Precious metals life cycle nears an end: Final stage of denial

The life cycle of most things, no matter what it is (living, product, service, ideas etc…), go through four stages and the stock market is no different. Those who recently gave in and bought gold, silver, mining stocks and coins will be entering this stage of the market in complete denial. They still think this is a pullback and a recovery should be just around the corner.

Well the good news is a recovery bounce should be nearing, but if technical analysis, market sentiment and the stages theory are correct, then a bounce is all it will be, followed by years of lower prices and dormancy.

I really do hate to be a mega-bear or mega-bull on anything long term, but the charts have painted a clear picture this year for precious metals and I want to share what I see. Take a look at the chart below that shows a typical investment life cycle using the four stage theory.

The Four Stages Theory

Classic economic theory dissects the economic cycle into four distinct stages: Accumulation, Markup, Distribution and Decline.  A stock or index is no different and proceeds through the following cycle:

  • Stage 1 — Accumulation: After a period of decline a stock consolidates at a contracted price range as buyers step into the market and fight for control over the exhausted sellers.  Price action is neutral as sellers exit their positions and buyers begin to accumulate.
  • Stage 2 — Markup: Upon gaining control of price movement, buyers overwhelm sellers and a stock enters a period of higher highs and higher lows.  A bull market begins and the path of least resistance is higher. Traders should aggressively trade the long side, taking advantage of any pullback or dips in stock price.
  • Stage 3 — Distribution: After a prolonged increase in share price the buyers now become exhausted and the sellers again move in.  This period of consolidation and distribution produces neutral price action and precedes a decline in stock price.
  • Stage 4 — Decline: When the lows of Stage 3 are breached a stock enters a decline as sellers overwhelm buyers.  A pattern of lower highs and lower lows emerges as a stock enters a bear market.  A well-positioned trader would be aggressively trading the short side, taking advantage of the often quick decline in share price.

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