First published Sat Jan 28 for members of ElliottWaveTrader.net: In mid-November, as most of the market was becoming quite bearish in the metals complex once again, I provided you with a path as to how the market can get even more bearish, and set us up for a bear trap, while I was noting that I was reducing my hedges:
In our Trading Room at Elliottwavetrader.net and in my live video sessions with our members, I have noted several times over the past weeks that the perfect bottoming set up would begin as the market recognizes a heads and shoulders pattern setting up in the GDX. And, many this past week were pointing to this “perfect” pattern, which they view as setting us up for new lows in the complex. In fact, it could be “too perfect” since the entire market seems to now be hyper-focused on how it is going to take us to lower lows.
But, my view was that this pattern could very well present the market with a head fake. I was viewing a break of the neckline as providing more confidence to the shorts in the market, as they would likely then press their shorts. However, I think there is a very strong potential for them to be seeing those shorts squeezed . . . Those shorts can certainly provide us with the fuel to begin our 3rd wave higher. While there is clearly no certainty in this potential, I have seen this happen so many times, especially when the heads and shoulders patterns looks “too good,” as this one does.
And, the market played out exactly according to the plan I had been laying out months before. Yet, even those that followed my analysis were questioning whether I was correct in my bullish perspective. So, a few weeks later, as the market was a bit lower, I presented you the reasons I maintained a bullish perspective on the metals complex, with these being the top 3 reasons:
1. As you know, I am an Elliottician. And, as an Elliottician, I look for a completed number of waves in one direction, followed by a 5 wave move in the opposite direction to suggest that the market has changed trend. While this is not a certainty, it does strongly suggest a change in direction. And, that is what we have seen in the metals market over the last 5 years. We have what can be a completed a-b-c structure to the downside followed by a 5 wave rally in 2016 off those lows.
2. The correction we have seen off the highs in 2011 have struck appropriate Fibonacci retracements. While the HUI struck a standard .618 retracement, gold had a shallow Fibonacci retracement, whereas silver had a rather deep one. But, overall, the complex as a whole seems to have struck appropriate Fibonacci retracement percentages to complete this degree of correction.
3. Next, the move off the lows is more likely a 5 wave move than a corrective move due to the size of what we are counting as a 5th wave. I believe counting the 2016 rally as a corrective a-b-c structure is not correct BASED UPON STANDARD STRUCTURES. (Of course, it can be a non-standard structure, but they are in the lower probability range of market moves). The significant majority of a-b-c structures see the c-wave presenting as the same size of the a-wave, or, it will exceed the size of the a-wave to as much as 1.382 or even 1.618 the size of the a-wave, especially in the metals complex. In our case, the 5th wave struck where it normally does in the metals complex between the .618 and .764 extensions. That is the standard size I would expect in this structure for a 5th wave and not a c-wave. To me, this is strongly suggestive that the 2016 rally was an impulsive structure which is starting the next bull phase, and presenting a much lower likelihood that this move was a corrective a-b-c corrective structure, since, based upon standards, the c-wave would generally be too small, especially in the metals complex.
And, then in late December, I suggested that we are on the cusp of a 10%+ rally in the GDX:
For those that were with us back then in 2011 not long after we opened our doors at Elliottwavetrader.net, you may remember that I was actually “bullish” as we went into the Thanksgiving holiday due to the extent of the divergences we had seen to that point. And, if you also remember, the day after Thanksgiving saw a 4% rally off that bottom, with approximately 10% seen within a week. I view the current set up in the metals complex as no different than that one . . .
Since that time, the GDX has provided us with an almost 30% rally off the recent lows. But, more importantly, the market has provided us with another 5-wave structure off that low.
That now has the market set up with two 5-wave structures off the lows struck in December of 2015/January 2016 in the complex. And, when we have two 5-wave structures off a major low, it increases the probabilities that we are about to embark on an extremely strong rally.
The best recent example I can provide to you would be what occurred in early 2016 in the SPX. As the market was hitting the lows in early 2016, it also developed two 5-wave structures off its February lows, at which time I implored all those who were still bearish the market to change perspectives, since this was an extraordinarily bullish set up. In fact, even when we were in the 1900 region, I was suggesting that we likely have begun a rally which was going to take us towards 2300SPX, and potentially even in 2016, as you can see from our analysis from 2016, which is attached below. We all know what happened since.
Well, I view the potential set up in the metals complex as no different. While it certainly is not “guaranteed” that this will occur, as there is nothing guaranteed in our non-linear financial markets, I think the probabilities side with such bullish potential.
Now, on the smaller degree, we have enough waves in place to consider wave (2) of wave 1 of iii as completed as well. While it can certainly take a little longer to complete a more protracted wave (2), you must be prepared for a break out which will likely occur within the next few weeks, and as early as the coming week.
Last weekend, I provided you with the relevant support levels, above which we must maintain a bullish bias:
The support for such a wave (2) pullback in silver resides between 16.10-16.50. . . As far as the GDX is concerned, our main support resides between 20.50-21.65. . . In GLD, the relevant support resides between 110.50-112.65.
So, in the bigger picture, as long as we do not break our support levels, I will be looking for a break out over resistance. Should we see a strong break out over the highs struck this past week in GDX, as well as silver taking out 17.50, that is our trigger telling us the market is likely heading back up towards the August highs to complete wave 1 of wave iii. And, since we only deal in probabilities and not absolutes, should we break the cited supports before such break out is seen, it would make me question the potential bullish set up. But, for now, the market has done exactly what it needs to do to set us up in a larger degree bullish posture.
There is one last issue I would like to address this weekend, and that is silver’s rally on Friday, which seems to have taken many in the market by surprise. For those following us this past week in our Trading Room at Elliottwavetrader.net, you would know that we had a completed downside structure in place right before the market took off to the upside on Friday. However, that does not mean that we are certainly about to take off immediately to the August highs based upon that micro-structure. Silver still only has completed 3 waves off Friday’s low. So, as you can see on the 144-minute silver chart, I have an alternative count for silver suggesting this is only a (b) wave rally in wave (2), as presented in yellow. That means we CAN see another downside move to complete wave (2) before we begin the rally towards the August highs. In fact, I sent out an update suggesting hedges to those who would like to be hedged in the complex, with stops on those hedges over Friday’s high in silver. But, should silver be able to break out over Friday’s high, it provides us with yet another 5-wave structure to the upside, and heavily weights the potential of a break out in the bulls favor sooner rather than later.
See charts illustrating the wave counts on the GDX, GLD and Silver (YI) at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-Silver-201701291477.html .
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.