Since I warned of topping action in GLD (NYSEARCA:GLD) in the $131.50-$133 region, we have not seen much in the way of upside strength in the metals. Rather, all rallies have been quite weak.
This past week, we saw tensions escalate in the Crimea, yet, we saw the metals finish the week relatively flat. Does gold no longer care about what is going on in Crimea? The better question is, "Did it ever?" Yet, I can assure you that there are many that have been burned of late in going long on the expectation that the Crimea events will cause a significant rally in the metals.
So, it brings me to the question of what "catalyst" will cause the metals to go up? Then again, isn't the better question whether the metals are actually set up to go up so a catalyst can have an effect? Yes, I know this is a completely opposite manner to the way most think about metals. Rather, they look at the catalyst and make the assumption that the metals will move in the "reasonable" direction due to the catalyst. But, have we not had enough examples over the last several years as to why this is a failed premise upon which to base your metals purchases (ex. QE, Syria, Crimea, etc.)?
Moreover, as I pointed out last week when the metals declined, the metals dropped even without a catalyst. Remember how the metals declined a bit over a week ago, and we received an email from Seeking Alpha entitled "Precious metals decline; writers search for an excuse." And, yes, I still get a chuckle from reading that. It just begs the question of at what point will thinking people open their eyes and realize that the news itself is not what moves markets. Rather, it is market participants' emotions which move metals, and emotions can be acted upon even without some triggering news event, or can even respond in the opposite manner of "reasonable" expectations.
Think about it. Why would one attempt to use "reason" to analyze emotional actions? Isn't that like attempting to fit a square peg into a round hole?
As for the price action I am seeing, we are at an inflection point, and a decision will likely come this week. The immediate downside set-up has very little room left to play out, so my patience has run out. This coming week will likely see a strong drop in the GLD to the $119 region - just to begin the bigger decline to much lower levels - or it is going to break this immediate downside set up by taking out the $126 region.
Now, I already know that I am going to get comments below saying "So, I guess metals are either going to go up or down." And, my answer is "Yes." That is how any market works. However, what I am saying to you is that there is a very strong downside set-up in place which will take GLD to $119 within hours of a breakdown of support. What I am also saying to you is that this immediate downside set-up is broken if we move over the $126 level. And, while a breakout over $126 does invalidate the immediate downside set-up, the larger degree downside set-up is still intact as long as we remain below $131.50. But, the breakout over $126 will cause GLD to take more time in setting up as strong an immediate downside set-up as the one we have in place right now.
I do want to add one more note. As of the close on Friday, there is a set-up in place for GLD to see a rally back to the $125.50 region, but what it does from there will be very important for the next several weeks of action in the metals.
Disclosure: I am long SLV. I own intermediate term puts on GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.