Some things change, and some don’t. Miners invalidated their head-and-shoulders pattern, which is a buy signal. Stocks remain bearish, and the USDX…
The USD Index is indicating that a correction might be about to happen, anyway.
I previously wrote that the RSI might need to get to extreme levels (marked with red) before we see a meaningful top and then a decline. However, given the very recent move lower in the USDX and the corresponding action in the RSI (it moved a bit lower from the 70 level), we might be seeing a local top right now, after all.
I had been expecting that the next local top would come close to the June highs, and that’s more or less where the USDX moved recently.
The horizontal dashed line (the upper one) is based on the April/June top in terms of the closing prices. Each intraday attempt to move above this level was invalidated. The same happened very recently. Consequently, we might say that the previous high was already hit.
The USDX also moved below its rising support line, which is another bearish factor for the short term.
Now, let’s not exaggerate the meaning of the above.
The USD Index is after a major buy signal, as it invalidated its breakdown to new yearly lows. This was huge, and it continues to point to much higher USDX values in the following weeks and months.
However, since no market moves up or down without periodic corrections, we might be seeing one right now as well.
The 38.2% Fibonacci retracement level at about 102.5 corresponds to the early-August top, and it might be the next target for the U.S. currency. Whether the USD Index moves up from that level or will it need to correct a bit more (or less), please keep in mind that it’s most likely just a correction – a breather – and not the beginning of a new big decline.
The implications for the precious metals sector are bullish.
Having said that, let’s take a look at the S&P 500 index futures that show that there were actually no changes in the technical situation.
I mean, yes, stocks moved visibly higher yesterday, but they stopped at the rising resistance line, which had already been verified once, and it seems that it was just verified for the second time yesterday.
Moreover, the recent corrective upswing took the form of a zig-zag, which is a very common way for a market to correct. Consequently, it looks like stocks are about to fall.
And since the recent rebound is quite similar to what we saw in June, the entire June-now price performance can be viewed as a potential head-and-shoulders formation. This formation – when completed – would imply a move well below 4,200.
This is bearish for the precious metals sector, in particular for junior mining stocks, as the latter are connected to stocks more than the underlying metals.
What about the flagship precious metal – gold?
Well, gold moved to the neck level of its head-and-shoulders pattern (based on daily closing prices) and closed pretty much at it. Gold price was close to invalidating it but haven’t done so. This means that the next move is still likely to be to the downside. The next target based on the head-and-shoulders formation is at about $1,740, which is much lower than where the gold price is currently trading right now.
So, what will gold do now? Will it rally based on the USD Index’s decline? Or will it decline along with stocks and in line with what the head-and-shoulders pattern is suggesting?
It’s a tough call at this very moment. As more information becomes available, it will become clear what kind of action the market really wants to take here. Even if gold rallies here, it’s likely to be something temporary, not the start of another multi-month upswing. Of course, I’ll keep my subscribers posted (and I’m adjusting our current trading position to reflect the current outlook).
What about the junior mining stocks?
Juniors invalidated their head-and-shoulders pattern, which is bullish. We’ve seen rallies after invalidations of the H&S formation quite often in the precious metals sector, which means that it’s not something that should be taken lightly.
Now, this could be due to the fact that junior miners have been one of the weakest sectors, and stocks are now topping. There’s a tendency for the worst performers to suddenly perform well close to the end of a rally because that’s when the investment public buys (close to tops), and those investors often buy what’s cheap without considering that it might be cheap for a reason.
So, the short-term situation here is rather unclear.
How high could the GDXJ ETF rally if it does rally at all from here? I’d view the $37 - $40 area as the likely topping target. It’s quite broad, I know. If it was clear, I would be considering a long position, but I don’t think it’s justified right now.
And we don’t want to have a big short position open if the short-term situation is unclear – we want to have it, when this outlook is clearly bearish. Consequently, I’m limiting it to a small position – 50% of the regular size of the position. I’m not closing it completely due to the fact that the medium-term trend remains down, and the downside potential for the next few months remains extremely bearish. Consequently, the surprises can – and likely will be – to the downside.
For now (perhaps for just a few days), I’m changing the size of the position to small. Of course, this is my general opinion, and since it’s your capital, feel free to decide whether you want to keep your current position intact (based on the broader trend) or to adjust it.
As always, I’ll keep you – my subscribers – informed.
