On occasion of our last update on gold's technical and sentiment condition (slightly overoptimistic, as it turned out), we wrote:
“All in all, the sentiment and positioning data give us however no unequivocal 'buy signal'. They merely tell us that the downside is probably limited. If we were to guess, there could easily be at least one more 'shakeout' in order to get small speculators in gold futures to capitulate and bring the sentiment gauges to new extremes. This would also provide an opportunity for the gold stocks to re-test their 2012 low. It is possible that such a retest is required in order to put in a durable low (preferably a retest at lower volume, following Tim Ord's rules for successful tests).”
In the main, the downside turned out to be a lot less 'limited' than we thought, as various technical support levels were breached with ease. Not even the lower rail of the triangle shown here survived the assault, although the first of the lateral support levels drawn in did (so far that is; at the time of writing, gold is oscillating around its vicinity). Yesterday the January Fed minutes were greeted with a heavy dose of renewed selling, on the widely held view that they indicated a sooner than hitherto expected return to a somewhat less expansive monetary policy. Bridges in Brooklyn come immediately to mind, but of course we cannot know the future with certainty.
Gold itself remains above a few major near term support levels (barely), but the gold stock indexes actually breached their equivalent supports and are now poised above what looks like a lot of empty space.
Not surprisingly, already bearish sentiment has turned even more bearish. For instance the daily sentiment index (DSI), a survey of futures traders, clocked in at 3% bulls yesterday. That is an all time low and is incidentally equivalent to the percentage of SPX bulls found at the March 2009 low in terms of the DSI. We wanted to show a few charts that illustrate the situation further:
Sector sentiment according to sentimentrader: the gold bugs pendulum has finally arrived at what looks like the worst possible reading.
The public opinion indicator has now plunged below the 2008 crash low (this indicator merges several surveys). The red line near the bottom of the chart indicates the lowest level this indicator reached in 2008 – click for better resolution.
We see something analogous with the HUI-gold ratio: this is roughly where it was at the 2008 crash low (of course both gold and the HUI were at far lower nominal levels) – click for better resolution.
To a large extent sentiment is simply following prices; one must therefore be cautious not to read too much into it. Price action itself remains the most important market datum. However, there are two things that can be said about sentiment extremes: first, they tell us that the recent trend is getting very stretched. Secondly, the more pronounced they are, the more likely the eventual rebound will be lively and possibly of the durable (medium to long term) variety. Note though that if a cyclical bear market has begun – and one could certainly argue for this view in the context of the gold stocks – then extreme bearish sentiment will be a recurring feature. In other words, until price action invalidates the recent bearish trend, it is only of limited importance. However, if and whensuch a reversal occurs (indicated by higher highs/higher lows and the retaking of previously breached support/resistance levels), then it will be meaningful that such extremes have been recorded.
Charts by: Sentimentrader, StockCharts
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