Are We In The Final Run To Lower Lows – Or Will The Market Offer Another Fake Out?

I have seen articles this past week that suggest the investment world is delusional.  I have seen articles suggesting that the only thing we need to do is listen to the Fed to know which way the market is going. And, if you count your own perspective amongst these “common beliefs,” then God help you too. 

The only reason someone believes the rest of the market is delusional is because the market is moving in the opposite manner in which they believe the market should move.  And, anyone that thinks we need to listen to what the Fed says in order to understand the appropriate directional moves of the metals market was clearly not listening to the Fed in 2012-2015, or was simply on the wrong side of the market. 

What I have seen over the last week that is truly delusional are articles, as well as comments, by “believers” that QE was the Fed’s plan to sink the metals.  And, I have seen this perspective written by several analysts and commenters of late.  So, let me get this straight.  These same “believers” were strongly looking skyward in the metals market in 2012 after the announcement of QE3, expecting QE3 was going to launch the metals rally.  And, when the metals reacted in the exact opposite manner in which they expected at the time, now they believe that QE3 “caused” the decline in the metals!?  Moreover, many even believe it is part of some insidious plan to suppress gold being orchestrated by the Fed.  Good grief.  Is there any intellectual honesty left in this market?     

Whether you like it or not, markets rally and markets correct.  And, no matter how much QE the Fed throws at the market, no matter what the Fed does, the market is going to complete its correction before it begins its next bull market phase.  And, guess what?  When the market begins that next bull market phase, all those claiming that the market is manipulated will fall by the wayside because when the market is going up there is no “manipulation.”  Right?

I would like to quote R.N. Elliott, who outlined this phenomena within markets so well:

“Civilization rests upon change.   This change is cyclical in origin and characteristics.  A rhythmic series of extreme changes constitutes a cycle.  When a cycle has been completed, another cycle is started.  The rhythm of the new cycle will be the same as that of the previous cycle, although the extent and duration may vary.  The cycle progresses in accordance with the natural law of movement.”

“The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle.  This fundamental law cannot be subverted or set aside by statutes or restrictions.  Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.”  

Is it too much to ask from pundits and market participants to engage in some intellectual honesty?  All I ask is for people to view the market as it is, and not as what they think it is.  Who cares what the “reasons” are for why people think the market moves one way or another. 

Often we see markets move in opposite directions supposedly being “caused” by the exact same reasons.  We have all seen it, if we are being honest with ourselves.  Some weeks we see a metals rally being attributed by pundits to a “good” jobs report and other weeks it falls supposedly for the same reason?  That is not intellectual honesty, but intellectual dishonesty.  Ultimately, reasons may make people feel as though they are smarter than the market, but often causes them to remain on the wrong side of the market – but for the “right” reasons.  You see, these people are clearly smarter than the market, but are rarely on the correct side of the market.

So, now I will get off my soap box, and look at the charts.  But, I want to begin by noting that I mayhave been wrong in expecting a higher high before the top is in for this 4^th wave.  Yes, there is no methodology that will provide you 100% accuracy when it comes to non-linear markets.  But, I certainly believe our track record has significantly outperformed those of which I was speaking above.  One of the main differences is that we utilize an objective methodology which also lets us know when we were wrong early enough to be able to turn in the opposite direction, rather than continue to claim we are right, but blame it on someone else, like “manipulation.”

I think it is worth repeating what I said last week about the pattern in the GLD:

Since the next drop to lower lows would be a 3 wave event, I cannot necessarily be looking for a 5 wave structure off the highs to tell me we are heading to lower lows – as it certainly can and most likely will start with a 3-wave (a) wave.  Therefore, I am going to need to see a break down below support to suggest that the market is heading down rather than looking for an impulsive break down below support. 

This past week, the market broke down below the 109.90 level, which, to me, makes it a very low likelihood that the final lows have been struck in the metals  – yes, even lower than the 30% I was at last week.  And, as I have also noted last week, we still have the potential for an expanding ending diagonal to play out to take us to a higher high to complete the c-wave of purple wave (4) before we decline to the lower lows.  The only reason I still maintain this perspective is because the top thus far was struck on a 3 wave rally in what should have been the c-wave of wave (4), and c-waves are 5 wave events.  If the top was to have been struck on a 3 wave event, then it would classify this topping pattern as a more rare, and less foreseeable, w-x-y pattern.

