by Avi Gilburt, ElliottWaveTrader.net
First published Sat Mar 4 for members of ElliottWaveTrader.net: Three weeks ago, as the GDX was consolidating just below its .764 extension, the market had a clear set up to break out. However, when it did not do so over the following week, I noted in our trading room at Elliottwavetrader.net that I was hedging my portfolio because when a market has an opportunity to break out, and chooses not to do so, the market is often signaling it wants to pullback before the actual break out. This seems to be the path the market has now taken.
In the past, I have noted that when the metals complex is in a larger bullish posture, I will always look towards the more bullish of the patterns as my primary, because experience has taught me this market often leaves people behind with shallow retracements:
“. . . based upon the larger degree perspective, with seeing 5 waves up from the 2015 lows, and then another 5 waves up from the December 2016 lows, I am on the hunt for the heart of a 3rd wave in this complex. When we are looking for a heart of a 3rd wave to take hold, they OFTEN do not provide much in the way of pullbacks. For that reason, I have always defaulted to a more immediate break-out scenario potential, since, otherwise, you can be left in the “dust” (pun intended), wondering where your pullback went.
Along those lines, the market has been consolidating near the highs for quite some time now. And, as I noted last week, when the market has made a number of attempts to break out, and is unable, it often falls back into more of a correction, in order to take another running start at the heart of the 3rd wave. So, with the inability to break out when it had a break out set up last week, I noted towards the end of the week that I would be hedging my account in consideration of that potential, and while we were still right at the highs.
While some of you may want me to tell you EXACTLY what the market is going to do at any point in time, I am sorry to disappoint you by telling you that I, or any other human being for that matter, am unable to do so. Rather, I can show you where we have set ups to break out or break down, but I cannot provide you any certainty. For that reason, I will inevitably be wrong at times.”
This is one of those times where the market has chosen to provide more of a pullback rather than a direct break out. And, the break of 23.30 in GDX should have clearly alerted you to the potential to drop to the 21.50-22 region, as I noted to expect last weekend. In fact, the low for this past week was 21.53, which was struck pre-market.
One thing I have noticed about this complex is that too many investors believe it will be the road to riches, and it will be easy to get there. Nothing can be further from the truth. Yet, many are still using leveraged ETF’s, or using aggressive options strategies, or are too heavily weighted in the complex despite my warnings to the contrary. At the highs of GDX a few weeks back, I warned strongly several times in our trading room at Elliottwavetrader.net about taking too aggressive a position in this market, and I even provided that warning in bold each time:
“UNLESS YOU ARE A VERY EXPERIENCED TRADER, I WOULD STAY AWAY FROM OPTIONS TRADES OR USING LEVERAGED ETF’S IN THE METALS COMPLEX.
MOST PEOPLE USE THESE INSTRUMENTS BECAUSE THEY FEEL THEY ARE THE TICKET TO OVERNIGHT RICHES. HOWEVER, MORE OFTEN THAN NOT, THEY WILL PUT YOU IN THE POOR HOUSE. YOU MAY GET THE DIRECTION RIGHT, BUT UNLESS YOUR TIMING IS NEAR PERFECT, YOU WILL NOT OBTAIN YOUR DESIRED RESULTS.
FOR THIS REASON, I ONLY SUGGEST USING OPTIONS OR LEVERAGED ETF’S WHEN THE MARKET IS CONFIRMED IN THE HEART OF WAVE 3 OF III, WHICH I DONT EXPECT WILL OCCUR UNTIL MUCH LATER THIS YEAR. AND, I WILL EVEN TELL YOU WHEN I WANT TO USE THEM MYSELF, AND I PERSONALLY WILL NOT USE THEM IN ANY REAL WAY UNTIL WE HIT THE 3 OF III.
JMHO BASED UPON MY EXPERIENCE”
The main reason I have warned about this repeatedly is due to the nature of where we are in the wave structure. Until we have the set up for wave 3 of iii, the decay you can experience in these instruments can severely limit your profitability, or even cause losses.
Market Analysis – Differing Wave Structures
I will first warn you that the structure of each chart seems to vary a bit. Whereas they are all supporting our larger bullish perspective for now, I am going to have to maintain differing counts for each chart. And, this is not the first time this has happened in this complex.
The manner in which silver dropped this past week signals that this may take longer to consolidate than I had initially expected, even though the larger degree patterns are still set-up in a very bullish posture. But, I guess the market has to develop more believers that the metals complex is going to crash again before a parabolic rally is able to take hold.
