Sentiment, TA & the Gold Correction

Today we use the recent events in the gold sector as an example of how effective use of Sentiment and Technical analysis can keep us on the right track despite what we may believe with all our rational being at any given time.

i GoldBug

I am bullish on gold.  That is simply because I believe you can’t sustainably grow an economy by layering more debt and leverage upon previously unresolved debt and leverage.  Since 2002, I have been a gold bull and have no plans to change that orientation at this time.  Quite the contrary.

I have probably written just about enough about the ‘gold generals’ and the strident psychology that tends to lead the gold “community” into a painful abyss every few years.  The time to talk about risk in the precious metals is when they are blowing off to the upside amidst bullish animal spirits, as in 2011. Or on shorter time frames, as during the run up to the much hyped QE3 announcement in September:

“Sentiment is over bullish in the precious metals.  Public opinion is over bullish, Hulbert’s HGNSI is over bullish and the CoT data show that the little and big speculators are over bullish.  This should be cleared out before we renew our bullish enthusiasm on a risk vs. reward basis.”  –NFTRH 208, 10.14.12

To complete the above story, this warning was simply a notice that the precious metals were due for what I thought at the time would be a normal correction.  As we know, what followed has been anything but what most gold bugs would consider normal.  Later this article will discuss TA and what its parameters (disciplines, kill switches, trip wires, etc.) can do for people to keep them on the right track.

The time to talk about opportunity is well, now, when gold is being sold hard and people are being compelled to swear off the precious metals story in favor of what is actually working.  To add insult to injury, the gold mining sector is being absolutely decimated if not yet fully in price, then in perception (much of it earned by the way) as the most high profile geologist/sector analyst Brent Cook has just produced a widely disseminated and definitive piece, defining myriad reasons one should avoid the sector.

I am not a stock analyst or anything like an expert on any stock sector.  That is not my gig.  But I have learned a lot over the years and a big lesson was avoid the garbage, even in a bullish sector.  With gold stocks now riding the bear hard, this is even more important because a lot of the garbage is not going to be there when the bear phase ends.

On the other hand, there are discreet quality situations out there.  None in my opinion, as quality a situation as actual gold, or monetary insurance.  But there are quality ‘plays’ and as they are puked up with the garbage, that would be an opportunity.  But again, the metal is for insurance against the debt and leverage being employed to keep the system running.  The stocks are a play (a sometimes dynamic one), and nothing more.  This sector has proved that, even in bullish phases, it is not investment worthy as a whole.

Sentiment & Technical Analysis

Sentiment and TA can most certainly help people avoid the type of pain now being inflicted on the die hard gold “community”.  We noted above how sentiment came into play as an over bought sector became too favored and over bullish.  Once the correction started, it was time for TA to guide.

Hui Daily Chart

TA predicts nothing.  But it does guide the way and often sets targets and parameters.  HUI became over bought (see MACD and RSI extremes) in September and due for a correction as it blew through the 460 level, which had been a significant parameter to a topping pattern that formed in 2011.  This was a bullish event.  But the vertical drive had to be corrected and it would have been normal for the correction to find support at 460, an area that also included some important moving averages.

Personally, I became quite bullish as this area was tested and sentiment had come off its over bullish readings.  But folks, things then quickly became very abnormal as an important support zone was crashed and turned to resistance.  This is when the gold “community” began finding evil bankers and various boogeymen behind every move.  And they were there alright, in the persistently bearish CoT data released every week for silver (see right side bar under ‘Technical & Data’).

HUI’s loss of 460; silver’s ominous CoT structure; this thing was now going abnormal to the preferred bull case.  HUI went on to sport a potential bottom with support at 420; crashed.  395; crashed.  And so on.  But things became abnormal when 460 was lost; no ifs ands or buts.

Bottom Line

The main point I want to make is that there should be no predictions nor defiance when managing markets.  There should only be probability, risk vs. reward and discipline first and foremost to guard against our own preconceived notions or dogmatic beliefs.  The point of being a market participant is to be intact first and capitalize second.

The market never cares what we may believe.  People did not believe in the S&P 500 last summer.  It did not care about this.  People believed in the precious metals in September and the market as it turns out, did not.  Evil bankers?  Yes, probably in some quarters.  Meddling policy makers?  Most definitely.  Right and wrong?  There is no place for righteous ideology in the markets.  There is only right and wrong regarding market direction.

I thought I was right in October as HUI began to correct September’s excess.  I found out I was wrong when the 460 trip wire was hit.  This is all about adjustments while maintaining big picture views, not about making predictions and holding to them through the damage.  A bull who holds through thick and thin could have been a better and stronger bull with more discipline and less defiant dogma along the way.

It is okay to feel greedy now, in anticipation of coming opportunities in the precious metals.  But that only applies to people who used discipline every step of the way to be in position to be greedy by being fearful when appropriate.  That’s the market.  Regular stock bulls are becoming ensconced in greed now.  Many gold bugs are gripped in fear.  The world turns and TA and sentiment help in the process of not getting thrown off., Twitter, Free eLetter, NFTRH