We need 'confirmation' of a metals market bottom
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Originally published on Sat Nov 30 for members of ElliottWaveTrader.net: I want to take you back a bit in time so you can develop the appropriate perspective of a bottoming process in the metals market.
For those of you that were with us back towards the end of 2015, you may remember that I was being quite vocal of the fact that I was heavily buying mining stocks. In fact, we even rolled out our EWT Mining service in September of 2015 to prepare for the bottoming in the complex we expected. At the time, quite a number of mining stocks were striking their long-term bottoms and beginning a strong rally.
Yet, if you also remember, it was not until the end of December of that year that gold struck its bottom. So, as you can see, we do not always see bottoming in all products and charts within this complex at the same time.
Most specifically, when you review charts like GDX and GDXJ, bottoming can take shape as a very overlapping and unclear structure. The reason is that some of the stocks within the index are striking lower lows, whereas others have already bottomed. This push/pull type of bifurcation can sometimes make it more difficult to be certain of when a bottom is actually struck in the larger index itself.
You see, most corrections develop as an a-b-c structure, with the c-wave of that structure providing us with a 5-wave structure. When we do not see a CLEARLY completed 5-wave structure, it makes it much more difficult in being certain that a bottom has indeed been struck.
To be honest, none of the charts I have been tracking have provided us with a clear, standard 5-wave c-wave structure. Much of what we have seen thus far has been quite overlapping, leaving us wanting for a clearly definable bottoming structure. In fact, the one with the clearest potential for providing us with a 5th wave lower low (silver) still has not followed through to complete that 5th wave. Again, this leaves me wanting for a clear structure telling me that we have likely bottomed.
This brings me to my next point. While I may not have stated this outright and clearly, there is a big difference in expecting the market to be bottoming, and in “confirming” that the market has bottomed. While I have been identifying the potential for the market being in a “bottoming” structure based upon having most – if not all – of its bottoming structure completed, as well as seeing the technical indicators suggestive of bottoming, expecting a bottom and confirming a bottom are two different things.
So, when I look at silver, we still have a micro i-ii downside structure in place for a 5th wave lower low. And, until we see a strong rally taking us through 17.50, I cannot assume we have completed this pullback/correction throughout the complex.
GLD has been a bit tougher than silver, since its downside structure off the 4th wave higher we caught has been overlapping and not a clean 5-wave structure to suggest we have bottomed. So, until I see strong follow through over 139.70, I cannot begin to see probabilities as shifting towards the GLD as having bottomed. This is how the confirmation process work, especially when the 5th wave lower low is not terribly clear.
So, not only is there a difference between expecting a bottoming and confirming a bottom, but there is also a difference as to when I want to turn very aggressive in the complex. My own trading plan turns aggressive when I am in the heart of a confirmed 3rd wave. For this reason, I keep explaining that I am going to wait until the market completes the larger 5-wave rally off a low, followed by a corrective wave 2 pullback. And, when we begin to rally over the top of the initial 5 wave structure, that confirms for me we are likely in the heart of a 3rd wave rally, and it is much safer for one to turn aggressive on the long side.
So, as I write this update, I cannot say that the market has yet “confirmed” for me that a bottom has been struck, especially in silver, despite my overall expectations of “bottoming.” Moreover, I certainly am not at a point of suggesting to be aggressively long (meaning using leveraged ETF’s or aggressive options strategies). Lastly, I am still quite cognizant of the potential for a lower low in products like silver until they are able to move through resistance.