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I want to discuss something that came up on the blog Friday. An
anonymous poster hinted that we were going to see more gold weakness in the days
ahead because big money had to sell their positions. Folks, big smart money
traders don’t sell into weakness. These kinds of investors don’t
think like the typical retail investor who is forever trying to avoid draw
downs. Big money investors take positions based on fundamentals and then they
continually buy dips until the fundamentals reverse. The fundamentals
haven’t reversed for gold so I’m confident in saying that smart
money isn’t selling its gold, it is using this dip to accumulate.
With
that being said, there are times when big money will sell into the market and
it is why so often technical analysis, as it’s used by retail traders,
doesn’t work. They sell into the market in order to accumulate
positions. Let me explain.
When
a large fund wants to buy, it can’t just simply start buying stock like
you or I would. Doing so would run the market up causing them to fill at
higher and higher prices. Unlike the average retail trader, smart money
attempts to buy into weakness and sell into strength. (Buy low, sell
high). In order to buy in the kind of size they need without moving the
market against themselves, a large trader needs very liquid conditions. Ask
yourself, when do those kind of conditions exist? They happen when
markets break technical levels.
If
big money is selling it is because it is trying to push the market below a
significant technical level so all the technicians will puke up their shares
to him. By running an important technical level it can cause a ton of
sell stops to activate, allowing it to accumulate a large position without
moving the market against itself in the process. We saw this very thing
happen in the oil market recently and also in February as gold
bottomed.
Technical
traders wrongly assume these breaks are continuation patterns but the reality
is that very often they are just smart money “playing” the
technical crowd so they can enter large positions. The key to watch for is an
immediate reversal of a technical break. When that happens you know there was
someone in the market buying when everyone else was selling. 9 times
out of 10 it was smart money.
At
the moment everyone is jumping on the bear side for gold. Remember we
saw this exact same sentiment in the stock market 3 weeks ago. I knew
the bears were going to be wrong simply because the market was way too late
in the intermediate cycle for there to be enough time left for a significant
decline.
The
gold bears are going to be wrong also and for the exact same reason. It
is just too late in the intermediate cycle for there to be enough time left
for anything other than a minor decline.
I'm
now waiting and hoping for a break of the May pivot. I want to play that
break, if it comes, like a smart money trader. That means I want to buy into
the break instead of panic sell like most dumb money retail traders will
invariably do.
The
reason, of course, is that gold is still in a secular bull market. In bull
markets you buy dips.
Also,
the dollar, with the break below 82 this morning, is starting to show signs
that it is now in the clutches of the 3 year cycle decline. Every Gold
C-wave so far in this 10 year bull market has corresponded to a major leg
down in the dollar. I'm confident this C-wave will inversely track the
dollar’s move into that major cycle low due early next year.
Sentiment
wise, gold has now reached levels more bearish than at the February bottom.
That means gold is at risk of running out of sellers.
And
finally, and most importantly it's just simply too late in the intermediate
cycle for gold to have enough time for a significant drop. This is the
25th week of the cycle and the intermediate cycle rarely lasts more than 25
weeks. That puts the odds heavily in favor of a major bottom either sometime
this week or next. And don't forget, gold is about to move into the strong
demand season. Like clockwork, gold invariably puts in a major bottom in July
or August before the run up into the strong fall season.
The
bears are going to be wrong again.
Toby Connor
Gold Scents
Toby
Connor is the author of Gold Scents, a financial blog with a special emphasis
on the gold secular bull market. Mr. Connor's analysis skill of the markets is
largely self-taught, though he admits to being an avid reader of Richard
Russell and Jim Rogers, among several others. Toby is an avid rock climber
and world class weight lifter (for his age). Toby's premium service includes
daily reports and an extensive weekend report.
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