Bottom Line, Up Front – I think anyone holding gold and silver/mining stocks is about to have money reflate that trade quickly. I think lots of shorts are getting decimated as we speak and with that, rocket fuel is happening and uncorking 20 months of pent-up energy. While this move will fade, I believe this now will have us at higher price shelves and take mining stocks into the next orbit. I find the arc patterns compelling – but feel if these arcs have false information added to them, it can be signaling the discount it’s at to get a lot of alpha on the trade.

On to our regularly scheduled program…

Kevin Wadsworth (Twitter profile linked) is one of my favorite chart guys out there and I think he needs a bit more attention and love. I say this because I’m not impressed with most chartists – there are 3 I mostly look at – Kevin, Patrick, and Gareth Soloway. Most chart guys (outside of these guys) use it as a religion and price MUST go there – I don’t mean to be overly hard on some of you TA guys I generally like, I just have had a few spats on Twitter with some TA guys I wanted to throat punch due to their pomposity and certainty which is DANGEROUS. It’s a level of arrogance I find very unappealing in the financial sector. Basically, the idea here is “human behavior tells us this will happen”. And then Russia invades Ukraine. Re-draw all of your charts. Make new proclamations. Now – IF that chart guy legit has 8 figures in the bank account, I will then listen intently because obviously you have done something right. What he PROBABLY did right to get that 8 figures was manage the risk properly on trades.

I bring up those guys because they speak to a level of probability and possibility rather than certainty. I find their approaches smart to point out the possibility of human behavior going in a certain direction, and allowing you to digest this as one tool in your toolbox. I left David Brady off of this because I don’t really count him as a “chartist” the way the guys above are. Gareth has utterly nailed some bitcoin calls within 1% or so – and Bitcoin seems to be a pure emotional play given there are no dividends, P/E ratios, and strikes of labor to worry about. Bitcoin has political risks, but some of that is baked into the fear risk/reward part of it. Anyway – Brady has something called a FIPEST model he uses which has charts as PART of it – but not like some who use the charts as a shaman might. I appreciate the approaches of a Brady because he/they use a lot of different items to improve the confidence in their calls. They can be wrong like anyone – but those guys also probably manage their downside risk properly and let their winners run like thoroughbreds properly.

With Kevin, he educated me on the arcs a lot over the last 18 months. I had a video with him and Patrick where he talked a bit about them – and I told him I was seeing it with the USD and the like. Even with BTC. When I first saw them being drawn by him, my first reaction was, “that’s cute”. I then saw them more and more and was like, “hmmm. There’s more of these. There could be something there”. Finally, I started seeing more of his stuff and how these things get ridiculously close to these things and can no longer deny there are elements there that need serious attention. I now seem them in a LOT of charts and this might help a lot if you are trying to forecast a cone of certainty for your favorite stocks.

Kevin put this out today, and I needed to give some love to it.

If you look at the charts closely here, you see this…

This identified a cup pattern in early 2020, and with that, you can suggest directionality, with a move up, pull back, and launch up. There’s no exact number there – but you can see he nailed this pretty accurately. By trade, he’s a meteorologist. When I was a kid, I thought a meteorologist read the news on TV. Then my close friend from HS became a meteorologist out of Penn State, then was hired away by a hedge fund to do futures and owns race horses. Sorry if you are reading this Matt, I know you fly under the radar, but you are probably my second most known friend from high school. You can’t compete with our friend in HS who invented YouTube. To think – I have two master’s degrees and am the black sheep of my school where most of my friends have PhDs, invented YouTube, and own a hundred race horses. And I write this shitty blog.

Sorry for the side bar – my point here is I think meteorology is a PERFECT background to deal with charting and price forecasting. I would not doubt if these disciplines someday merge a lot more with the math backend. I use my “cone of certainty” now in respect to the probability side of this, and I think Kevin’s look at a lot of this through the lens of a probability and “likelihood” rather than “certainty” is a good way of looking at this stuff.

But I then need to interject a point here.

What if…

What if that arc is interrupted by misinformation? Bad data? What if the item that pushed it off its course is reversed? Now, if you are looking at a hurricane barreling down on Cuba, and your models have a 99% certainty of hitting it a week out, and a volcano erupts and does something screwy to the pressure and wind patterns and pushes it to the right, you have to adjust your models to correct for it. In THAT case, the course may veer to the right and once the volcano erupted, there’s no putting the lava back in it.

