I am now turning over rocks and peering into dark caves looking for bears in the forest of the metals world. Yes, it seems everyone has gone bullish. Even the hedge funds who were heavily short the metals have been frantically covering their short positions this past week, and that was even before the bigger rise seen on Thursday. Market analysts and traders have been pointing to the miners, noting that there is a "clear" bottom in the metals, and the bull market is back again. Yes, bullishness is once again "en vogue."
The latest COT report shows that the hedge funds, who were holding historic levels of short positions, began heavily covering those shorts, and that was based upon information before the tremendous rally we witnessed on Thursday. My expectation is that they have covered to an even much greater extent than the latest COT report has shown, which has likely taken most of the short positions out of the hedge fund world, and potentially left a vacuum underneath the market. It also suggests that much of the panic buying we witnessed this past week was more likely from short covering rather than outright buying due to a belief in the new bull market. More importantly, my gut feeling is that the commercial traders have begun to add large short positions in earnest in preparation for the next larger degree metals take down, which will likely be the final take down we see in this 3+ year correction.
As I peruse the analysts' articles, I literally see no one who is waving a bearish flag. Rather, it seems the bears are now in white-flag-waiving mode, screaming "we surrender." And, most of the former bears have now even donned bull suits, other than those who have retired to caves to hibernate. Everyone seems to be quite confident that the bear market has completed. Supposedly, we are now finally on our way to new all-time highs.
And, it's not like this market reaction was unforeseen. Rather, a rally like this is truly what is needed to get everyone back on the bullish side of the boat, which should give us the appropriate sentiment needed in order to take us down through the 2013 lows. In fact, I warned everyone on Seeking Alpha to expect this type of reaction at the end of last year:
Currently, I am still tracking the set ups which can take us to the 136-140 region in GLD before we target the 100 region, which I have been warning about for weeks now. But, remember, even if we do get that break out towards the 136 region, it is just a set up for a bigger short trade to the 100 region. And, yes, that is why I think this will be the YEAR THE BULLS DIE. This set up will likely put hope back into the metal bugs and bulls (and even the CNBC pundits, who will likely become bullish near the top) only to have them wiped out, and potentially capitulate in 2014. And, that will finally set us up for the real rally we all want to see.
So, I have still not seen complete despondency from the gold bulls, nor have I seen any capitulation. All we have seen is a short squeeze. And, I think we will need to see some form of bullish capitulation before this market finally makes a long-term bottom. From my calculations, it means that we really should be seeing the GLD100 region, or even below it.
Last weekend, I noted that the 121.50-122 resistance I was watching had broken, and that "I do see the potential to rally back to the 126/128 region, or even as high as the 140 region in GLD before heading down to new lower lows." I also warned those that were still attempting to short the market that "unless you are a nimble trader and are able to know where to take your low-risk shots on the short side, this corrective pattern can still take us as high as the 140 region before taking us much lower."
During the week, as the market pulled back early on Tuesday morning, the market actually provided a low-risk long-trade opportunity at the open, when GLD was in the 121.75 region. While my expectation when I entered that trade was to test the 124 region within the next few days, the market clearly subdivided higher in a strong fashion, and took us directly to the 127 region, right into the heart of the 126/128 region I have been speaking about for the last several weeks. But, at this point in time, there are no clear indications that the market is done with the current upside move.
For the upcoming week, the setup with which we were left on Friday has me looking higher in GLD, as long as we maintain support over the 125 region. Assuming we maintain that support, then I will be looking towards the next target region between 128.50-130. However, a break down below 125, depending how it develops, may indicate to me that this counter-trend rally has completed.
Disclosure: The author is long SLV. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I also have a short term long position in GLD calls, which will likely be sold within the next week.