Monday, March 07, 2016

Guest Post: Gold Committment of Traders (COT) Report at Nosebleed Levels

PM SECTOR update - not a Flag / Pennant, but a top - NEW LONGS ABOUT TO BE FLEECED...


Many analysts and writers have described the pattern forming in the past couple of weeks in gold as a “bull Flag or Pennant” with some appearing to be “playing to the gallery” – i.e. telling their audience what they want to hear, which is that gold will continue to go up. I, on the other hand, decided that the triangle that had formed was not a continuation pattern, but a top, and said so about a week ago. So, as you will readily understand, I was not looking good when gold seemingly broke out upside on Thursday, and came in for considerable flak. However, on Friday there were some dramatic developments across the sector which look set to vindicate my stance.

When you buy a used car it is not enough to look at the clean shiny exterior and decide as many do, that the car is good – you have to know what its internal state is – the condition of the motor and the transmission etc. which means you have to poke around and dig deeper. In the same way it is not enough to look at the price pattern in something like gold and say “It’s looks like a bull Flag and therefore it is a bull Flag” – you have to know what’s going on beneath the surface - in the “internal plumbing” of the market so to speak, and we do this by using COT data and the volume pattern, and as we will see, the internal state of this market is not good at all and calls for a sharp drop soon that will take most by surprise. There are a number of compelling reasons to expect an intermediate correction in the Precious Metals sector imminently that could be severe, which we will now proceed to look at.

Starting with the 1-year chart for gold, we see that it has made a parabolic slingshot advance that has brought it to the trendline target shown, where the advance hit a wall. Many are expecting the choppy action of the past couple of weeks to be followed by another sharp upleg, but that looks highly unlikely for several reasons. In the 1st place, look at how steep the parabola has become – even if gold has started a new bullmarket, do you really expect it to just go up vertically, like a rocket, without any reactions or periods of consolidation?
If you think that gold is going up from here, I suggest you take a trip down to your local skate park and watch the kids in action. See what happens immediately after they zip up a ramp that becomes vertical – if they are good they might work in some turns or spins, like the triangle on our gold chart, but after that it’s kind of difficult to resume the upward path. Take a look at the following picture and rate the chances of the skater going vertically upwards from this position. Not very high are they? – so why do you think gold should be any different after its vertical ramp?
Another important reason why the triangular pattern of the past few weeks is not viewed as a valid Flag or Pennant, is that the volume pattern is not consistent with it being one. Volume should die back steadily to a low level as the pattern forms, and clearly it has not, as we can see on the 7-month chart for gold below. Thursday’s supposed breakout from the Pennant, which is viewed as false, did not make it past the target line projected from the peak of last August, then on Friday a “Spinning Top” candlestick appeared whose bearish implications are magnified by the fact that it occurred on multi-month record volume, and confirmed by very bearish candles appearing all over the sector at the same time.
The latest gold COTs are a disaster with Commercial shorts, which were already high a week ago having piled up even more, and since this data is for Tuesday night’s close, you can bet that they went even higher on Thursday’s advance to new highs. Now, I’ve heard the justification that they reach higher peaks in a bullmarket uptrend, but even so, taking the other factors detailed here into account, this looks bad – and it won’t be the Commercials on the losing side if gold if now proceeds to drop.
Click on chart to popup a larger clearer version.

Our next chart shows that there aren’t many investors left to turn bullish on gold stocks, which is clearly a dangerous situation. The Gold Miners Bullish Percent Index has ramped from about 14% to 72% is just 6 weeks…
They’re nearly all in – so it’s fleecing time again!
A group of new longs contemplates their fate…
Now we will take a look at concurrent ominous developments across the sector late on Friday, which all point to the same thing – a breakdown and drop. We start with the 3-month chart for the Market Vectors Gold Miners, on which a very bearish prominent “Gravestone Doji” appeared…
As Steve Nison writes in his terrific book “Japanese Candlestick Charting Techniques” – “The gravestone’s forte is in calling tops. The shape of the gravestone doji makes its name appropriate. As we have discussed, many of the Japanese technical terms are based on military analogies. In Japanese candlestick literature, it is said that the gravestone doji represents the gravestone of the bulls that have died defending their territory.” So there you have it.

The very same candlestick also appeared on the Direxion Gold Miners Bull 3X Shares chart…
As you would expect the inverse candlestick, a “Dragonfly Doji”, appeared on the chart for the Direxion Gold Miners Bear 3X Shares ETF, and what was notable here also was that volume exploded to titanic record levels, a sure sign of a reversal…
Silver and silver related investments also showed reversal candles, with a fine bull hammer appearing on the chart for ProShares Ultrashort Silver, right at support at the February low.

Finally, the “Moron Index”, a proprietary clivemaund.com indicator, has spiked over the past couple of weeks. This is carefully calculated on the basis of the number of Emails I get from people telling me that I am wrong, and laced with insults and profanities. This is usually a very reliable indicator, since such people, by their very nature, are led by cheerleaders, and thus invariably end up on the wrong side of the trade.
 
Conclusion: we are at an intermediate top, and recent new longs will end up being fleeced.

End of update.

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