Just one year ago, when I stood my ground and continually maintained that lower levels were still going to be seen, not only did I encounter disbelief, but, often, I experienced ridicule.
Now, one year later, how many market calls within the media are we seeing for targets of $350-700 gold? But, can I say I am surprised? Absolutely not. This is simply the way herding and sentiment direct a market, as well as the analysts that cover the market. And, analysts herd better than most.
I know some of you have seen me cite this before, but 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 conclusion:
“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.
Now that the market has broken down further than most believed just 3 months ago, the market has begun to shift from looking for the resumption of the bull market towards disbelief that a rally represents the resumption of the bull market. While I do not yet have evidence that we have completed that shift, I don’t think we are far off.
It is for this reason that I think we will likely see one more rally to test overall market bullishness, and the market will likely fail that test. We call that test a 4th wave rally. The 5th wave decline to lower lows which follows is what usually will turn the majority of the few remaining bulls into either “questioners" or “disbelievers." When the market begins to rally off this final 5th wave low, and most of the market will then question or not believe that the bull market is about to resume, that will represent the point at which we know, from a sentiment perspective, that the market has finally turned. These will then be the “chasers" which will fuel the next major 3rd wave higher.
Currently, I do not believe we are yet at the point that the remaining bulls have turned into “questioners" or “disbelievers.” Although most of the comments I am now seeing to my metals articles within the mainstream financial media are quite “questioning" or “disbelieving" the resumption of any bull market, from an anecdotal standpoint, I don’t believe enough of the bulls have yet been converted. It is for this reason, along with my wave count, that I believe lower levels will still be seen.
But, my friends, when we see the mainstream media publishing market calls for $350 gold, and I even see comments in my articles about the potential to see sub-$100 gold, it tells me that the market is shifting towards the majority become much more bearish overall. Again, the test will be the impending rally I foresee in the near term and how the market views that particular rally.
From a wave count perspective, both silver and GLD would look best as having completed or just about to complete their wave iv of 3 down, which means that the upcoming week will see the set up to lower lows to complete the 3rd wave in this final 5th wave of this multi-year c-wave pullback. While we can still see even higher levels to set up the wave v of 3 to lower lows, it is truly not necessary after the action we saw on Friday of the past week. Currently, we have enough waves in place to support a completed wave iv flat pattern, which suggests that the next move will be to the downside and lower lows in the metals.
And, the GLD now presents the cleanest patterns of the 3 charts I follow. Again, as I noted, we have enough waves in place now to suggest that a wave iv of (3) has completed on Friday as a “flat." This means that as long as GLD does not break over the high seen on Friday, and then breaks the low seen on Friday, we should be looking for wave v of (3) to head down to the 101 region. In that event, silver should break the 14 level, and if GDX follows suit, it can drop as low as the 11.60 region (quite amazing when you think about it).
But, should we see a move over the high seen on Friday in the GLD, it may put into question whether the 3rd wave has in fact bottomed and the larger degree 4th wave has begun. Again, the pattern in the GLD suggests that to be the lesser likely scenario at this time if this is to complete this 5th wave of the c-wave as a standard impulsive structure. In fact, the market “can" rally as high as the .618 extension at the 108.50 region, and still maintain this impulsive downside structure. So, for anyone brave enough to attempt an aggressive short position with the rubber band being this stretched this tightly to the downside, my suggestion would be to wait for the next micro 5 wave structure to the downside, which would likely retest Friday's lows, before attempting the short side trade on the ensuing corrective bounce.
But I must warn you again that this rubber band has been stretched farther than most expected just several months ago. While we expected the market to drop down to this region, this extreme pessimism should soon spark the wave 4 rally which should take us at least a month's time. But, as I have warned for years, until the pattern completes, do not be taken in by any renewed bullishness or calls for "the bottom being in." We need a larger 4th wave, followed by a 5th wave to lower lows to convince me this bottom has been struck. It has been a long haul these past few years, but we are very close to the end of the correction now.