Gold & Silver Trading Alert originally published on July 18th, 2014 7:26 AM
Briefly: In our opinion (full) speculative short positions in gold, silver and mining stocks are now justified from the risk/reward perspective.
In our yesterday's second alert we wrote that yesterday's rally was quite likely to be a one-time event and that it didn't change the overall trend, which remained down. The reason was that the rally was clearly event-driven and not a reflection of the change in the attitudes of investors and traders. Based on today's pre-market decline, it seems that we were correct. Let's take a closer look at yesterday's changes (charts courtesy of http://stockcharts.com).
From the long-term perspective, we see that the previous breakout has been more than invalidated and that yesterday's session didn't really change anything. The bearish implications remain in place.
On the above chart, we see that the GLD ETF is now once again above the 300-day moving average, which seems bullish at the first sight. In our opinion, however, what happened yesterday didn't reflect the investors' true attitude or its change, so we don't think we should take this strength at face value. In yesterday's second alert we emphasized the following:
These are the moves that at times simply have to happen and are one of the reasons for which we usually need to wait for confirmations of a given move. It seems that any breakout / that happened today should be treated seriously only if they are confirmed in the coming days.
We expect the strength to be proved temporary shortly, and today's session is a good start toward this outcome.
Additionally, please note that the high volume that accompanied the decline earlier this week was significant and it seems to us that it was a sign that showed the real direction in which the gold market is heading.
The situation in silver didn't change a lot yesterday, and it continues to support the bearish outlook. Having said that, let's take a look at what changed in the case of mining stocks.
In general, what we wrote regarding the GLD ETF applies also to the situation on the GDX ETF chart. In the case of GLD, we were discussing a move above the 300-day moving average, and in this case we are discussing a move above the declining support/resistance line. Again, it seems too early to say that anything has really changed.
Before summarizing, let's take a look at the forex market, specifically at the Euro Index.
Our most recent comments on the above chart remain up-to-date (which is another way to say that yesterday's session didn't change anything from this perspective and the implications remain in place):
There are 2 things on the above chart that are significant for precious metals investors. Firstly, it seems that the Euro Index is on a verge of breaking below a combination of strong support lines (having invalidated the breakout above the very long-term resistance line earlier this year). Such a breakdown - if it materializes - will like be followed by a substantial move lower. Secondly, the previous big downswings in the Euro Index were seen along with big declines in gold, silver and mining stocks. Naturally, the combination of the above points is bearish for the precious metals sector.
Summing up, we had expected to see a pause within the decline and we did. The move higher was higher than expected, because of the unforeseen crash of a civilian airplane, allegedly shot down near the border between Ukraine and Russia. The move - even though it was greater than it had been likely to be - hasn't changed the overall trend, and it seems that the precious metals market will soon move in tune with its medium-term trend - which at this time is still down. Our best bet is that we will see a major bottom in the precious metals sector later this year -we don't think we have reached this point yet. The short position that we mentioned on July 14 (we wrote about it more or less before half of the daily decline) still seems to be justified from the risk/reward perspective.
To summarize:
Trading capital (our opinion): Short (full) position in gold, silver and mining stocks with the following stop-loss levels:
- Gold: $1,353
- Silver: $21.73
- GDX ETF: $28.30
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As always, we'll keep our subscribers updated should our views on the market change. We will continue to send them our Gold & Silver Trading Alerts on each trading day and we will send additional ones whenever appropriate. If you'd like to receive them, please subscribe today.
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