I am quite certain we will begin to hear calls about how the daily chart on silver is presenting a heads and shoulders pattern set up again to take silver to lows below that of 2015. This is no different than what we have recently seen in GDX back at the end of 2016, and I expect the outcome to be the same.
In fact, Dr. Cari Bourette, of MarketMood.net, noted that she sees a major change in sentiment for the metals complex in the coming week. She stated that “gold in the coming week has the largest positive change in sentiment in over a year!” So, the question is if this next major sentiment change will finally be the beginning of the smaller degree 3rd wave, or if it will just provide us with a corrective b-wave rally. The structure will likely provide the answers over the coming two weeks.
As far as the specific charts for the SHORTER TIME FRAME, I will say that, of all the charts, the GDXJ points to a lower low in the coming week more so than the others. As you can see from the attached 8-minute chart of the GDXJ, we seem to be rising in a 4th wave in this c-wave corrective pullback. That suggests that a lower low can be seen in the coming week for wave 5. An impulsive move through the 38.90 region would make me think otherwise.
Yet, the GDX has an almost perfect Fibonacci Pinball 5 waves down, as I pointed out this past week. So, it really leaves me unsure as to whether we see a short-term lower low in the miners or not, as the two main charts in the miner’s complex seem to disagree about how the start of the upcoming week can play out.
Going back to the larger time frames, as far as the GLD is concerned, my ideal – and more immediate bullish default scenario – suggests this drop this week is a c-wave in wave (2) of wave 3 off the lows. So, as you can see, this pullback has caused me to slightly adjust the count, which would suggest the next rally can target the 138 region in the GLD this summertime. But, clearly, we would need a break out over the high struck a little over a week ago to trigger this potential.
Silver I would view slightly differently. As you can see from the attached 144-minute chart, I am viewing silver as a (1)(2)(i)(ii) off the lows. Alternatively, I have silver counted as a 1-2, as presented on the daily chart. I like the count on the daily chart since it fits the larger degree Fibonacci Pinball structure a bit better, as we struck the .382 extension for wave 1 of wave iii. But, in this count, it may take us a few more weeks until silver completes its wave 2 pullback, because there is potential that this current drop is only the a-wave of wave 2.
So, as you can see, the structure of the rally across the market still does vary for right now. But, I cannot say that this is highly unusual, especially when you consider that silver topped in April of 2011, whereas it took gold 5 more months until it completed its prior long term rally in September of 2011.
Ultimately, we will need to see all these charts break out over the highs seen a few weeks ago in an IMPULSIVE fashion (EW term of art for a specific type of rally structure) in order to trigger the heart of a 3rd wave. And, as long as we remain below those highs, the market may attempt to continue to draw this pullback out in time.
Over the longer term, I want you to keep in mind when you read my analysis that I will always take the more bullish expectation as my primary focus in the metals complex when it is in a long term bullish posture. But, it also means that I may miss some of the downside we experience on pullbacks.
Yet, we are often forewarned when the more immediate bullish posture will not take hold, and that a bigger pullback is setting up. For example, even though I was looking for the more immediate bullish potential in the market a few weeks ago, the structure started providing signals that it may not develop. So, I noted that I was hedging my portfolio near the highs a few weeks ago, with stops over the .764 extension in GDX, and provided you levels at which the bigger downside would be seen (break of 23.30 points towards 21.50/22). This is how I will always approach a longer-term bullish metals market, as outlined before.
Another example was back in August, where we missed the initial decline off the 31.50 high, but then caught the decline from 28.50-20, and then went bullish the market when most expected a crash. Again, we may not catch all of the downside move, but we usually do catch all of the upside move, as we did from the Dec15/Jan16 lows in the market, and again at the Dec16 lows in the market. Is this not how one wants to trade within a bullish market?
So, if perfection is what you seek from anyone you follow for analysis in order to garner every single point, both up and down, in the market, you may as well find something else to do because perfection in a non-linear environment does not exist. However, if you understand my focus, and how I approach the market, then you can adjust to fit your own personal preferences and perspectives.
Within the next day or two, we will be having a management meeting for our EWT Miners Portfolio and scrubbing all the charts we follow. I will post an update in our trading room at Elliottwavetrader.net about how the underlying miner stocks are aligning. But, in my own cursory review, it is just as varied as what I have presented above.
For now, I maintain a larger degree bullish bias, even though we may see the dreaded one more lower low in the coming week. But, the larger patterns off the Dec15/Jan16 lows are set up quite bullishly, and I do not want us to lose focus of the forest because we are focusing on a single leaf.
Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.