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If you’d like to participate in my Mastering Multidimensional Wealth | 1:1 Coaching Experience (perhaps by re-investing some of your profits into yourself) or become a partner/investor in Golden Meadow, you’ll find more details in the aforementioned links.
Overview of the Upcoming Part of the Decline
- It seems that the recent – and probably final – corrective upswing in the precious metals sector is over. The only thing left is probably a small rebound, and then the prices are ready to plunge.
- If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400 and GDXJ close to $15 . This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
- The above is based on the information available today, and it might change in the following days/weeks.
You will find my general overview of the outlook for gold on the chart below:
Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
Please post your questions in the comments feed below the articles, if they are about issues raised within the article (or in the recent issues). If they are about other, more universal matters, I encourage you to use the Ask the Community space (I’m also part of the community), so that more people can contribute to the reply and enjoy the answers. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
Summary
To summarize, the medium-term trend in the precious metals sector remains clearly down, and it seems that the corrective upswing is already over or about to be over. We just caught the 10th profitable trade in a row – congratulations. The outlook for the short positions in junior miners and in the FCX remains favorable, but just in case we see a very brief rally here, I’m limiting the size of the current short positions. I expect to restore them to their big size within the next 0-2 weeks.
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Locking in those is a great idea not only because it’s perfect time to be ready for what’s next in the precious metals market, but also because the inflation might persist longer than expected and prices of everything (including our subscriptions) are going to go up in the future as well. Please reach out to our support – they will be happy to assist you and make sure that your subscription days are properly extended at those promotional terms. So, for how many years would you like to lock-in your subscription?
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Small speculative short positions (50% of the full position) in junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:
Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $26.12; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding exit level for the JDST: $12.18; stop-loss for the JDST: none.
For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway.):
Silver futures downside exit price: $20.22 (stop-loss: none)
SLV exit price: $18.62 (stop-loss: none)
ZSL exit price: $24.98 (stop-loss: none)
Gold futures downside exit price: $1,812 (stop-loss: none)
Spot gold downside exit price: $1,792 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the exit price: $10.38 (stop-loss: none)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the exit price: $18.87 (stop-loss: none)
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Optional / additional trade idea that I think is justified from the risk to reward point of view:
Short position in the FCX with $27.13 as the short-term profit-take level.
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
Whether you’ve 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 we describe the situation for the day that the alert is posted in the trading section. In other words, if 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 to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).
Additionally, 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 (as 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: UGL, GLL, AGQ, ZSL, 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" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) 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 daily 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. Furthermore, 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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On a side note, while commenting on analyses, please keep the Pillars of the Community in mind. It’s great to provide points that help others be more objective. However, it’s important to focus on the facts and discuss them in a dignified manner. There is not much of the latter in personal attacks. As more and more people join our community, it is important to keep it friendly. Being yourself, even to the point of swearing, is great, but the point is not to belittle other people or put them in a position of “shame” (whether it works or not). Everyone can make mistakes, and everyone does, in fact, make mistakes. We all here have the same goal: to have a greater understanding of the markets and pick better risk-to-reward situations for our trades. We are on the same side.
On another – and final – side note, the number of messages, comments etc. that I’m receiving is enormous, and while I’m grateful for such engagement and feedback, I’m also starting to realize that there’s no way in which I’m going to be able to provide replies to everyone that I would like to, while keeping any sort of work-life balance and sanity ;) Not to mention peace of mind and calmness required to approach the markets with maximum objectivity and to provide you with the service of the highest quality – and best of my abilities.
Consequently, please keep in mind that I will not be able to react / reply to all messages. It will be my priority to reply to messages/comments that adhere to the Pillars of the Community (I wrote them, by the way) and are based on kindness, compassion and on helping others grow themselves and their capital in the most objective manner possible (and to messages that are supportive in general). I noticed that whatever one puts their attention to – grows, and that’s what I think all communities need more of.
Sometimes, Golden Meadow’s support team forwards me a message from someone, who assumed that I might not be able to see a message on Golden Meadow, but that I would notice it in my e-mail account. However, since it’s the point here to create a supportive community, I will specifically not be providing any replies over email, and I will be providing them over here (to the extent time permits). Everyone’s best option is to communicate here, on Golden Meadow, ideally not in private messages (there are exceptions, of course!) but in specific spaces or below articles, because even if I’m not able to reply, the odds are that there will be someone else with insights on a given matter that might provide helpful details. And since we are all on the same side (aiming to grow ourselves and our capital), a ton of value can be created through this kind of collaboration :).
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief