By Poly

This is an excerpt from this weekends’s premium update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. Now offering monthly & quarterly subscriptions with 30 day refund. Promo code ZEN saves 10%.

In all my years of studying and mapping out Cycles, I have found that gold is the most consistent of assets. I find it to be the truest of assets when it comes to respecting traditional technical analysis, including during long, bear market periods. And this remains true today, within this Daily and Investor Cycle, as gold is following a very clear, predictable and understandable path.

You generally don’t want to get into the business of predicting the day to day movements, but in this case, gold is extremely oversold and has not experienced a meaningful bounce in over a month. Since topping for the Investor Cycle, the path lower has been relentless for too long, leading me to believe that a counter-trend (suckers rally) is about to unfold.

This is primarily because we’re now at the Half Cycle Low point for this Daily Cycle. Also around this level, support should begin to develop as the “double bottom” buyers off the prior ICL ($1,130) begin to defend this area. Further, the move out of the last Cycle low generated just a $28 rally, which was well below the average. Yes, another equally poor showing is possible here, but a stronger $40-$50 reaction is also just as likely, sending gold back up to challenge the $1,200 area.

3-14 Gold DailyAs is always the case, the Daily Cycle is simply following the curvature of the longer Investor Cycle. As we know, the Investor Cycle is near the tail-end, heading towards the next Cycle trough, allowing us to generalize that the Daily Cycles will be severely pressured lower. We find during these periods that rallies can be sharp, but generally short in duration, as they are typically sold quickly and aggressively.

What we’re on the look-out for is evidence to support an Investor Cycle Low, that’s all that matters at this point. Typically that means a mix of the right Cycle timing, one-sided investor positioning (COT Report), and extremely pessimistic sentiment. A Cycle simply reflects the natural ebb & flow of investor appetite and sentiment towards an asset, and these three metrics help us determine where we stand within that Cycle flow.

When we look at the latest COT report, we see that commercials are long and speculators short, both by significant amounts. I’ve gone ahead and marked all the prior ICL’s as they relate to traders positioning within the report. As you can clearly see, we find that Gold ICL’s do correlate well with extreme positions taken by traders. We’re not exactly there today, as we’re short of the levels seen during the past 4 ICL’s. But looking at this chart we see that gold is just one or two big capitulation weeks away from those levels.

3-14 Gold COTCourtesy Sentimentrader.com

The COT report shows trader’s positions, which by extension reflects their sentiment towards the asset. Traders, especially the speculator, trade with their emotions and biases, which is why sentiment correlates highly with the COT report, and by extension, the current timing of the Cycle.

So not surprisingly, we see that gold sentiment continues to fall, just as the Investor Cycle begins to enter the timing band for the next ICL. This is exactly how all Cycles play out; as sentiment worsens the closer we come towards the next Cycle Low. The chart below shows that in all but the 2013 collapse, whenever Sentiment has fallen below the 30 level, the ICL came within 2 to 3 weeks.

3-14 Gold SentimentCourtesy Sentimentrader.com

The precious metals miners generally mirror the Investor Cycle well. The number of mining stocks showing bullish P&F charts will begin to fall as the price of gold declines late in the Investor Cycle. In the chart below, we see that miners have begun that predictable trend, selling off as sentiment worsens. Notably, and possibly important for coming Cycles, they show a hint of relative strength, as in general they have held up better than in past Cycle declines. But the important take-away is that within this Investor Cycle, we’re still likely at least 2 weeks (if not more), away from the ICL.

3-14 Gold Bullish Percent MinersAs I have done for the past 6 weeks, when it became clear the Cycle topped, I caution members to remain patient. ICL events are a process and they always take longer than people allow. The expected timing bands must be respected because in most cases, the asset will sell-off quickly well before the normal timing band. This leads investors to believe a low might be in on the first big drop, primarily based on the fear of missing “the bottom”, by convincing themselves they are buying value.

But in end, it is about sentiment and timing; it takes the crowd to stack on one side of the trade before the Cycle can turn. That means it generally needs to get “very bad” first, before that Cycle can trigger a turn. The same rules apply today, even though 7 out of 8 weeks lower is clearly “very bad” and is a move towards the next ICL, the evidence presented here shows it’s still short of your typical ICL. The charts presented earlier show gold’s natural progression towards the next Cycle turn, but also unmistakably that it’s short of the mark. The current Daily Cycle is two week shy of its Cycle Low and is really the first opportunity for gold to form an Investor Cycle Low.

3-14 Gold Weekly

 

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