Wednesday, October 5, 2016

Looking For The End Of The Current, Deep Correction In Precious Metals

It is not easy to tell when the current correction is going to end. I do not have a crystal ball but let me make a guess.

As I wrote in my last post, deep corrections end when weak hands investors go away in despair.

Generally, the so-called weak hands enter any market on specific technical signals. Because weak hands are not smart investors they apply the most simple (or, better said, primitive) methods to find entry points. One of the most popular rules is this:

"Enter a market when the 50-day simple moving average crosses above the 200-day simple moving average "

If that pattern occurs, weak hands enter a market en masse. So it is quite easy to find at what price levels these investors entered any market.

Now, let me show at what price levels weak hands investors were probably entering the precious metals market, taking GDX as an example:


The chart shows that the 50-day simple moving average crossed above the 200-day moving average at around $19.0 (in early March).

Further, it takes time to load up a significant amount of shares so I guess weak hands were entering the market between $19.0 and $$21.2 (the area marked in yellow)

If I am right, these investors now hold a profit of around 10% - 23% (assuming the last closing price of GDX of $23.4 a share). It means that they are very close to the point where there is no profit at all. That is why they panicked yesterday, throwing lots of shares to lock in this small profit (look at the yesterday's huge volume of 232M shares).

And here is the positive thing - weak hands are close to go home empty-handed, which means the end of this deep correction.

What is more, once again many precious metals shares present buying opportunities (more on this in my incoming third issue of Simple Digressions Newsletter).

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