David Tablish | Jan 20, 2014 12:40AM ET
It’s always amazing to me how market sentiment can move from one extreme to the other, taking the herd with it. Chartology is the study of charting and investor psychology which, when you put two together, can give one an edge on where you are at any given point within a bear or bull market.
Back in the first week December of 2012 the sentiment was very bullish for the precious metals sector, especially the precious metals stocks. Gold and silver both had rebounded off of the bottom rails of their six point blue rectangles which had been building out since they both topped out in 2011. It’s easy to forget how bullish sentiment was back then after a year of falling prices in 2013.
The chart below is a weekly combo chart that has gold on top and silver on the bottom. This charts shows gold and silvers near parabolic move up in 2011 with silver topping out first in April and gold topping out in September. Usually gold and silver tend to move together but not this time. The blue shaded area shows the massive divergence between the two. As is typical with parabolic rises the decline is just as fast if not faster than the rise. Even though they both topped out at different times they both began their long drawn out, blue 6 point rectangle consolidation patterns, at reversal point #1. I can still here the cries of manipulation as gold and silver broke down from their parabolic tops. From a Chartology perspective this is exactly what one would have expected to see happen after such a huge move up with no consolidation patterns to stem the decline once it got started. There is a lot of information on this chart so I’ll post it right here and we’ll look at it some more in just a bit.
The red dashed arrows, in the red sideways trading range, is where we covered our shorts. It was actually when the HUI crossed above the 50 dma for the first time since the top was put in. As you can see, we didn’t catch the exact top nor did we catch the exact bottom but we did capture the meat and potatoes of that big impulse leg down. Before we move on I would like to draw your attention to the breakout of the 6 point blue rectangles. Again cries went out that the precious metals were being manipulated, but from a Chartology perspective, this is exactly what a breakout looks like. The bulls were exhausted and there were none left to buy when the rectangles broke down, so there was a vacuum where prices could easily fall. Once you can understand the psychology of these types of shifts, you can then begin to understand how markets move.
As you can see at reversal point #3, which I’ve labeled with a question mark, because we don’t know 100% for sure if this is actually the bottom, this could be the beginning of the next rally phase. The daily chart is showing a double bottom in place and the placement of that double bottom at the June low is giving us a high probability that at least a tradeable low is in place. Note the thin black dashed horizontal line which is holding resistance that is taken off the previous lows made last fall in the red sideways trading range.
That previous low is offering initial resistance right now. A break above that horizontal black dashed line will signal a strong move higher, possibility to the top of the bigger red trading range.
Now, fast forward to the present day. What a difference a 2 1/2 year bear market can do to sentiment. I’m just as guilty as the next guy that hasa been, or is, looking for even lower prices. It’s hard to fight the herd, especially after the drubbing the precious metals sector has taken over the last few years. What I’m seeing now, with regard to sentiment, is that everyone is now looking for lower prices. That is a huge change that often happens at turning points in a market. Right up to New Year's Eve I was in the bear camp. When the precious metals sector opened for trading on the first day of 2014, with a big gap up, a warning bell went off for me. I had stated that we were at an inflection point where the precious metals complex could move in either direction for a decent move. For me the big gap up told me to exit all our short positions, and take our profits and run.
As we were short going into New Year's Eve, let's take a look at the Horizons TSX Global Gold Bear Plus ETF, (HGD). This is a Canadian, 2X short gold ETF. As I stated earlier, I thought we were at an inflection point which the chart below clearly shows. Note the last bar inside the red rising-wedge which closed almost right on the bottom rail, on New Year's Eve. As you can see, we had a decent H&S bottom forming with the red rising wedge forming right on the neckline. This is usually a bullish setup.
Note the big gap down, out of the red rising wedge, that found initial support at the neckline. As I saw it, that breakout gap wasn’t supposed to happen if gold was going lower. We exited our short positions on that very same day, asking no questions. When you're expecting something to happen, and the exact opposite happens, there is a conflict of interest—and the best course of action is to get out until the dust settles.
So we now have a bottom in June and one in December. At this point it’s still too early to tell if we are going to end up with a big sideways trading range or if the potential double bottom, made from the June and December lows, is going to be a double bottom reversal pattern. All we know right now is that we have a small bottom in place that makes it worth trading gold to the upside, IMHO.
Now let's fast forward to the present. There is a subtle change taking place right now with the precious metals stocks. Unlike 2011 when gold and silver were making new highs and the precious metals stocks could have cared less I’m now seeing just the opposite happening. As gold and silver are still barely off the floor, the precious metals stocks are starting to make some big moves to the upside. What is even more surprising is that the little juniors are out-performing everything in the PM sector. Talk about a change of character!
Let's start with the Market Vectors Gold Miners ETF, (GDX), that is showing us that a small inverse H&S bottom is now in place. This may be a small inverse H&S bottom, but keep in mind it is forming at the end of a year plus decline. This is the perfect place to look for a reversal pattern. As you can see, it’s trading comfortably above the 50 dma which has been working as support lately.
Based on this action I have taken 6 Positions in Our Kamikazi Portfolio (from January 8th trough January 14).. in the Direxion Daily Junior Gold Miners Bull 3X Shares ETF (JNUG), the 3X ETF based on the GDXJ. In less than 3 weeks, these positions are already up 44%, 48%, 42%, 24% ,22%, and 24%. The leverage on a 3X ETF is astounding if you get in before an Impulse move. I expect much more to come albeit with potentially wild drawdowns.
At the bare minimum we should have at least a short to intermediate term rally that may or may not be the start of the next major impulse leg up. With Chartology on our side we will be able to see what is unfolding and take advantage of anything the market gives us.
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