDX:GLD - Gold mining stocks to Gold ratio (GLD ETF)

Let’s also keep in mind that mining stocks are at their March highs, while gold is very close to its March lows. Mining stocks were not exceptionally strong relative to gold yesterday, but overall this kind of strength was visible in April. At the moment, the above chart doesn’t clearly show that the short-term trend has changed.

At this time, the implications are generally neutral, but at the same time, the mining stocks to gold ratio suggest that a bigger move in either direction is about to take place. If we see a rally in the ratio, it will complete a bullish cup-and-handle bottom pattern (mid-February and mid-April highs being the borders of the cup). If it declines, however, it will serve as a verification of the breakdown below the rising dashed black line. Whichever comes first, is likely to determine the next short-term price move.

Overall, the very short-term outlook for the mining stocks seems neutral, but at the same time, it seems that it will clarify shortly.

If GDX moves higher, it’s likely to once again rally to its 61.8% Fibonacci retracement level and the April high at about $23.30.

Forex Action

In yesterday’s alert, we commented on the USD and euro charts in the following way:

The situation in the currency sector suggests that we’ll likely see a corrective short-term downswing in the USD Index. This is theoretically bullish for the precious metals sector, but the situation may not be as simple here.

Let’s start with the short-term charts.

Gold and US Dollar - dialy price chart - USD

The USD Index rallied significantly in the second half of April and it broke through several important resistance levels. The key resistance that you can see on the above chart is the declining blue line. It’s noteworthy that the USDX initially moved lower immediately after breaking above it and it successfully tested this line as support. The rally then continued and we saw several closes above it, including the weekly one. The medium-term outlook improved greatly, but we wouldn’t rule out another verification of the mentioned blue line in the following weeks.

There are three things that make a short-term move lower likely – the RSI very close to the 70 level, the fact that USDX tried to break above the 2017 low, the January 2018 low and the 50% Fibonacci retracement, and failed, and the shape of the Friday’s session. Namely, we saw a clear reversal.

XEU - Euro daily chart

The EUR/USD moved higher right at its triangle-apex-based reversal, which also suggests that we’ll see a break in the current decline.

But, does it have to start right away? Not necessarily. The USD Index could form another reversal as that’s what it used to do quite a few times in the past. For instance, the early December 2016 reversal was not the final one – the USDX topped two days later. The early April 2016 reversal was also followed by 2 (in terms of daily closing prices) or 3 (in intraday terms) days of higher prices. In such case, we could even see a quick move to the 61.8% Fibonacci retracement, which is approximately at the 2018 high and November and October 2017 lows.

Plus, there were several reversals in December 2016 and October/November 2017 before the USD finally declined.

Even if we don’t see anything specific in the USD today or tomorrow, precious metals (especially silver) could still plunge based on the similarity to the previous black candlesticks that we outlined earlier today. The similar sessions in silver took place in early March 2017 and in early July 2017. The first case was right after the initial USDX top and the second one was after a daily reversal in the USDX. Consequently, as odd as it may appear, the possibility of a very short-term decline in the USD Index doesn’t invalidate the very bearish sign for silver at all.

We also discussed the big USD Index picture, but it hasn’t changed since yesterday, so there’s no point quoting our comments on it (please feel free to read the yesterday’s analysis about it if you haven’t had the chance to do so previously – it’s up-to-date).

After the above was posted, we saw another daily upswing in the USD, which was in tune with our expectations. The USD Index could move even higher today or tomorrow, but it’s not an outlook worth betting on, it would seem. The time for the correction here is based on the euro’s apex-based turning point.

Moreover, please note that the RSI based on the USDX is now above 70, which means that its higher than its been since the beginning of 2017. That’s right, with regard to the RSI, the USD Index is more overbought on a short-term basis than it was at the late-2016 / early-2017 high and more overbought than on any other day that followed.

How low can the USD Index move? To 90.10 or so. That’s where we have the declining blue support line and it seems to be the most prominent support level that’s visible on the above chart. Another possibility is the March high of 90.89, but since the USD Index is only about 1 index point above this level, it might not be enough to cool down the investors’ RSI-confirmed enthusiasm.

All right, having said that, let’s move to the part you’ve been waiting for. Why would gold and silver bottom in 2 weeks. You might be thinking that it’s because of some apex-based turning points and if you do, you are not wrong, but that’s an incomplete answer. There’s more than that.

True Seasonals for May

The True Seasonal patterns are the regular seasonality plus the effects of the expirations of derivatives: futures, options and stock options. You can read a detailed report on this tool by clicking here and the long-story-short version is that this upgraded version of seasonality is most useful when there are no strong signals from other tools, but even if there are other signals in place, it can be used as confirmation. Overall, it’s more of a loose guideline than a strict rule.

So, let’s take a look what’s in store for this month.

