Could The Gold And Silver Miners Have Provided The Ultimate Fake Out?

First published Sat Jan 7 for members of ElliottWaveTrader.net:  This past week saw a very nice move higher in the GDX and gold, but silver has seriously lagged, which does dampen any outright bullishness at this time.  But, let’s review where we stand overall.

Several weeks ago, as the GDX broke down below its .618 retracement, many were throwing in the bullish towel, and everyone seemed to adopt the “clear” heads and shoulders pattern presenting on the daily chart, while pointing to target levels below the January 2016 low.  But, it just seemed too obvious to me, and it seemed like the market was setting everyone up.

In November, well before we broke the .618 retracement and well before we broke the neckline of the seeming heads and shoulders pattern, I wrote the following:

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 . . . [and] 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.

Back in mid-December, I wrote the following:

Some of you have asked me why I still retain a bullish bias if we have broken below the .618 retracement, which was my ideal target for this correction.  When the market as a whole maintains a certain expectation, price will usually push you beyond the overall market expectation or simply does not meet the expectation to begin with.  You see, markets do not give the majority what they seek.  And, for some reason, there have been many in the market that expected the .618 retracement to hold, at least from what I have been reading in the analysis on the net.  So, just like the market was certain in 2011 that we were heading over $2,000 in gold, or in 2015 that we were heading below $1,000, I think too many believed that the .618 retracement would hold, and we needed to undercut that level to develop even more bearishness to support a 3rd wave higher.  (And, now, the majority seems to be certain of going below last year’s lows . . . so consider what that may mean yet again).

So, as the market broke down below the heads and shoulders neckline, and followed through slightly below the .618 retracement, it spent a little over a week under that .618 retracement, as bearishness swelled.  But, two weeks ago I noted that set ups such as we have been seeing in the GDX usually lead to strong rallies which can see a 10% move higher quite quickly.  Since that time, we had a 26% rally in the GDX. But, more importantly, we rallied in what counts relatively well as a 5 wave impulsive structure off the lows.  Moreover, we broke out through the initial resistance at 22.50, through the downtrend channel that has contained price action since the August high, and through the neckline of the heads and shoulders that everyone has been betting on.

Now, for those that have followed my analysis over the longer term, you would know that a potential 5 wave structure off a low is only the start of the confirmation process that a bottom is in place.  We then need to see a corrective 3 wave pullback, followed by a break back out over the top of the initial 5 wave structure. 

On Friday, the market pulled back in what counts best as a 3 wave structure, which bodes well for the confirmation process. I am currently counting Friday’s pullback as the a-wave of a bigger wave (2).  But, I want to warn you that if we break back out over Thursday’s high at 23.35 and continue through 24, it becomes likely that we are on our way to complete the larger degree wave 1 of iii in the 28-30 region.  So, unless we see “break out” action, I would expect the upcoming week to present us with more consolidation.  And, as long as the market does not break down below 20.40 (the .618 retracement of wave (1), then I can maintain a bullish bias for the GDX.

But, this now brings me to the underlying metals.  While I would love to present you with a high probability wave count in the GLD, all I can say is that the rally, thus far, is quite sloppy.  That does not mean that it is not bullish, as the rally off the 2015 low also started in a similar sloppy manner.  But, it does give me reason for continued caution.

The bigger issue in my mind at this time is that, even though silver has taken out initial resistance at 16.50, it still only has 3 waves off the lows.  Again, this is another reason for concern in the overall complex.  But, this is nothing new as silver seriously lagged the complex when we struck the bottom last year as well.

While we can still view this rise in silver as the makings of a leading diagonal wave (1) off the lows in silver, or even a (1)(2)(i)(ii) potential structure (as long as we hold over 15.85), it still needs a high to be struck over the one made on Thursday of the past week to have any bullish interpretation off the lows on this chart.  A break down below 15.85 before that higher high is made would make it a high probability that we will drop below the December low.

So, for now, I will continue to watch the silver and GDX charts quite intently, since they respectively present the most bullish and potentially bearish patterns in the complex.  Should silver be able to make a higher high early in the coming week before breaking back below 15.85, then it will add to the bullish potential in the overall complex. And, if the GDX is able to rally over 23.35, with follow through over 24, that would put an even more bullish spin on the complex, and you can move your stops on longs to just under 23 at that time.  A further move through the 1.00 extension off the lows of 24.50 should have us on target to head to the 28-30 region for wave 1 of iii.

See charts illustrating the wave counts on the GDX, GLD and Silver (YI) at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-Silver-201701081465.html .