Price Action Over Prior Week
This past week or two we have seen a corrective pullback in the market. This was followed by what seems to be the start of another rally to most market participants. But, I believe cautious optimism is needed over the next two days.
Anecdotal and Other Sentiment Indications
I want to take you through a perspective that has been quite fascinating to me over the last several years.
During the market decline between 2011-2015, and almost every week during the 4-year correction, analysts and market participants were certain that the market was going to imminently spike higher due to the "strong demand in China and India." Yet, the metals continued lower and lower. And, the lower we went, the less conviction they had.
What I found most interesting, and, indeed fascinating, was that as analysts and market participants were seemingly giving up on fundamentals over the last 9 - 12 months (based upon the articles which began emerging around that time), the market was hitting its long term bottom. Let me give you some of the more recent examples.
At the start of the year, I read an article which evidenced some rare intellectual honesty in the gold market by stating that "using fundamental analysis is futile, as a great many precious metals bulls will attest." Yet, amazingly, the analyst then progressed into a treatise of fundamentals analysis which lead to his prognostication for the price of gold. A head scratcher indeed. But, I am simply resigned to the fact that most place their brains in neutral and simply provide rote regurgitation of what they have been taught about the market no matter how wrong they recognize it to be. Sadly, they know of nothing else.
Even GATA was noting that "[n]o amount of quantitative easing anywhere in the world has done the price of gold any good. Neither have near-zero interest rates. Nor has enormous physical demand from India and China. Nor the staggering debt in the United States. Nor a race to the bottom in many currencies."
In fact, in June I read an article entitled "Fundamentals Will Matter One Day."
You see, fundamentals have meant nothing to the metals market because, as I have been trying to explain to you for 5 years, fundamentals do not control this market. In fact, they have been a perfect contrarian indicator. Anyone that has attempted to trade or invest in this market based upon fundamentals has felt nothing but pain. And, please don't insult the rest of us with the common retort that "as long as you don't sell, you don't have a loss." If that is your perspective for holding during a 70% draw down in silver then there is truly no hope for you, so just stop reading now.
But, over the last year, many have been giving up on fundamentals, more and more have begun to recognize the intellectual honesty of this perspective.
It seems that, as the market headed lower and lower, and more and more investors and analysts were giving up on the fundamentals, the market was actually striking a long term bottom. So, we can actually say that even the "sentiment" for the belief in fundamentals turned extremely bearish as the market was hitting its lows.
To take this even one step further, and to reiterate a more extreme point I made about the dichotomy in fundamentals and sentiment, I pointed to the recent article by Lawrence Williams citing the decline in demand in 2016 by China and India. So, while the fundamentalists were certain that strong demand was going to send metals higher, yet the metals continued to decline in the face of those strong fundamentals, in 2016, as those fundamentals were weakest, we have seen the strongest rally in the metals complex seen in many years.
If you are a fundamentalist in this market, and are not scratching your head, well, you should be. Ben Franklin said "pain instructs." But, if the pain of being on the wrong side of price on both the downtrend and the recent uptrend does not instruct, then, sadly, there is no hope.
The main point I am making is that sentiment speaks a lot louder than fundamentals at major market turning points. While most of the time, fundamentals will represent the perspective of the market during an up-trending market, it will never assist you in identifying major turning points in the market.
So, rather than being instructed by Franklin's "pain," I highly suggest you include some measure of market sentiment in your investment decision making process.
This is the goal of my new series on Seeking Alpha, entitled Sentiment Speaks. And, I, along with our 14 analysts at Elliottwavetrader.net, intend on providing you sentiment insights into the world-wide markets we cover, such as the US equity market (along with individual stocks), emerging markets, bonds, metals, and Forex in the coming years. All our articles will be entitled "Sentiment Speaks," so keep your eyes out for us.
Price Pattern Sentiment Indications and Upcoming Expectations
In this article, I am only going to focus on the price levels for GDX as a key to following the next larger move for the market. At this point in time, with the "pop" we experienced after the Fed announcement, the complex is set up to run quite strongly. But, having a set up and following through are two different things. So, I must warn that there is still a pitfall of which one must be aware if they are aggressively long.
As long as GDX remains over 29.20, we are setting up to head to at least the 35 region next, but, more preferably, I would even like to see us extend all the way to 39-41 before the market takes its next breath and provides a consolidation again.
However, the pitfall is if we see the market break below the 29.20 level, as that opens the door to a drop back down to the 26 region in a bigger pullback before we are able to set up another rally phase. While a break of 29.20 is not going to absolutely kill the rally, it is highly suggestive that a larger pullback may well be in order and one may consider a short term defensive posture.
Price action over the next several days is critical to whether we immediately continue the rally to much higher levels sooner rather than later.
Disclosure: I am/we are long SLV AND VARIOS MINING STOCK.
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.