Psychological Warfare In The Precious Metals Markets

For almost a year now the PM stock indexes have been building out a triangle trading range that has yet to be determined if it is going to be a consolidation pattern or a reversal pattern. With big patterns one can lose sight of what is really there, as the longer a trading range develops the more trendlines one puts on a chart, and the more confusing things become.

Tonight I would like to show you, from a Chartology perspective, what the basic patterns are, from the short term to the longer term. The bigger a trading range the more chart patterns can develop before we see the final product. Sometimes it’s totally different from the early stages of the trading range. It’s important to clear one’s mind of all the preconceived notions of what they think is happening to just what the charts are suggesting. It’s a hard thing for most investors to do because of all the things we read each and every day which works on our subconscious. More than anything else we are playing a game of psychological warfare.

Let’s start by looking at a short term daily chart for the HUI which is showing the H&S Top we’ve been following since early October. The H&S top is pretty symmetrical and the breakout below the neckline was accompanied by a breakout gap. This is what we know to be true at this point in time. If the price action can trade back above the neckline then this scenario will be thrown out the window, but until that time the H&S top is valid. Also when the neckline gave way so did the 200-day moving average.

Next let’s look back a little further back in time to see how the H&S top on the daily chart above fits into the bigger picture. Since the December low from last year this daily chart for the HUI shows the internal structure of the almost one year triangle trading range. As you can see the initial pattern was the big blue bearish falling wedge which shows the height of the triangle. Normally when you see a wedge pattern buildout the price objective will be where the wedge began to buildout. In this case the blue rising wedge should have had a price objective down to the December 2016 low at reversal point # one. The failure of the price objective to be reached was our first clue that a trading range of some kind may develop.

As you can see, two more blue rising wedges built out as part of the bigger trading range and reached their minimum price objective, which was where the rising wedge started to form. The 4th chart pattern on this one year chart is the H&S top at the 4th reversal point. That H&S top at the 4th reversal point is strongly suggesting the bottom of the one year triangle is going to be broken to the downside, which still hasn’t happened yet.

In big trading ranges like this sometimes it’s hard to connect all the reversal points on one trendline so in this case I’ve added a second trendline which is showing two possible scenarios. Believe it or not the internal structure of this triangle is pretty typical of most big trading ranges. The only thing we have to see now is confirmation. There is also no law that says the triangle trading range has to breakdown from here. If one of the bottom trrendlines holds support it’s possible that a 5th reversal point can form and the trading range could be a reversal pattern to the upside. As I stated earlier though, the H&S top is strongly suggesting the bottom rail is going to give way, so we wait for confirmation.

This next chart is a long-term weekly look at the HUI that shows its massive 2011 H&S top with its bear market downtrend channel. Our current triangle has formed just below the top rail of the 2011 bear market downtrend channel, which is another clue that the triangle may break to the downside. This is the area where the bulls need to step up to the plate and produce a strong move higher to negate what all the charts above are suggesting.

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