"Gold Lower on Global Fears", "Gold Soars on Global Fears". I am sure you have seen similar titles to articles that have made their way through our world-wide web over the last half a year or more. Yet, none of them are imbued with an iota of intellectual honesty. In fact, they are completely dishonest portrayals of how gold moves. How can the same event "cause" opposite reactions?
If one were to twice touch a hot stove, would you keep your hand on it one time, and then quickly retract it the next time? Something tells me that you would retract your hand immediately both times, rather than having two completely different reactions to the same stimulus.
Newtonian-based cause-and-effect analysis does not work within financial markets. Moreover, as Einstein stated: "During the second half of the nineteenth century new and revolutionary ideas were introduced into physics; they opened the way to a new philosophical view, differing from the mechanical one." Yet, even though physics had moved away from the Newtonian viewpoint, financial market analysis had not.
So, then it leaves us with the question of what moves metals? We have discussed many times before that it is the sentiment of fear that moves metals, and there are many types of fear that may move metals. However, ultimately, since it is sentiment that moves metals, we track such sentiment through the use of Elliott Wave analysis, and not through news sources which have completely whipsawed the masses.
Over the last several months, we have seen metal bulls turn to bears, back to bulls, and then again to bears-- and sometimes even within the same week. This week has been no different. While this correction has clearly taken much longer than I had ever expected and has also gone much deeper than I had expected, I have remained staunchly long with a suggested re-entry in the metals market with a 25-33% initial position, after I suggested to clients to sell our last long positions on February 28th, the day before the metals' "flash crash."
We have not wavered in this position, and have not whipsawed into entries and exits-- back and forth-- in this market, as the rest seem to have been. Rather, we have been waiting VERY patiently to determine if the pattern we have been following will validate with a move up to new all-time highs, or if this pattern will break down with a break below the December 2011 lows. While we have come very close to invalidating this pattern several times, it has maintained its support and its larger bullish pattern thus far.
So, now, do we get uber-bullish, as many seem to have become due to Friday's price action? I think not. While what we saw on Friday was clearly a good start and what we would expect the start of an expected break out in the metals to look like, we are still looking for that ever-elusive pattern up off the lows in the metals, which will then cause us to buy another 25-30% position on the pullback / consolidation that follows.
So, I will provide you with the resounding warning that I have been issuing to my clients and subscribers for the last several months:
We do not have the signs of a break out nor do we have signs of a break down. We only have signs of a corrective decline.
However, any move over the 159 level, accompanied by larger volume, is our first clear indication that the next rally phase has begun. But, until such a breakout has been seen in the market, and as long as we are above the 2011 market lows, then we are simply left with a seemingly impulsive 5 wave move off the 2011 lows, and an overlapping, messy, corrective decline on positively diverging technicals. Nine times out of ten, this is indicative of a strong rally about to begin, and we are all in the business of trading patterns that provide us with high probability set ups.
But, even with that warning, GLD has provided some light at the end of this tunnel, so let's look at GLD a bit more closely this week.
Over this past week, we have seen the USD rally higher again, but GLD has also rallied higher. While I still see higher levels over the next month for the USD, as it has not yet reached our targets, as I have said in the past, gold will do what gold will do regardless of what the dollar does. Furthermore, the rise in the metals over the last week also exhibited the type of volume one would expect to see in a breakout for gold. Therefore, it is very possible that the bottom has been seen.
While I have been told that providing a detailed Elliott Wave analysis is not appropriate for this forum, I will at least provide you the levels which we are watching for confirmation of a breakout. First, the 158.30 level in GLD is a big level of resistance for us. If GLD can sustain a move over that level on high volume, then you may look to add to your long positions and use a stop of either 155, or as low as 153.
If gold does continue its upward trajectory this coming week, then our targets are initially the 163/64 region before we see a larger consolidation / pullback, which would provide another good time to add to your long positions. Thereafter, GLD should move to the 174 level in a hurry. Depending upon how it moves up to that level, that may act as the top in GLD for the rest of the year. However, if it is able to maintain support in a high consolidation or if it is able to slice through that level, then it will not consolidate until it hits the 180 level.
So, no matter how we slice it, the manner in which gold will act within the next week will be very telling for its near term pattern.
Writers Note: I apologize for not being able to update you on the movement in the metals of late, but I have been quite overwhelmed lately between work and a serious family healthcare matter. I am hopefully going to be able to provide more current updates again.
Disclosure: I am long GLD.