I want to reiterate that I am having trusting that the top to the 4^th wave has actually been completed, since it topped in a 3 wave structure, rather than a 5 wave structure.  It is for this reason I scrubbed this chart a bit more on Friday and over the weekend to make sure I was not missing something.  And, I came up with something which is actually quite reasonable and has a fair probability of playing out.

So, for those that that have been patiently waiting for this long term correction to complete, I am sorry to potentially break your heart with a further extension to the timing of this correction, but I do have to note an alternative which has now presented itself. 

Because of the break down we experienced this past week without completing 5 waves up in a c-wave, if the market continues lower in the upcoming week and breaks the expanding ending diagonal potential, I have changed my alternative count to that which is represented in blue on the attached daily GLD chart. This count would likely break the 108.50 level, but potentially hold the 107 level for an expanded flat in a (b) wave, and set us up for an “impulsive,” 5 wave rally back towards the 116-119.50 region. 

Take note that the 107 region represents the 2.00 extension of the pattern off the blue b-wave high, as well as the point at which blue a=c.  Also, it is the point at which the market would be back-testing the break out of the longer term trend channel, as well as the bottom of the rising support trend line formed since the lows struck in July. In fact, all these seem to intersect at the end of the upcoming week. There seems to be strong support there which can still launch us to the initial targets we had for the 4^th wave, and, potentially rather quickly.  This 107 region will have to solidly break to make me a bigger believer that we are setting up the imminent drop to lower lows.

Yes, I know this one will likely hurt the most people in this market, and will clearly push out the final lows until sometime between March – June of 2016, but the 3 wave high we recently struck has to make me give this potential strong consideration, especially if the rally off the 107 support takes the shape of an impulse.  So, please keep this perspective in the back of your minds for now because this is still a 4^th wave, and this would be a new iteration of an evil market plan.

So, if the market were to break below 108.50, then I will be looking for us to continue to drop towards the prior lows in the (a) wave of the final 5^th wave to lower lows.  But, the next confirmation of this potential will need a break below 107, as you can see on the attached GLD daily chart.  Assuming we did drop below 107 and towards the region of the prior lows, this would likely complete the purple (a) wave of the final 5^th wave.  This would set up a (b) wave rally, which would provide us with a shorting entry before the market were to head down to complete its 4+ year correction.  But, if the 107 region were to hold, and we see an impulsive pattern develop off that low, then I would have to strongly consider the blue count on this chart.

As I look at the silver chart, this is the one chart which has not broken support yet.  In fact, we are just at the Fibonacci support noted last week, as well as the bottom of the uptrend channel.  This is the chart that makes me still view the potential for the market to seek one more high before this corrective rally tops out.  However, should this support break, then it means that we are likely heading down to lower lows, and what will likely be the final opportunity to buy the lows in this market.  Yet, I have to keep in mind the new evil alternative noted in the GLD.

Lastly, the GDX has finally moved out of “the box.”  This suggests that we could be setting up for the run to lower lows.  However, since the larger pattern in the GDX requires an impulsive pattern to lower lows, we must first complete the initial 5 wave structure out of “the box” and target the 14 region in 5 waves, followed by a corrective rally, and then a break down below the bottom of the initial 5 wave decline to convince me we are heading to lower lows sooner rather than later. Right now, the 15.75 level is the resistance under which the market must maintain until it completes its full 5 waves down to the 14 region in wave i of the final 5^th wave to lower lows.  But, as in the GLD, I am going to keep an open mind to further market machinations within this 4^th wave (as represented in blue), especially if this initial 5 wave decline is not completed, or the rally off a 5 wave low is impulsive in nature.

While the path to the lower lows which we have been seeking for 4 years has been a long and arduous one, we cannot ignore the market’s ability and potential set up to take us even a bit longer.  Again, I want to reiterate that the action seen this past week makes it much more likely that the final lows have not yet been struck, but it is only a matter of time and path to those lower lows which is in question.   How the market takes shape over the next month will guide us in that regard.  In the meantime, do not lock yourself into a belief of what the market “must” do, but simply follow the signals the markets gives you as to what it “will” do. This could still turn into a more painful 4^th wave than we had initially expected.  And, clearly, I will update our members at Elliottwavetrader.net during the week as the market progresses.

See charts illustrating the wave counts on the GLD, GDX and YI at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-YI-20151101896.html .

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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.