Even The Bulls Are Expecting A Pullback In The Gold Price

As gold was in the heart of a parabolic rise during the summer of 2011, the market was quite certain that we would imminently exceed the $2,000 mark.  However, we expected it to top just over $1,900…and did not believe we would exceed $2,000, as the market was simply too euphoric at the time.  Well, we know how that turned out, as gold topped out just $6 away from our target.

Back at the end of 2016, as the metals were heading lower, the consensus opinion was quite certain that gold would head below the $1,000 mark.  However, we thought otherwise, and as the market had become too crowded in its thinking of a “certain” drop below $1,000, I continually warned that many of those waiting for sub-$1,000 levels may be left behind.  And, thus far, we know how that turned out. 

In fact, Doug Eberhadrt, from whom I buy my metals (buygoldandsilversafely.com), continually reminds me of the Thursday evening on December 3, 2015 when I placed an order with him as gold was hitting its $1,045 low, which I noted in our Trading Room at Elliottwavetrader.net.  And, thus far, that seems to be the lowest level struck by gold over the last five years.

You see, when the market assumes something will happen, more often than not, the majority expectation will be proven wrong.  And, my concern is that we MAY stand in a similar position today, so I want to present something you should strongly consider. 

Most market participants are awaiting a “certain” market pullback, with many pointing to the latest Commitment of Trader’s reports as their support for such a pullback.  But, I can honestly say that I am not as certain we get any pullback right now, especially if we are not able to break below immediate support.  In fact, the markets have set up in place to continue to rally in the upcoming week.  And, if a very strong rally begins to take shape, the covering of the short positions of the commercial traders, as identified in the latest COT report, can propel this market to levels most do not seem to be considering at this time.  So, I suggest caution to those trading based upon the COT data - as long as we remain over support.

On Wednesday of this past week, I began to explain this perspective to our members at Elliottwavetrader.net:

There is a strong point I want to make about the metals and miners.  When we have a really bullish move in this complex, it will usually not allow you much of a pullback, as most pullbacks are quite shallow.  And, if we really have a long term bottom in place, I am going to put a count before you this evening which you MUST take seriously, which will not allow many in before we hit the 36-41 region in the GDX – yes, you heard me right.

You see, everyone believes the miners are so overheated and they MUST have a pullback.  Many are still awaiting lower lows before they buy into the complex.  But, this seems to be the environment that can support an EXTREME bullish count, which is noted in blue.

First, I want to present the main count, which has us in a 5th wave in wave I off the lows.  As you can see in the GDX charts, we may only be completing wave (i) of wave 5, which would make sense since the 3rd wave was not terribly extended.  That means that as long as we do not break below 18.86GDX, I will remain immediately bullish.  The target for this 5 wave structure will be 23.20-24.10.  The 24.10 region is where the 5th wave would be equal to .618 of waves 1-3.  That would be my maximum expectation for a 5 wave structure off the lows in GDX.  But, I will warn you that if we see a strong move through 24.10, with follow through over 25.25, my target is going to be in the 36-41 region to complete wave (1) off the lows.

And, with silver consolidating below its long term down trend line for the last month, I can easily support a 1-2, i-ii structure off the low, as presented in blue, which would then take us to my original target off the lows in the 20/22 region.

For now, I believe that GDX has the cleanest levels of support and resistance to work with, so I am going to be keying off that chart.  As long as we remain above 18.86, I am going to maintain a strong bullish bias . . . .

So, please do not take anything for granted in this complex, as even the bulls seem to be looking down now, along with all those that are still looking for lower lows.  While I am not saying that the probability for lower lows is exceptionally low (as I still classify it as approximately 35%), I am saying that we may have an equal probability for upside surprises, with so many looking so much lower.  So, watch the levels of support and resistance, and do not pigeon hole your thinking into what you think “MUST” happen.  I am going to remain open to the possibilities the market provides to us, and will be focusing on immediate bullish probabilities as long as we remain over 18.86GDX.

I still strongly believe in what I wrote on Wednesday.  The set up for another strong push higher is clearly in place in the metals and miners, but whether the market choses to take that path is something I cannot foretell.  All I can do is note the setup.  And, the GDX has the cleanest pattern for such a move.  So, I am moving up my bullish support in GDX to 19.75.  As long as we remain over 19.75, I am going to maintain an immediately bullish perspective.  But, a break down below it, with follow through below 18.86 tells me that wave ii is likely in progress, with an outside possibility that lower lows may be seen.

As you can see from the attached GDX chart, overhead we have our modified initial resistance region in the 21.75-22.10 region.  That can represent the top of a 5^th wave of wave I off the lows, assuming this pullback is a wave iv of that 5^th wave.  However, should we see a strong move through that resistance region, then 21.70 becomes the bullish support and the upside target becomes 24.50-25.25.  Now, if we break out over 25.25 strongly, it means the more bullish blue i-ii count is in effect, and we are heading up to the 36-41 region to complete a larger 5 waves off the recent lows.

In GLD, the immediate resistance is 121.75-123, with 129-132 over that.  Immediate bullish support resides at 117.95. 

And, in silver I am lowering the bullish support down to 15.45-15.60 region, with the initial resistance at 16.35-16.95.  Over 16.95, we have the 17.75-18.35 region, and through that we are looking at the 21-22 region.  Silver is a little harder to gauge because it is a much more “wild” metal when it begins its move, since its extensions often exceed that of the other metals.  It is for this same reason why I believe silver will see the greater percentage rise relative to gold once this bull market begins in earnest.  And, in order to make me view silver as being in wave ii or something a bit more bearish, we need to break 15.17.

So, while many may be looking for a certain pullback in the metals, and possibly even lower lows, I am unable to consider that potential until the support levels cited above are broken.  Should we break those supports, then my focus will be a wave ii, or even the outside chance of lower lows.  However, as long as we remain over the cited support levels, I have to maintain an immediate bullish bias, with the potential for a massive move higher, even though most in the market seem to be looking down for at least some kind of pullback.  And, the fact that most believe that the metals and miner “must” have some kind of pullback makes me believe that the potential to break out to even higher levels is much greater than most realize.  Should such a break out occur, I believe we will see that occur in the month of March.  So, we will likely have a strong directional cue on the metals within the next week or two, as the very bullish set up is rather immediate. And, if it is going to break down, it will likely occur within the coming week.

Lastly, I want to address the common question I receive about whether the final bottom is in place.  You see, the actual bottom which was struck was not at all a satisfying standard smaller degree 5 wave bottom in the metals.  (GDX did provide a completed 5 wave bottom).  Rather, we had a truncated bottom in the metals rather than the spike down which almost everyone seemed to be awaiting.  But, the problem with truncated bottoms is that they are not nearly as trustworthy or as reliable as standard bottoms.  This is why I am still allowing as much as a 35% probability that the final bottom may not be in place.  So, until we either see the much more bullish count noted above take hold, or see a better i-ii set up, with a follow through over the top of wave i thereafter, I will still maintain a modicum of caution (along with hedges), and view the potential that a lower low may be seen, at least with a probability of approximately 35%.

See charts illustrating the wave counts on the GDX, GLD and YI at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-YI-201603201195.html.