True Seasonals for gold

True Seasonals for silver

True Seasonals for mining stocks

Gold’s rally, silver’s decline and miners’ horizontal trend are not errors – that’s a reflection of how the PM market performed in the recent years. It doesn’t necessarily imply that gold will lead, silver will lag, and the miners’ performance will be average. The relative performance is more likely to depend on individual factors that change from year to year.

What’s most interesting about the three above charts is what is similar in the case of all markets and this thing is the local top on May 11th in all cases. If it was just one market that suggested a top at that time, it wouldn’t be that important – but since all three do, it’s something that we should definitely keep in mind.

Taking this one level higher, if the True Seasonality was the only thing that made the outlook bullish and a top close to May 11th likely, we still wouldn’t view this time target as very important. But this time target is confirmed by – that’s right, you guessed it – apex-based turning points.

Apex-Based Reversals

Gold - Triangle apex reversal

Silver - Triangle apex reversal

Gold stocks (HUI) - Triangle apex reversal

The long-term triangles have apexes on May 14th (gold), May 11th (silver), and May 11th (HUI Index), which is a near-perfect confirmation of what we saw on the above True Seasonal charts.

The apex-based reversals proved their usefulness multiple times and since we’re seeing all three of them pointing to almost the same reversal day (May 11th is Friday, so it’s just before Monday, May 14th, in trading day terms), the likelihood of seeing a major reversal on this date or close to it (give or take 3 days or so).

Naturally, the reversal could also be a bullish one if the PM sector declines for the next two weeks, but…

The additional signal here is that silver’s nearest apex-based reversal date is today. The most recent move was definitely down, so the implications are bullish for the following days.

Summary

Summing up, the situation in the USD Index and the Euro Index suggests that we’ll see a correction, and it becomes increasingly likely that the correction will also take place in the precious metals market. The odds are that if we see a rally shortly, it will not be a new medium-term upswing, but rather a short-term, two-week-long move. At this time, the situation is already bullish based on several factors, and the only short-term factor that is suggesting lower PM values is yesterday’s weak performance of mining stocks. However, just like one swallow doesn’t make a summer, one thing doesn’t change the overall outlook.

Consequently, we are opening a small speculative long position today, while expecting to still see lower PM prices today on an intraday basis. The above is based on the shape of yesterday’s candlesticks in mining stocks and the fact that the apex-based reversal for silver is today. The comeback could be significant in light of the apex-based reversal and the recent volatility in silver, so we’re opening the position in advance. The position is small because the medium-term trend remains down and thus this counter-trend position is riskier than a short position that would be in tune with it.

Intraday traders may want to wait 30 minutes or so after the session starts in order to catch the pending decline (the immediate-term decline that doesn’t seem to be over based on the mining stocks’ daily candlestick).

Again, the likely short-term rally in the precious metals sector doesn’t change the medium-term trend, which remains down.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Small long positions (50% 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:

  • Gold: initial target price: $1,338; stop-loss: $1,272; initial target price for the UGLD ETN: $11.68; stop-loss for the UGLD ETN $9.88
  • Silver: initial target price: $16.86; stop-loss: $15.49; initial target price for the USLV ETN: $10.68; stop-loss for the USLV ETN $7.88
  • Mining stocks (price levels for the GDX ETF): initial target price: $23.18; stop-loss: $21.47; initial target price for the NUGT ETF: $28.38; stop-loss for the NUGT ETF $22.88

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: $33.93; stop-loss: $31.38
  • JNUG ETF: initial target price: $15.68 stop-loss: $11.88

The stop-loss levels are quite far from the current price, but please note that the aim of the stop-loss is to take the investor off the market if the price move by its own is so meaningful that it changes the outlook. Naturally, if things go against us, we will aim to get out of the market much sooner – for instance based on signals from volume or other tools.

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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Latest Free Trading Alerts:

Alchemists are precious metals experts, aren’t they? So let’s see what we can learn from the latest issue of the Alchemist, the LBMA’s quarterly journal.

What Can Alchemists Say About Gold?

There were a lot of positive expectations before the opening of Friday's trading session, but stocks closed virtually flat following slightly higher open. So, investors' sentiment worsened despite Thursday's better-than-expected big cap tech earnings releases. Will Thursday's move up continue today? Or is this some short-term topping pattern before another pull-back? There are still two possible medium-term scenarios.

Earnings, Economic Data, End of Month, Bulls Ready to Take a Chance Again

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Hand-picked precious-metals-related links:

PRECIOUS-Gold hits six-week low as dollar climbs before Fed meeting

Mint American Eagle gold coin sales at weakest April since 2007

This Billionaire Has Put Half His Net Worth Into Gold

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In other news:

Fed likely to keep rates steady; investors bet on June hike

Australia's central bank holds cash rate at 1.5 percent, in line with expectations

US Treasury says Q1 borrowing set record of $488 billion

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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager


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