Gold & Silver Trading Alert: Silver And Its Signals

Briefly: In our opinion, a speculative short position (full) in gold, silver and mining stocks is justified from the risk/reward point of view.

Silver caught the attention of many precious metals traders earlier this year when it outperformed gold in a quite sharp manner and broke above the declining long-term resistance line. Many investors and analysts were cheering and emphasizing silver breakout’s importance and silver’s leadership as something bullish for the precious metals market. We respectfully disagreed. It was the case years ago (!) that silver’s outperformance signaled higher prices for the entire precious metals sector, but it wasn’t the case in the recent history – in fact, exactly the opposite was the case. Several weeks ago we featured the following silver to gold ratio chart (charts courtesy by http://stockcharts.com):

The reality is that silver’s short-term outperformance was actually a bearish sign and RSI based on the silver to gold ratio moving above 70 is actually a sell signal, not a bullish sign. The history seems to have repeated itself once again.

What about silver’s breakout above the major, declining resistance line (red dashed line on the below chart)?

It was already invalidated, just like most breakouts in case of the white metal have been ending in the recent history. Silver’s breakouts are not reliable, especially if they are not confirmed by analogous action in gold and mining stocks. Consequently, we have been expecting to see this breakout’s invalidation, and that’s what we saw.

Silver didn’t manage to break above the 50-week average and the 2013 low, so in one way the trend remains down and in another way (taking the declining resistance line) we saw a sell signal because of breakout’s invalidation. Either way, the outlook for silver in the short and medium term doesn’t look good.

On a short-term basis, silver showed us something as well.

Silver broke below the rising medium-term support line and the 61.8% Fibonacci retracement level and – based on yesterday’s closing price – confirmed these breakdowns.

Silver’s previous attempt to move below this line was invalidated and followed by a visible rally, however this time, we have breakdown’s confirmation, which makes another decline very likely in the following weeks.

What about gold?

Gold confirmed its breakdowns last week, so the situation here is bearish and it will remain bearish even if we see some very short-term strength. Gold moved a bit higher yesterday, but the move was accompanied by relatively low volume, which suggests that it was just a counter-trend bounce – nothing more. The trend remains down.

As far as the situation in gold stocks is concerned, our yesterday’s comments remain up-to-date:

(…) gold stocks have broken below a certain support level. This level is created by the rising line based on the 2014 low and the March 2015 low. The breakdown is not confirmed, but a weekly close below the support is quite a bearish development on its own even if it doesn’t imply a confirmation of the breakdown.

With another daily close below it, we are closer to breakdown’s confirmation (you will find more about waiting for confirmations in our list of gold trading tips) – the situation is now more bearish, but it will be much more bearish when the breakdown is indeed confirmed.

On a short-term basis we see that miners moved a bit higher and the move took place on relatively big volume. We could see some more short-term strength in the next few days, but we don’t expect to see anything significant. The declining red resistance line is relatively close and it seems that it would be able to stop the resulting rally, especially that miners have been underperforming gold for a few weeks now.

Speaking of relative performance, gold and miners moved a little higher yesterday while silver declined a little and it seems that overall the precious metals sector didn’t do much. That is only the case until one compares the above with the performance of the USD Index, which declined by more than 1%. Precious metals didn’t respond to USD’s bullish signal, which is a bearish signal on it’s own. That’s the kind of performance that preceded many declines in the precious metals sector, and it seems that our profitable short positions will become much more profitable in the following weeks.

Before summarizing, let’s take a look at the gold seasonal chart to see what’s likely in store for us in the short term.

In short, our yesterday’s comments remain up-to-date:

June tends to be a quite bearish month for gold and the rest of the precious metals sector, especially the part of the month that we are just about to enter. Gold has already been declining for days, but it seems that the declines are far from being over (even if we see a temporary bounce, it’s likely to be short-lived).

Summing up, the outlook for the precious metals market was bearish on Friday and yesterday and after yesterday’s session it became – once again - even more bearish. It seems that the final bottom is still ahead of us. The current short positions in the precious metals sector are but it seems that they will become much more profitable in the future, so we are keeping them intact.

On a side note, we would like to stress that despite our short- and medium-term outlook, we are actually very bullish on gold for the long term – we simply think that it will be best for our gold portfolio to wait for another big downswing (likely the final one) to re-enter this promising market.

Please note that our thoughts on the precious metals market may change in the coming days. We encourage you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It’s free and if you don’t like it, you can unsubscribe anytime. Sign up today.

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Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Gold Investment & Silver Investment at SunshineProfits.com

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Disclaimer

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.