- Not all consolidations are the same.
- Commercial traders have gone hugely bearish.
- Upcoming week's expectations.
Not everything is as it outwardly seems in the metals world at this time. In fact, I think all camps may be in for a bit of whipsaw over the next month or so.
More and more technicians are viewing the current consolidation in GLD as a bullish sign. They expect continuation of the trend off the 119 lows. Many of the fundamentalists have been pointing to demand numbers from China and India, and a whole host of other factors that are supposed to push gold higher. And, maybe they will finally have their day.
Then there are those who watch the Commitment of Traders report intently, attempting to glean clues as to where the markets are supposed to go. Last week, we were provided with one of the most bearish reports we have seen in quite some time. The commercial traders went heavily short, and many view this as an indication to an imminent big decline.
This report is also what most point towards who feel that the metals are manipulated. Their claim is that when the commercial traders - the supposed manipulators of this market - go heavily short, the market follows the path they set. Well, this past week, they are faced with a bit of a conundrum. In fact, someone questioned why the market has not dropped this past week when the commercial traders went so heavily bearish. Don't they control the markets? If they went heavily short, why did the market not drop hard and fast?
The issue that most do not understand, about which I am attempting to continually enlighten, is that sentiment controls the market. No matter how many short positions are placed by the supposed "manipulators," the market will not drop until sentiment is sufficiently ripe for that drop to occur. Sentiment is the primary controller of this market, despite the myriad of news events and short trades pointed towards over the last 3 years.
In fact, quite some time ago I pointed out that the exact same Fed statement supposedly caused movements in silver of greater than 10% in exactly opposite directions. Furthermore, a little over a year ago, the commercial traders were caught on the wrong side of a market move in a very bad way. Even recently, someone pointed out how the commercial traders were caught on the wrong side of the market during the last bull-market run. So, again, unless you understand the primary direction for sentiment, none of these factors will matter.
And, this past week's COT report is even more bearish than the last. Commercial traders have become even more bearish than before, and the hedge funds have become even more bullish.
So, it looks like the battle lines have been drawn. It is the technicians, fundamentalists and hedge funds against the commercial traders. And, I really believe the commercial traders have the edge here.
When one looks more closely at the technical perspective, you have to realize that not all seeming consolidations are continuation patterns. In Elliott Wave parlance, we view truncated patterns as topping pattern which can also look like bigger consolidations, which then break to the downside. And, this can very well be one of those patterns. A break down below the 125.70 level confirms to me that we have a truncated top in place. This would then align the technicians with the commercial traders. Furthermore, nothing even precludes this market to another higher high before we break down below that 125.70 support level, so I will be maintaining an open mind in the upcoming week.
Ultimately, I think the fundamentalists will be standing alone at this dance expecting much higher levels, assuming 125.70 breaks as support. Well, there is really nothing new there. These fundamentalists have been pointing to the same factors for three years, claiming that the gold bull market is about to return, only to see further and further lows. So, this camp really does not carry with it much ability to prognosticate the immediate direction of metals and should likely be discounted at this time.
Now, if I were to draw out a playbook as to how to get the most market participants confused as to the real market direction, I would be looking for a "scary" drop in the GLD towards the 121-123 region (even if we get another push higher before 125.70 is broken). This would make the COT followers believe that the "big one" is upon us, and we are on our way to the 1000 region or lower. However, as the retail shorts begin to pile in, the market then maintains support in the 121-123 region, and begins a very strong rally towards the 129-130.50 region. This would serve to reassure all those that have become newly inaugurated bulls that the lows have indeed been seen, and we have truly moved back into the long term bull market.
What this would do would be to take out the weak hands on the long side with a break down below the current consolidation, bring in more retail short side traders on the drop to 121/123, whipsaw the short side traders with one more strong rally, and then bring in more retail long side traders. Ultimately, this scenario would hurt the most traders within this region, only to then skewer these newly inaugurated bulls, as the market then drops to take out the 119 region, on our way to the 100 or potentially even lower.
Now, I know this sounds like quite the fantasy to some of you, but I see a very real pattern potential on the charts I am looking at to see this play out. But, again, I must caution you as I have in the past. We are, in my humble opinion, still within a counter-trend, corrective rally. These can take many different twists and turns, as they have no set pattern within these corrective structures. These are the most variable of all Elliott Wave structures that we use to follow market sentiment. Therefore, we almost have to be ready for the unexpected, and be exceptionally nimble as we attempt to determine from where the market will set up for the final break down and final flush out of all bullishness from this market. And, yes, I still believe that this final flush is needed in order to set up the next major multi-year bull run, in a similar manner as the phoenix rising out of the ashes in a spectacular burst. (And it does not hurt my expectations that the USD is setting up for a strong run over the next several months).
So, in summary, my pivot in GLD is now 125.70. As long as we remain over that level, we can still subdivide for a full 5 waves higher. However, should we break below it, then I will be watching for that whipsaw scenario, as long as we remain over 121GLD. Below 121GLD, and I think we are likely headed to new lower lows.
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 own intermediate term puts on GLD