However, the thought occurred to me with a Fortuna Silver Mines, the environmental permit was put in danger November 12th, and the price got hammered. This is the volcano taking it off of the ORIGINAL arc. You then have to re-draw the lines. But what if the information that was provided was incorrect? “Ooops”! Shouldn’t that price information then change it BACK to its original destination? Unlike a hurricane that moved to the right to avoid Cuba, in this case price information that moved the arc could be reversed?

I wanted to look at the CURRENT price of FSM with the CURRENT arc I drew, based on two major price details that pushed the stock down.

  1. In Peru in late summer, a PM was elected who was anti-mining and the worries were Peru would nationalize or halt mining. In early November, this guy was removed. All Peru mining stocks were killed when he was elected, and when he was removed, they started to come back a little before gold and silver were taken down a massive notch at end of November.
  2. In November, the San Jose mine essentially had its environmental permit revoked, which 5 weeks later was restored. There’s a little more to this, but for the sake of the arc stuff, it’s revoked here.

I bring up these issues because they were both super massive volcanos in moving the hurricane, but both items are false price information. In my arena of education, you can deal with things called “false positives” in cyber security. These were originally positives, but eventually were changed to false positives. Meaning, the price information should essentially be discarded, and stocks like these trading on a severe discount SHOULD be bought back up.

Let’s look at the CURRENT ARC.

I look at the red squiggly line I drew and that shows perhaps December until price gets back to $9.

However, let’s look at the ORIGINAL ARC, and with this, you will see where price is, and where it should be going. IF this discount is bought up.

Now, the ORIGINAL price arc would potentially reflect it’s position to GDXJ, and how GDXJ would oscillate in value to gold. Meaning – when at the peak FSM (GDXJ) was overvalued to gold, there would be a course correction in the cruise liner where the price of the stock would move down RELATIVE to gold. You can see this easy enough now…

But what happened then was FSM took a detour, and with these two items, you can see it got cheap relative to GDXJ.

So now you will see FSM catch up to GDXJ, and GDXJ catch up to gold.

Meaning, I believe the “original” arc is correct. And, the discount WILL be bought back up. However, the question is when? Could a move over the 200dma trigger buys? Could this crisis with gold get GDXJ a massive bid to pull FSM above the 200 dma and with this, trigger algos to buy?

So how can we use this type of thing to our advantage? I drew the original arc, then placed the new arc within it, and it reveals the delta area that will be re-captured in short time.

Gold a fake out or break out?

This is the first time I’ve seen gold with respects to “war”, but many forget the run up with gold that started in the 2000s.

This was on the back of the dotcom bust. We have had these great booms and busts – and it all stems from this one issue. Once the dollar was taken off of the gold standard, there is no relative value to anything in terms of the dollar. Everything has relevance to GOLD. So in times of crisis, it appears the value of gold increases because things start to have more relative value in gold terms.

I think many have recently warned that gold can make an initial move higher, then come crashing back down once the conflict is over. While I don’t think this is any different from that, where there is nuance to this is this may have appeared to be the catalyst to break these items out of their 20 month trading ranges. While receding waters will no doubt happen, I believe this is the type of stuff that makes Michael Oliver rich and many others poor. With his momentum structures, you could see a breakout coming – but what exactly the catalyst was, was anyone’s guess. He also pointed out to everyone that while everyone is worried about another March 2020 where there was a deflationary shock and everything was sold off, he felt this would be arm wrestling over a year with gold going higher and stocks going lower. If you look at the last 6 months, that’s precisely what has been going on.

So with this, I don’t expect gold to be thrown back down to $1806 in a few days. We could close February over $1900, and that would be a big deal. It might be interesting next week for Oliver to discuss how some of this breakout action comports with his momentum models, and how he might be playing this/trading this.

Remember the “cone of certainty” I talked about as a nod to Kevin and meteorologists? This breakout flew way above that. You can see probably a pull back and sideways moves can get it in that cone area. My expectations now will be a period of 1-2 months where mining stocks now play catch up and July 2020 might get a run for its money.

While gold may recede – as stated – it is time for miners to outperform gold and this may mean rising significantly faster than gold, or perhaps holding their own as gold falls. Given many stocks are priced for gold at $1500-$1600 right now, my expectation is NASDAQ money may start to find a home in GDX/GDXJ rather quickly