-- Published: Tuesday, 11 October 2016 | Print | Disqus
Gold, silver and mining stocks moved higher yesterday, but the size of the rally was not huge and it was another day during which the PM sector didnít decline. The back and forth movement and decreased volatility appear to be temporary as this kind of performance is something that weíve seen during both consolidations and bottoms. Which way will the precious metals sector go?
Before replying to the above question, letís emphasize that itís not the most important question at this time. The most important thing to keep in mind is that earlier this year precious metals likely rallied as a correction after a very big decline, but the final bottom has probably not been seen so far as the investorsí sentiment hasnít reached extremely bearish levels. Now it appears that this big corrective upswing is over and metals and miners are moving lower. Consequently, whether we have a short-term correction from here or not is not extremely important if we are going to see lower precious metals prices in the coming months.
Having said that, letís take a look at the charts (chart courtesy of http://stockcharts.com).
Starting with mining stocks, we see that they moved a bit higher on very low volume. This had previously meant that a bottom was likely in, but it changed when the uptrend changed into a downtrend (and even a bit before as the final top was formed in August, but the rally had more or less ended in July Ė the move above the July lows in August was insignificant). We now have a situation in which very low volume can imply nothing (like in early July and late September), a rally (like in late July and mid-September) or a decline (like in mid-August). The overall implications are now neutral.
What happened in silver? It rallied and outperformed both gold and miners, which can be viewed as a bearish sign (silver tends to outperform in the final parts of a rally or right before the plunge in the case of horizontal trends), especially that silver didnít invalidate any breakdown. The white metal moved to the declining, dashed support line and moved back down. Thatís a verification of a breakdown, not its invalidation. The bearish implications remain in place for the medium term.
On a side note, we received a question about the support in silver created by the 200-day moving average. Our reply is that this moving average in silver is not really effective as support. Please note that during the 2011 - 2016 decline, silver moved below it several times and it only served as support in mid-October 2012 and April 2016 (and once approximately in early 2016). On all other occasions (late 2011, early 2012, late 2012, early 2013, early 2014, mid-2014, mid-2015, late 2015), silver more or less ignored the 200-DMA. Consequently, since nothing happened in the majority of the cases, we donít think itís a major factor this time either. Other factors (discussed today and in the previous several alerts) seem to be much more important.
Gold moved a bit higher on relatively low volume. It appears to be a pause after a huge decline, not a big, volatile comeback. Still, itís not a bearish confirmation by itself.
The key thing right now appears to be the situation in the USD Index and its relationship with metals.
Until todayís pre-market action, it didnít seem like a big deal that metals moved a bit higher despite a move higher in the USD. The size of the phenomenon was limited and PMs were likely to pause regardless of whatís going on in the USD.
However, in todayís pre-market trading, USD moved higher by over 0.60 so far today and metals didnít respond almost at all. The next strong resistance for the USD Index is at the July tops (at about 97.60) and this is exactly the price level that USD managed to reach today.
Consequently, we could see a reversal Ė especially that the turning point is just around the corner. As a reminder, turning points work on a near-to basis, which means the next one already has bearish implications (especially in light of todayís rally).
If gold and silver donít want to respond to USDís rally, they are quite likely to respond to USDís decline (the above indicates that people donít seem to be willing to sell at this time, which means that buyer can easily outnumber them).
In addition to the above, we just saw a confirmation (third consecutive close) of the breakout above the declining black line. This line stopped the rally in July (which was the biggest rally in the USD this year) and we just saw a confirmed breakout above it, which is a big deal. As discussed earlier, the cyclical turning point is just around the corner, so the USD may not be able to rally very high (the July tops seem to be a probable target) before a turnaround and a corrective decline, but still, the outlook for the following weeks has just improved. This means that the implications for the precious metals sector became more bearish for the following weeks, but at the same time, we could see a rebound in PMs and miners as the USD corrects.
Consequently, we the odds for declineís continuation in the following days declined from about 70%-80% to about 45%, which is means that keeping a short position opened at this time is too risky.
If we get a rebound in gold, silver and miners, we will probably re-enter the positions at higher prices, and if we donít see a significant rebound, weíll (probably Ė unless other factors change) get back to the short positions when gold and silver once again respond to USDís signals, which means getting back in the positions at lower risk. Either way, exiting the short positions at least temporarily and taking profits off the table appears justified from the risk to reward point of view at this time.
Summing up, due to the recent strength in the precious metals relative to the USD Index and the likely turnaround in the latter (perhaps after an additional rally, but since PMs no longer react USDís upswings, it doesnít really matter), it seems that exiting the short positions and taking profits off the table is now justified from the risk to reward point of view. We had originally featured these short positions on September 30. On that day, gold had closed at $1,317 and the closing prices for silver and GDX were $19.21 and $26.43, respectively. Yesterday, GDX closed over $3 lower, silver closed over $1.50 lower, and gold closed over $50 lower. In case of the DUST ETF, the profits are almost 50%.
We may have a good opportunity to re-enter the short position at higher prices, but if the risk/reward ratio suggests opening long prices, weíll likely proceed as well. We will be monitoring the market for opportunities and report to our subscribers accordingly.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits - Gold Investment & Silver Investment
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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
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-- Published: Tuesday, 11 October 2016 | E-Mail | Print | Source: GoldSeek.com