Sentiment Speaks: It Never Fails

by: Avi Gilburt

- Price action over the prior week.

- Anecdotal and other sentiment indications.

- Price pattern sentiment indications and upcoming expectations.
Price action over the prior week
The metals complex may have bottomed this past week, and began what I think may be a very strong rally.
Anecdotal and other sentiment indications
It never fails. When the gold market was going down again, we began to hear the bears grumbling about how we are heading to the $1,000 region and lower. We began to hear about "false breakouts" leading to major breakdowns.
In fact, just as we were hitting the lows this past week, I read several analysts suggesting shorts on the metals. Yes, you heard me right. In fact, one analyst who was bullish all the way down from the 2011 high to the 2015 lows is now suggesting that seasonality will not allow the metals to move at all during the summer. For a perma-bull, that is akin to turning bearish.
But, remember, analysts are human beings too. And, they fall prey to the same sentiments affecting the masses, so they herd just as well as most novice investors.
In 1996, Robert Olson published a study in the Financial Analysts Journal in which he studied the effects of herding upon "expert" fundamental analysts' predictions of corporate earnings.
After studying 4000 corporate earnings estimates, he arrived at the following conclusión:
Experts' earnings predictions exhibit positive bias and disappointing accuracy. These shortcomings are usually attributed to some combination of incomplete knowledge, incompetence, and/or misrepresentation.
Mr. Olson's article suggests that "the human desire for consensus leads to herding behavior among earnings forecasters," with the herd always looking for the current trend to continue unabated and indefinitely. But, those that have experience in the non-linear work of the stock market understand that the most bullish calls by these "expert fundamentalists" almost always come at the top of a market or stock. And, in our recent case with metals, at the bottom.

When dealing with a non-linear market, one has to have a non-linear tool with which to gauge it. In my particular case, that tool is Elliott Wave analysis. That tool had me recently looking for a test of the 24 region in the GDX, before a pullback down towards the 21.50-22 region. It seems the market chose to split the difference, since we are seeking confirmation that GDX just bottomed at 21.75.
As far as silver is concerned, my ideal target was 16.30, which is exactly where silver bottomed.
However, the ideal target I had in GLD was in the 118.30 region, which GLD did undercut by approximately 25 cents.
Yet, the positive divergences we were seeing on the charts were strongly suggestive of bottoming action despite a slight break below our ideal target on GLD. In fact, as the metals complex was hitting their lows on Wednesday, June 21st, at 8:32am, I posted in our Trading Room at "This SHOULD be the last decline in the metals complex."
While our methodology is clearly not perfect, and we have been wrong at times, it has given us advance warning of each and every bottom struck in the complex since we bottomed a year and a half ago. The one time we missed a call was back at the August 2016 high, where we missed the first move down from 31.85-28 in the GDX, but we did catch the remaining decline from 28 to the 19 region, at which time we correctly turned bullish again.
While there is no such thing as the holy grail in non-linear markets, you still do need some perspective which can provide advance notice of a change in trend a great majority of the time.
Otherwise, you are left to assume that the trend will continue unabated, just like the analysts reviewed by Mr. Olson above.
Price pattern sentiment indications and upcoming expectations
At this point in time, I think it rather easy. The market struck the bottoming targets we had on all our charts, and has since reversed. As long as the market provides us with corrective pullbacks that do not break below this past week's low, we are set up for a very strong rally into the summer. Specifically, once you see a strong break out in GLD over the 123 region, it would not shock me to see it rally in semi-parabolic fashion with an initial target of 138, but with an ideal target of 143-145.

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