Approaching A Pullback

Originally published on Sat Jan 4 for members of ElliottWaveTrader.net:   Back in October and early November, I was preparing our members for the next rally phase I was expecting in the metals complex.  And, when the 144-minute MACD on the silver chart signaled a bottom in early December, I noted it was no longer time to look down, but we need to be looking higher in a more serious way.  And, since that time, the complex has certainly provided us a nice return for our accurate assessment.  In fact, those that have been following our micro counts on this market would know just how well the market has been tracking of late.

And, while positive sentiment has certainly risen for the market of late, I still think most of the signals and structures I am following suggest much higher can be seen in 2020.  But, that is not likely going to be seen without a pullback.  In fact, the pullback in GLD is the one I will be watching most closely over the coming weeks since that is the one chart that provides me with the greatest concern of all the charts I track.

Over the last year, I have tried to outline the one pattern which can still take us to levels lower than what was seen in late 2015 in the metals complex.  That structure would suggest that this rally is a c-wave within an a-b-c corrective rally off the 2015 lows.  And, as GLD approaches the 150 region, the Fibonacci Pinball structure in the GLD can easily be interpreted as a 5-wave structure off the 2018 lows.  In fact, the high seen in September was at the 1.764 extension of waves [1] and [2] off the 2018 lows, and the pullback into the November low found its support at the 1.00 extension.  With the 151 region being the 2.00 extension off the 2018 lows, this is the one chart that causes me some concern if we do rally that high before this structure off the November low completes. 

Therefore, I am going to be watching the GLD VERY carefully to make sure that the next drop is clearly corrective and not impulsive.  Yet, I do have to note that none of the other charts I track present in similar fashion from a Fibonacci Pinball structure.  Therefore, as long as the GLD pulls back correctively and remains over the 139-142GLD support region, then I have strong reason to remain quite bullish in the immediate perspective.  Alternatively, a break down below 139 would be strong warning to me regarding the complex. 

So, as I said, I remain quite bullish for 2020, but it does not mean that I ignore my risk management process.  It is also for this reason that I will not turn aggressive in the complex until we see the next corrective pullback, followed by a break out over the high we strike in this current rally.  That would make the potential for the red count on the GLD chart an extremely low probability and would allow me to turn quite aggressive on the long side of the trade.

As I also said, GDX and silver really do not present in the same way as the GLD.  Neither of them have a strong indication of the same negative potential I just outlined in the GLD.  And, this certainly does provide me further support to consider the GLD potential a lower probability at this point in time.

As far as silver and GDX, both seem like they need a bit higher before they complete a 5-wave structure off the recent lows.  GDX seems to have the clearest structure, wherein we can count a nice 4^th wave as just about having completed on Friday.  That would suggest that we can see a 5^th wave higher towards the 30.40-31 region before we complete 5 waves off the November low. 

As far as silver is concerned, it really leaves me no way to count it in similar fashion to the potential negative implications that I outlined above in GLD.  In fact, silver counts best as a series of 1’s and 2’s, as presented on my chart.  That would normally suggest that silver can outperform gold if we do trigger the next [1][2] break out scenario outlined on the chart.

Within this current rally in silver, wave [1] of [iii] should be targeting at least the .382 extension of waves [i] and [ii].  That target is the 18.50 region, which is why I have been focusing on that region for this rally since we bottomed.  Therefore, in an ideal sense, I think we can see one more push higher before I would consider this wave [1] as completed, with that .382 extension being my minimal expectation for this 5-wave rally in silver.

Lastly, I want to address a comment I hear all the time about metals.  Many people believe that if gold leads the market then that is positive for the complex, others believe that if silver leads it is positive for the complex, and others believe that if the miners lead it is positive for the complex.  And, they also point to the lagging of one of these charts as being a negative indication for the complex as a whole. I am sorry to burst your bubble, but none of these are true. 

You see, during a bull phase in the complex, there are going to be times when gold leads, when silver leads, and when the mining stocks lead.  None of these are historically reliable indications of the overall health of the complex, despite what you may want to believe. 

In fact, history has shown us that they don’t rally alongside each other to the same degrees.  And, understanding where they are in each of their own structures is what can add alpha to your accounts.  As the perfect example, I highlighted my expectation for a potential pullback in GDX on Friday, whereas I did not see the same degree of potential in the GLD or silver. 

Moreover, if you remember back to 2011, you would likely have seen the largest divergence in decades, as silver topped in April of 2011, whereas gold continued to rally parabolically for half a year and did not top until September of 2011.  And, if you remained on the sidelines because of the silver action, then you missed $400 of rally in gold (which was a 27% rally) until it reached the target it had for its chart, whereas silver had reached its target in April.

So, I suggest we all deal in the realities of taking each chart on its own, rather than “betting” on commonly propagated market fallacies.

In conclusion, it looks like we are approaching our next local topping point throughout the complex.  Therefore, I think it to be prudent to de-risk a bit on the next move higher, at least until the market is able to provide us with a corrective pullback over the coming weeks, followed by a break out over the high we will likely soon strike.  Should we see that type of structure play out in the coming months, then I will likely turn VERY aggressive in the metals complex.  Until that happens, I intend to become a bit more cautious and look to protect my portfolio for the pullback I expect to see soon.

See chart on GDX illustrating Avi's wave counts.

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