Textbook Set Up in the Metals ComplexThursday August 11, 2016 08:03
First published Sat Aug 6 for members of ElliottWaveTrader.net: Last weekend, I prepared you for the potential set up for the 3rd wave to much higher levels in the metals complex. More specifically, I provided you with a map as to how the 3rd wave set up would look on the GDX, should the market comply by filling in our 8 minute chart as outlined:
As long as we do not break below that support, and ideally remain over the 1.00 extension at 29.87, then I will be looking to complete 5 waves up off the recent low, which I would classify as wave (i) of wave 3 of iii. That suggests that after a corrective wave (ii) pullback is seen, and we then break out over the top of wave (i), the market is well on its way into the heart of its 3rd wave, and targeting the 39-41 region next.
And, over the last week, the market has complied in almost textbook fashion. In fact, once we completed 5 waves up into the top of our wave (i) target region, I sent out an Alert with a target box for a wave (ii). On Friday, the market dropped right to the top of our target box.
While the micro count in the c-wave does not look quite complete, it would seem that the market could still see lower before this c-wave bottoms. But, as long as the GDX remains over 29, I am viewing this chart as being on the cusp of the heart of a 3rd wave break out, which is pointing to 39-41, and quite quickly.
Now, for those who will read my words and consider leveraging up to the hilt in an irresponsible manner, I want to interject reasons one should still maintain your standard risk management practices. Set ups such as these are estimated to be about 70% probability. That still means there is a 30% probability that it could fail. One of the reasons this set up could fail is because all retracements in the GDX chart have been VERY shallow. This forces an analyst such as myself to make certain educated assumptions about where 2nd waves in the structure are located (since they are otherwise deeper retracements), which can have an effect upon the overall wave count if even one of those assumptions is wrong.
The alternative count on the GDX chart is that the high we made this past week was the b-wave of a more expanded wave 2, which would take us back down towards the 27-28 region should we break 29. This is noted in blue on my daily GDX chart.
The trigger now for this 3rd wave set up to the upside in the upcoming week is a move through the 31.65GDX level. A move through that level at any point now is strongly suggestive that the market is breaking out in the heart of the 3rd wave, and is on its way to 39-41. So, if one wants to trade this set up much more confidently, you can always wait for the break out trigger, and we can then note the appropriate stops after such a break out. This can provide stronger assurance of the move for which the market now seems to be set up.
As for silver, we still have the same (i)(ii) set up seen in the GDX, but, as noted before, this chart is one wave degree ahead of the GDX. The alternative count on the silver chart suggests that wave (iv) has not completed, but as long as we remain over 19.35, the (i)(ii) set up is intact. Our next higher target region also remains between 22.14-23.33.
Lastly, as I have mentioned for several weeks now, I am uncertain about the wave count on the GLD since the June low, as it can be interpreted in several ways. But, it, too, retains the same smaller degree (i) structure off the late July low. In fact, on Friday, GLD struck the .618 retracement of the last rally. The .764 retracement resides in the 125.50 region, which, if broken, opens the door for a larger a-b-c structure to take us down to the 124.50 region, where a=c off the July 6th high. So, those are the support regions one should be considering on this chart over the next week or two. And, as with the GDX, once we take out the high struck over the last week, it should propel the GLD in a heart of a 3rd wave to our next higher targets, ideally between 142-145.
I want to address one final issue which has been asked of me so many times throughout 2016 in so many different ways. Being a somewhat creative Elliottician, I am certainly able to come up with counts which suggest that the market can see a bigger retracement into the fall, and even the possibility of lower lows in the complex. This is what many seem to be doing because of their bias that the market has moved “too far, too fast,” or that the market “must” have a correction. But, I will not force a count just because people have biases or feel that the market “must” correct, especially when I have no high probability pattern set up in place to support such biases or feelings. So, allow me to present the perspective through which I analyze the metals market, which is most often based upon the Occam’s razor principle.
We have recently experienced a 4 year correction which took silver down over 70% and the mining stocks lower than most people even considered was possible. In fact, I remember the snickering and mocking posts when I suggested years ago that silver can see 14 and that the HUI can see 100. Now, after such decimation, the market has presented us with many impulsive structures off those lows on many wave degrees. This leads me to believe that the market has transitioned from a bearish trend to a bullish trend.
Now, normally, we see .500-.618 retracements for 2nd waves, whereas 4th waves usually retrace .236-.382 of the prior move. And, the deeper 2nd waves provide us with clear guideposts for the larger count. But, when we have had the decimation we experienced from 2011-2015 in the complex, it is not unusual to expect that even 2nd waves may only provide us with .236-.382 retracements, which I warned could be a strong possibility even before we began this rally in 2016. And, this seems to have been the nature of the market since we rolled into 2016. But it does lead to a bit more uncertainty due to having to accept higher 2nd wave retracements, which make it hard to discern between 2nd and 4th waves.
So, while we certainly can see a bigger retrace take hold at any time, I am unable to forecast larger retracements unless the market breaks some minimal level of support to suggest this may occur. Personally, I would have loved to have seen a larger retracement, as it would place even more confidence in the larger degree count. But, we have to work with what the market provides, rather than hope and wish for what we want.
So, until such time that some minimal support is broken, I am going to maintain my uber-bullish perspective on the complex, which has not really provided much in the way of a “gentleman’s” entry for those that missed the bottom. And, for those that have experience in this complex, you know this is not unusual and the resulting “chasing” often fuels the next rally phase. It was due to this potential that I was noting so strongly at the end of 2015 and early 2016 that I was moving heavily into the complex, and it is why I will not sell a single ounce of metal or a single mining stock for quite some time. And, it was for this reason we opened our EWT Miners Portfolio in September 2015, and immediately began buying mining stocks such as ABX, SLW, FCX, and GG, just to name a few.
During these types of bull-market moves, surprises are usually to the upside. So, when I expect some downside set up to take hold, I will hedge my personal positions, but will not sell them. In this way, not only have I and those that followed me garnered every penny of significant upside this market has offered in 2016 (and have not been left in the “dust” as so many have who claimed the market “must correct”), but we have even made some money on the downside during the small pullback/consolidations we experienced. And, in our EWT Miners Portfolio, we have been re-allocating money from those stocks that have led the market (once they have struck our upside targets) to those that have lagged, but have set ups to “catch-up.”
I hope this explains the prism through which I view the metals market. Some of you may certainly disagree with my perspective, and that is fine. Even though we caught the high in 2011 and the bottom in 2015/2016 in this complex, we will clearly not always be right about every move the metals complex will make. But, until the market shows me some indication of invalidating the more uber-bullish perspective it has been providing us for 2016, I will continue to stay the course.
So, now seems to be apropos to remind you of the Jesse Livermore quote I posted when we were lower in price in the complex:
“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It was never my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!”
Until the market gives me a clear contrary indication (of which I will alert you in a Mid-week Update at Elliottwavetrader.net), I will continue to “sit tight.”
See charts illustrating the wave counts on the GDX, GLD and YI at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-YI-201608081341.html .
By Avi Gilburt