In the first week of February did an update on precious metals and stated that we were “getting concerned that gold stocks are going to renew their down trend”. Then two weeks ago we reiterated our pessimism due to the lack of tweets talking about being buyers of gold stocks. As we look at the charts again today we’re even less hopeful than before. Gold (GLD) had a small bounce above the $150 level and now appears to be ready to break it.
Since the first of the year our Twitter sentiment indicator for GLD has mirrored the movement in price. This tells us that traders and investors alike are confused and are simply chasing price. When traders are making “rational” judgements about the future prospect of a security sentiment plots its own path. Short term traders often take profits on bounces and buy on dips, which shows up in our sentiment indicator as divergences from price near turning points. When market participants are confident in the direction of a stock, sentiment confirms that move by painting peaks and valleys in the same direction (but not a mirror image of price). These are examples of “rational” trades where traders have anticipated an entry and have specific targets and exit points. Emotional trades show up with sentiment looking almost exactly like price as market participants make their trades almost solely based on fear of missing a move. That’s the condition we have right now in GLD. When this occurs it is best to sit aside and wait for people who are buying and selling GLD to calm down and stop trading on emotion.
Based on sentiment it appears that GLD is breaking down and will most like fall below the $150 level. Gold stocks (GDX) have already broken below there intermediate lows from May of last year and are now in no man’s land. Twitter sentiment for GDX is showing a slight positive divergence from price, but this isn’t encouraging because the divergence comes after large negative prints that were recorded as GDX broke the uptrend line from the May lows. That day the backs of the gold stock bulls were broken. Since that time we’ve seen even more capitulation from gold stock owners. A break of $150 in GLD will probably bring out extreme selling and extreme negative sentiment that will most likely represent the next opportunity for GLD and GDX to bounce. We’re standing aside and watching how the game plays out as we’re not fans of trying to catch a falling knife.