The gold bull market began back in mid-December 2015 and was soon followed one month later with the bottom in the precious metals (PM) stocks on January 20th 2016. Gold has gone on to build out a complex double Cup & Handle pattern and encountered its first major resistance at the previous “Matterhorn” peak of $1309. This is the first major milestone in the young bull market.

The initial PM stock rally since January is a Phase I of three phases in a bull market. Phase I is that period where stocks return to “known values” after having been knocked down to below these known values in the previous bear market. Last autumn the PM stocks were completely abandoned on the bargain table and available for purchase to anyone who recognized their deep value. Once the bottom was in in January their rise resembled a beach ball held under water being released. That is classic phase I action and was described in my essay posted on April 21 2016, Three Phases of a Bull Market.

A study of Phase I psychology and the danger of following gurus

I last reported that the correct strategy for Phase I is to hold your position. The difficulty of this is because phase I is characterized by skepticism and refusal to believe the trend has changed. The previous bear market bludgeoned investors mercilessly with every rally soon flaming out and immediately led to more pain. This resulted in a conditioning process which caused position holders to sell after any profitable trade in order to survive. It’s not easy to reverse 5 years of psychological conditioning. If one understands however, that we have now entered a phase I of a bull market he can adapt the proper strategy which of course is be right and sit tight. That’s the correct strategy until we reach known values. After the phase I objective is reached then we change tactics to adapt to the upcoming Phase II of the bull market, but for now we be right and sit tight.

Now I must address a rather egregious example of not understanding this process. One of the most destructive things any participant can do in a market is to blindly follow a market guru without engaging one's own critical thinking skills. A guru in market circles refers to someone who goes beyond investment analysis into the realm of being a reverential figure to the student. Typically it involves engaging the ego in one's market calls. We can recognize this by the use of the phrase “I can guarantee” or telling the market what it should be doing or offering frequent opinions without much solid objective analysis.

Wise, authentic market observers constantly guard against these tendencies. I recall when Richard Russell was an active writer he would immediately cancel your subscription and refund your money if you referred to him as a market guru. Yes folks, it’s that dangerous.

Recently a writer was critical of my mid-May Matterhorn analysis.  I was called “the voice of complacency” because I would not retreat to the sidelines when gold neared $1300. This writer clearly mistook my steady hand on the tiller for complacency. As mentioned above, the proper strategy in phase one  is to be right-sit tight.

It is my experience that trading one's core position in a Phase I impulse move typically results in one ending up watching the remainder of the move from the sidelines. In the mentioned article I was quoted out of context saying “bulls won’t get a reentry into the metals sector”, then openly mocked saying “I’ve got news for you, We already have a 17% better entry”. At the time this was correct as the GDXJ had dropped 17% from its peak, however, three days later the GDXJ gapped up 8% before the open and has moved up since. The point of this exercise is to validate the Phase I “be right-sit tight” strategy. Trying to trade the move normally just results in being too cute by half and ends up with being on the side lines watching the train leave the station.

As a writer at Rambus Chartology I have proposed that “Known Values” may be in the vicinity of the HUI 370 area and therefore offer themselves as a price objective. I am not making a prediction as I don’t tell the market what to do, rather I am discussing possibilities based off of chart action. Here is one of the possibilities that still appear in play.