Briefly: In our opinion no speculative short positions in gold, silver and mining stocks are currently justified from the risk/reward perspective.
The USD Index moved slightly above the key, long-term resistance level but gold rallied by almost $20 on Friday. We have seen several bearish signs in the precious metals market recently – is the above bullish enough to make the overall outlook for the precious metals market bullish?
Not really. Gold didn’t move above the previous resistance levels, so actually not much changed and most of what we wrote last week remains up-to-date. Let’s start today’s analysis with the USD Index (charts courtesy of http://stockcharts.com).
The USD Index moved higher only insignificantly, and we don’t see much change on the short-term chart. One could argue whether there was a short-term breakout or not, but even if we agree that there indeed was one, it’s not confirmed. Consequently, the short-term picture doesn’t provide us with much new information.
The USD Index closed the week above 90 and also above the rising short-term resistance line, so the short-term breakout is confirmed. The implications for the next several days are bullish.
Let’s take a look at the situation in the USD Index from the very long-term perspective.
The USD Index has just encountered a major resistance line that it needs to surpass before a rally to 92 becomes very probable – the 38.2% Fibonacci retracement levels based on the entire 2002 – 2008 decline.
The Fibonacci retracements have worked for the USD Index many times in the past, so it could be the case that this level will keep the rally in check for some time. If not, and we see a confirmed breakout, then we’ll likely see another big rally – to the 92 level or perhaps even to the next retracement at 96.11.
However, we would first need to see the breakout and its confirmation. For now, we have just seen a move to this critical level. While the situation in the precious metals market remains bearish, without a breakout in the USD Index, the possibility of another slide in the USD and a rally in gold, silver and mining stocks will be too big for us to think that opening short positions in the precious metals sector is justified from the risk to reward perspective.
The USD Index closed the week above the critical resistance level (the 38.2% Fibonacci retracement level), but it closed only a little above it and for just one day, so the breakout is not confirmed at this time. Consequently, we don’t think that the move to 92 or higher is very probable for the USD Index at present. The implications for the precious metals market remain rather unclear at this time.
Please note that gold rallied on very low volume, but that was a low-volume session across the board due to the Holiday season. Consequently, while low-volume rally would be a bearish sign in normal case, at this time there are no such implications.
Moreover, there was a buy signal from the Stochastic indicator, which of course is a bullish sign, but on the other hand, there was no breakout above the declining red resistance line.
Overall, the above chart is more bullish than it was last week, but not bullish enough to justify opening long positions based just on it.
Could we really see such a significant decline in the mining stocks sector? Why not, it would be less than half of what the miners have already declined since 2010. Besides, the entire commodity sector could move even lower.
Overall, the situation is still unclear as there are several factors that point to a looming decline in the precious metals, but there are also some important signs suggesting higher values of PMs – like the critical resistance in the USD Index.
It seems that another trading opportunity is just around the corner and even though not much seems to be going on, it might be that paying close attention to the precious metals market at this time and in the coming days will be well worth it. It might be the case that the USD Index manages to rally shortly and confirms the breakout above its key resistance. If that takes place, it will likely create a great entry point for short positions in the precious metals market. However, we are not at that point yet and other factors will need to be considered as well. 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 or sign up for our free mailing list today.
Trading capital (our opinion): No positions
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.
Przemyslaw Radomski, CFA
Tools for Effective Gold & Silver Investments - SunshineProfits.com
Tools für Effektives Gold- und Silber-Investment - SunshineProfits.DE
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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.