What a difference a day can make! Everything was just SO bearish, and now… Well, some things changed.
They changed quite profitably, as we just took profits off the table with GDXJ at $33.26. And right now, it seems that long positions might actually be justified from the risk-to-reward point of view.
How come? Because no market moves up or down in a straight line, regardless of the bigger trend. And when things get too excessive on one end of the spectrum (bullish or bearish), the odds are that we’ll see a countertrend move. That’s just how markets work. Because that’s just how emotions work. Once the fear or greed gets extreme, they burn themselves out – everyone who was ready to make a transaction based on that emotion at a given point in time, has already done so, and now the price is likely to reverse. That’s how markets always worked (as long as they are free to a considerable extent), as that’s how emotions always worked. And since humans will continue to be driven by emotions, this behavior won’t change anytime soon.
The difficult part is to detect the moments where the emotions get excessive. Fortunately, we have technical analysis, with all its sub-parts, techniques, and indicators, and it’s helpful in detecting the extremes. One needs to know where to look, though.
For instance, during yesterday’s trading, something very odd happened in the case of the junior mining stocks and in the case of silver, and it was particularly visible in the first part of the session. While silver jumped up considerably, junior miners were down. Yes, those things happen every now and then, but they usually happen at the end of a rally. And right now, both markets are after a few-week-long decline. So, what really happened? Was it normal? Or was something excessive, and it actually meant something that we could use in our trading decisions?
One of the great ways to check a given market’s (works with ETFs or stocks, too) relative performance is to look at its ratio and how it performs. Then, we can analyze if the ratio itself is doing something regular or something meaningful. And we can estimate how effective it was to follow any indications that this ratio gave us.
Let’s do exactly what with the junior miners to silver ratio. To get an apples-to-apples comparison (with the same closing hours), I’m going to use the GDXJ and SLV ETFs.
Yes, the drop in the ratio was excessive – that’s clear at first sight. But was it too excessive?
Yes! That’s what the RSI indicator is showing us. Indicators are a very useful way to detect if what we see now is normal or if it’s something that’s likely too much (or too little). In essence, they are mathematical transformations of price movements (sometimes volume is taken into account) so that they isolate what’s most important.
What’s important in our case is that the RSI moved below 30 in a clear manner. That happened only a couple of times in the recent past and in almost all cases (3 out of 4), sizable rallies in the GDXJ followed.
That’s what happened at the May 2022 bottom, at the September 2022 bottom (which was also the yearly bottom), and at the December 2022 bottom. And it’s likely to happen also this time.
There was one time – in the second half of June 2022 – when the move below 30 in the RSI triggered only a tiny and brief upswing, but that was when gold was about to slide, and the USD Index was about to soar.
The vertical green line shows that it was right before the USD Index shot up higher after a brief consolidation.
Right now, the USD Index is after a short-term rally, and the RSI based on it just (almost) touched the 70 level. Back in June 2022, the RSI was close to the middle of its trading range. Consequently, those two situations are not alike, and thus, the link between now and then is not really strong.
Therefore, the odds are that the excessive move lower in the GDXJ to SLV ratio (dramatic underperformance of juniors as compared to silver price) is truly a very bullish development, just like it was in the three cases that I mentioned above.
There are other factors that are also in play right now and that can help us pinpoint the target price for this rally, but the GDXJ to SLV ratio alone is a major factor contributing to the current bullish outlook (for the short-term only, but still).
In yesterday’s Gold Trading Alert, I commented on the very near-term pictures of the USD Index and stocks in the following way:
Namely, gold moved a above its very short-term support line and the same happened in the S&P 500 futures. The USD Index invalidated its small breakout above its July high. This means that while this might or might not be the local bottom, the chances for it are quite high.
Stocks verified the breakout and are now moving even higher.
The USD Index moved below the rising support line in a quite decisive manner, and – unlike in mid-August – this time, the breakdown was not immediately invalidated. The implications are bearish.
Gold broke higher, and it didn’t move back down. It looks like the short-term rally is just starting.
Ok, so how high can the GDXJ go before turning south again?
Back in June, during the similar rally (preceded by similar action), juniors kept on rallying until they corrected 38.2% of the decline. The 38.2% Fibonacci retracement is the classic resistance level, anyway, and the fact that it just worked just a couple of months ago makes it even more likely that it’s going to work again.
This level corresponds to the mid-August high, and it seems that this is where we could see the next top. However, once we zoom out, we see something else as a nearby likely target.
The neck level of the previously broken head-and-shoulders pattern (marked with blue) is at about $35, and before GDXJ is likely to reach it, it’s likely to be slightly above $35.
Now, this target is particularly important and strong as it’s based on the two most important bottoms of this year.
Consequently, I’m going to place the binding profit-take target level slightly below $35. And yes, once the GDXJ reaches this level, I plan to automatically get back on the short side of the market.
So, once again, congratulations on profits from the (unleveraged) position in the GDXJ that you took yesterday, and I’m looking forward to the next round of profits with GDXJ close to $35.
Now, please keep in mind that this is a short-term trade only, so if you planned to focus on the medium-term move only, feel free to keep your short position intact, as I don’t think that this is anything more than a short-term corrective upswing within a much bigger decline. It’s your capital, and it’s your decision what you decided to do with it.
Also, I’m keeping the current (additional) short position in the FCX intact.
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In other news, I would like to remind you that the next Regain Inner Strength Experience session (#2) is going to take place today at 11 AM EST / 5 PM CET, and you can sign up for the RISE #2 session over here.
You can prepare for the session by watching the intro to the key exercise in the recording of the previous session. The intro starts at about 17:15 and ends at about 36:40.
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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), you’ll find more details in the above link.
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.
- 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, but it seems that we are going to see a notable, counter-trend short-term upswing, and in consequence, I think that a long position in the junior mining stocks is now justified from the risk to reward point of view.
In other words, I plan to “catch” the correction by making money on the upside and then to re-enter into the short position at higher levels in order to increase the overall gains even more.
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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 long 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: $34.89; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JNUG (2x leveraged). The binding exit level for the JNUG: $30.38; stop-loss for the JNUG: 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: (I have no specific target for silver – the current trade is too small for a silver play in my view)
Gold futures upside exit price: $1,943 (stop-loss: none)
Spot gold upside exit price: $1,914 (stop-loss: none)
HGU.TO – alternative (Canadian) 2x leveraged gold stocks ETF – the exit price: $12.68 (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 to of value can be created through this kind of collaboration :).
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief