An example of “Last” that is on the way to being “First”

I was suggested to forget about the gold miners and move on to the other sectors. But isn't it the case that the most profitable trades occur when we are patient enough to catch a stock (or a sector) that had a TON of negativity built up around it, where the price had declined a lot but is now just starting to make higher lows and higher highs?

Right now, all of these ingredients that are required for a great trade are in place for the PM sector. Some sentiment indicators were at decade lows in June, some were at all-time lows. The crowd of “dumb money” has completely moved to one side of the boat. However, as I have already pointed out, GDX made 4 higher highs and 3 higher lows since late June.

I know, all patterns can change on a dime, and if the previous higher low is violated -- I am out of my calls. But until it DOES get violated, I think it would be silly to abandon my GDX calls. If gold keeps going up for the next couple of weeks, then the HUGE short positions built up in this sector will start heading for exits, and a HUGE short-covering rally will occur. Below are a few charts that are showing this setup.

The first chart shows the net long position in gold futures of all non-commercial traders as a fraction of their total position. Two weeks ago it was at a decade-low:

Did the net long position of non-commercial traders drop to a decade-low because many traders have closed their longs and left the gold sector for good? NO! The chart below the total short position of all non-commercial traders starting from the last years of the very long bear market in gold:

As you can see, the build up of new short positions over the last 6 months has been phenomenal, NEVER seen before. Do you know what will happen if gold keeps going up for a few more weeks? All of those recently added shorts (which amount to more than 400 metric tons) will start heading for the exit door. Do you know how that will look like? Like this:

The epic short covering will also draw back some of the recently closed longs (about 100 metric tons) and also those who left the GLD ETF (about 400 metric tons). Remember when the news of Cyprus *potentially* selling its 10 metric tons of gold made a big deal? If gold traders simply return their positions to where they were in January, that would result in almost 1000 tons of buying!

That will be a once-in-a-life-time show, that is not to be missed... In fact, the show may have already begun, as the first two charts above are showing that the shorts have ALREADY started moving toward the exit door (the total short position of all non-commercial traders has dropped a little over the last week and the net long position has increased a little).