Price Action Over the Prior Week
The metals have continued to act bullishly over the past week, with silver finally breaking through its important 17.85 level, after spending most of the week consolidating just below it. Moreover, it broke through on strong buying volume, which is what we want to see during a bullish move.
Anecdotal and Other Sentiment Indications
As I have said many times before, markets are not driven by the substance of news or exogenous events. Many social experiments have been conducted over the last 30 years which prove this to be true, despite the public's belief to the contrary. And, as these experiments have proven, what does control market direction is something we term "market sentiment" or "social mood."
The prevailing social mood or market sentiment interprets the exogenous events we hear about, and then "spins" that news based upon the prevailing social mood. This is what moves the market. If sentiment is positive, then the market will react positively, even if the news is negative, and vice versa. This is why we often see markets go up on bad news and down on good news, and it makes so many scratch their head, especially if they are looking to "logic" in the markets or if they are looking for directional cues from the substance of the news or fundamentals.
If you need to look to the most obvious recent event which proved this to be true, I have written extensively about how and why most everyone got the move in the market wrong after the election, while we maintained on the correct side of price action the entire time.
So, in my continued quest to enlighten readers about how markets really work, we had yet another episode where the market reacted differently than most expected based upon the substance of the news, and I believe it deserves to be highlighted.
Last Friday, the market presented us with a very strong jobs report. And, the common expectation was that gold would decline on a positive jobs report. While there is a myriad of "reasons" many have noted as to why gold should drop on a positive jobs report, I believe the strong consensus was expecting a drop in gold.
Not only was this recent jobs report positive, but it was even stronger than most expected. Yet, gold not react as everyone expected it "should," but, rather, it rallied quite strongly. Yes, gold again bucked the common expectation, and rallied in the face of news which was supposed to send it lower. Amazingly, the sentiment patterns we were watching were still pointing higher. So, once again, we have yet another example where "sentiment trumps news."
The question you need to ask yourself is how many times do you need to be caught on the wrong side of a market move before you begin to recognize what the true driver of that market is?
Price Pattern Sentiment Indications and Upcoming Expectations
This past week, I noted that the 17.85 level in silver was very important to the next break out rally. All week long, the market continued to test that region, and backed off. And, I continually reiterated that this was the chart and level to watch for a break out signal in the complex.
On Wednesday evening, in our mid-week metals update at Elliottwavetrader.net, I noted the following:
As it stands as I write this right now, both the GDX and silver are sitting right below their respective .764 extensions off the recent lows, which, if broken through, should solidly confirm the heart of a wave (NASDAQ:III) of (3) in wave 1 of iii. And, remember, wave 1 of iii is likely targeting the highs of August of 2016, if not even a little higher.
The only question right now is if we see one more minor pullback before the break out. And, as I have been saying for quite some time now, 17.85 in silver will likely be the dividing line between these two potentials. Thus far, we have held below 17.85, yet still developing a high-level consolidation. And, as long as silver remains over 17.50, the market is setting up in a short term break out posture. We are looking for a high-volume spike through the 17.85 level, with follow through over 18.20 to point us to the 19 region for wave of (3).
In GDX, the .764 extension resides at 25.76, with support below residing between 23.75-24.90.
As I have said so many times, when the metals turn bullish, they rarely offer a "gentleman's" entry, and if they do, it is often via a spike down which scares people from buying. So, just stay on your toes, as either possibilities still remain as long as we do not see silver's break out signal as noted above. Once we do break out, I will be looking for GLD, GDX and silver to be heading back towards their August highs for wave 1 of iii, which will likely complete over the next two months, setting up a wave 2 pullback into the late spring or summer. That means the real fireworks for the complex may not be seen until later this year.
But, after testing the 17.85 region all week long and with GDX striking within five cents of its noted 25.76 resistance, and being unable to break through, on Thursday morning before the open, I warned the members in our Trading Room at Elliottwavetrader.net:
We MAY need more patience though. I fear a whipsaw set up on both ends of price now.
Within minutes of my posting that in the room, the GDX dropped 3% within an hour. And, to be honest, I was shocked at how "scared" that move actually made investors, even though we remained well within our upper support zone. As I noted, it was "barely a scratch," and there was certainly nothing broken in the complex. However, the speed of the move down certainly scared people. However, as I noted in the Trading Room as well, the move down in silver was "clearly corrective."
The next day, silver broke out over its 17.85 resistance with strong volume, and then maintained a high and tight consolidation over its break out point all day. This was truly bullish action, and what I was waiting to see.
Our next important resistance in silver is the 18.20 region, with GDX at 26.90. As long as silver holds over 17.50 and GDX over 23.75, I am looking for another leg of this rally to take hold, pointing GDX towards 28, silver towards 19, and GLD to 121.50.
When I take all the evidence into account, it seems to be pointing to the upcoming week being quite important for this complex. The set-up is in place for a powerful move higher in the short term. And, since we are not able to tell you whether the market will take advantage of this set up, we certainly can point to the evidence that suggests that all the ingredients are in place for such a strong rally to take hold. And, with so many still looking for that "ideal pullback," or "gentleman's entry," we know how much this market loves to leave people behind.
Disclosure: I am/we are long PHYSICAL METALS AND VARIOUS MINING STOCKS.
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.