For those that read my articles on a regular basis, you know that I was laughing hard when I wrote the title to this article. Allow me to remind you of my opening last week:
"Quantitative easing. China. The Pan-Asian gold exchange. Syria. Ukraine. Have I missed any of the major reasons for the expectation that the metals would rise over the last several years? And, now, the latest and greatest "reason" is the election in India."
So, it does look like I can formally add the Indian election to this list of supposed "bullish" catalysts which have led investors astray. But, let's even look at how imprudent it was to believe that the Ukrainian events "caused" movements in gold. This past week, we saw a helicopter with a Russian general shot down and tensions have clearly been rising in that region. Yet, what did gold do? Yes, it continued to go down.
Unfortunately, post hoc ergo propter hoc is the manner in which most metals analysts view this market. Just because a news event coincides with a move in gold does not mean that event was the cause for the move. A few years ago, I actually analyzed how the exact same statement made by the Fed month after month supposedly "caused" 10+ percentage moves in silver in different directions. Try and explain that one. And, the truth is, you really cannot if you based your investing decision upon news.
And, most recently, all those bullish of gold so wanted to believe that the unrest in Ukraine was surely going to cause gold to go parabolic, only to now be over $100 lower than it was when the calls for a parabolic rise were made. And, now, India is the latest "cause" that seems to have been thrown by the wayside, as gold really does not care about these events, no matter what anyone may or may not believe.
I have said it so many times before, and it seems it must still be repeated. Unless sentiment is in line with the news event, no news event will ever be able to cause an opposite movement in the metals. Just remember how astonished you were when you saw gold drop hard in the face of multiple rounds of QE. But, people can't seem to let go of "logical" conclusions as to where the metals should move based upon news events. Folks, when you finally recognize that metals are a sentiment-based trade, which can be tracked by patterns, it would all make so much more sense to you. When you stop fighting this conclusion, then trading metals will be much easier and profitable for you.
So, I now have to ask, after all the "bullish catalysts" being cited by the media, metals analysts and commenters here, some of whom have adamantly told me how wrong I am in my expectation for lower levels, what was the "cause" of the move down we just experienced? Bueller . . . Bueller . . . Yes, I know, there really is not a catalyst one can point towards as a clear "cause" for the decline. And, it reminds me of the email I received in early May with the title: "Precious metals decline; writers search for excuse." This time, I have not seen anyone even attempt an excuse.
When one does pattern work, you have to be cognizant of the fact that there are two specific classifications of patterns. First, there is an impulsive pattern, which follows a script with very high probabilities. Then there is a corrective pattern, which has many twists and turns and does not follow any particular larger script, as it is an exceptionally variable type of pattern. For the last 3+ years we have been dealing with a corrective pattern, which is why so many have been so badly whipsawed throughout. Therefore, one must first recognize that the pattern we are within is a corrective one. Once you understand this greater context for market moves, you can map these moves and adjust as needed as the market morphs into more complex structures. But, those that do not understand this larger degree framework within which markets move, it is nearly impossible to even consider identifying high probability turning points.
Therefore, I don't want anyone that is shorting this market along with me to stay too comfortable in those short positions just yet. Unfortunately, that larger consolidation we had above can be interpreted in several ways. While my preferred way is to consider it a set up for the bigger decline taking us down to 100 region, I do have questions in my mind due to the longer than ideal consolidation pattern from which we expectedly broke down. For this reason, I will be suggesting to all those on the short side to use stops in the event GLD is able to move through the levels I site as we go forward.
The nice thing about the Fibonacci Pinball method I developed, to be utilized in conjunction with Elliott Wave analysis, is that it allows you to continually tighten your stops as the market continues to move in your direction. It provides you with high probability levels which, if the market is able to move through, indicate that the pattern we are watching will likely invalidate and morph into something else during this corrective phase. Since we began shorting in the 131.50-133 region, we have been able to move our stops down several times based upon this method to lock in profits on a swing trade basis.
As I wrote two weeks ago, as long as we maintained below 126GLD, my next target was the 119 region, which I expected to be hit quite quickly. While the market took a week longer to begin that decline, and did make me concerned about whether the decline would be seen, we clearly had the expected strong downside follow through a week later than expected, and we hit a low of 119.62 this past week.
At this time, I am watching two potential patterns which can still take us down next to the 115 region on our way to much lower regions. Under all circumstances, it means that the 123/124 region must now hold as resistance, as opposed to the former 126 region we were utilizing. So, if you want to protect your shorting profits, then I would suggest you set your stops accordingly. In fact, I can even see a pattern taking us back up to the 139 region in GLD if we are able to move through that resistance level, but that is not my primary expectation at this time. The market will have to prove it to me before I would be willing to trade that pattern.
There is one more point I would like to make as well. While I still believe that we can see another 30 points lower in the GLD, remember that my long term expectations are that gold will likely at least double from the point we are at right now. So, please do not lose site of the forest when we are dealing with the leaves and trees. We are clearly setting up a generational buying opportunity in the metals. And, along those lines, one of my analysts at Elliottwavetrader.net, Zac Mannes, will be writing a new series of articles at Seeking Alpha entitled "Generational Buying Opportunities," wherein we will be discussing some of the mining shares opportunities we are following on our site.
Disclosure: I am long SLV. 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.
Additional disclosure: I own intermediate term puts on GLD