The Metals Complex Is On The Edge Again

First published Sat May 14 for members of Elliottwavetrader.net:

For weeks, the GDX has been on the edge of a break out, while showing signs of the corrective pullback we would rather see first. 

But, as I have said many, many times, when the metals finally turn bullish, retracements often are VERY shallow, as they do not let the masses into the market.  Rather, the pullbacks are often so shallow that most market participants have to chase the market.  And, it makes it very hard for the average investor to get into the market, if they did not buy at the absolute lows.

If you remember back in the last quarter of 2015, I wrote repeatedly about how I was moving into a FOMO (Fear Of Missing Out) perspective, since I understood very well how the metals move.  For this reason, I continually reiterated that I was following the long-term plan I laid out years ago, and bought metals and miners heavily at the end of 2015 into early 2016, as we were striking our long term “BUY BUY BUY” box targets. 

In fact, we rolled out our EWT Miners Portfolio in September of 2015 in our expectation of imminently striking the long term bottom in the complex.  Our initial buys were on 9/16, which included SA at 5.81 (now at 13.50) and RIC at 2.59 (now at 8.50), and then added more on 10/23, including ABX at 7.64 (now at 18.40).  While we have seen tremendous gains in many mining stocks we have owned, we plan to rotate our holdings within the safest miners we track to those with the most potential, as we move out of those that strike the targets we set. 

And, as many of you know our methodology, we have appropriate suggested stops on all positions to lock in a significant majority of the profit we have earned to date.  Moreover, due to our conservative perspective (until the long term bottom is confirmed with a rally through 28 in the GDX), we have not allocated any funds to the junior miners in a meaningful way yet.  But, once we do see a confirmed bottom signal, then we will begin rotating to a number of the junior miners we have been tracking, which will likely super charge our returns even more, but doing so only once the risk of lower lows has significantly passed, since a bottom will have then been confirmed with an 80% probability.

On the micro level, I still believe that we can see a further decline, but I have a very tight leash upon that expectation.  The micro set up suggests that Monday “should” see a gap down in the GDX in a c-wave towards at least the 22 region in the GDX.   However, if, instead, we see a break out over 25, with strong follow through over 25.40, then we may be seeing the initial confirmation that wave 2 of wave iii (as noted in yellow) has completed in extremely shallow fashion, and we may be on our way over 30 sooner than expected.

The downside micro pattern suggests that the past week developed a b-wave flat, with a c-wave down to be seen early in the upcoming week.  But, again, that means the market must maintain below resistance.  However, if the market decides to continue higher, and breaks out over 25.40, then we will be riding our current holdings until we see a strong break out through 28, which will then suggest that we are in the heart of wave 3 of iii, with a minimum target of 33.60, but, will more likely take us up towards the 35 region, likely before June has ended should the immediate break out scenario take hold.  I do want to note that a number of the mining stocks we track indicate that they are already in wave 3 of iii, so we have to maintain a healthy respect for the potential for the market to continue higher. But, until a break out over resistance is seen, my preference is for a pullback to take hold in the coming week.

There is one more modification I have made to the daily chart of the GDX.  Our EWT Miners Portfolio management team meets every two weeks, and also on an ad hoc basis when needed, depending upon the price action seen in the market.  We met this past week, and many of the miners we reviewed suggested that any drop we see in the coming week may be all we get before the complex continues to much higher levels.  So, for now, I am modifying my primary count to the next drop being wave 2 of iii, and will add an alternative of the bigger wave ii again should the rally from that low only take shape correctively.  This means that we are suggesting investors buy at the bottom of the next 5 wave drop in the GDX, and our target will be between the 20-22 region, depending upon how strongly the decline takes shape.

As for silver, amazingly, we have held our support at 16.90 this past week, and as long as we do not see a sustained breakdown below that level, the current rally may continue as well, with the next upside target being 18.50.  However, the more ideal scenario would be a pullback towards the 16-16.20 region, also representing wave 2 of wave iii, similar to the set up in the GDX.

As far as GLD, I truly do not have a highly reliable micro count with which to point.  But, as long as it remains below 122.40, we have a micro pattern that suggests downside continuation.  So, that is the level I will be watching early in the coming week for our next indications and will update you should that pattern invalidate for downside follow through.  Ultimately, I would still need to see a strong move through 124.50 (the 1.618 extension off the recent low around 120, as well as the prior high) to view this as a strong break out potential. 

Finally, I would like to address two issues that are constantly brought up to my attention.  First, as you know, I have been expecting a rally in the US Dollar.  And, many have suggested that this expected rally should certainly cause the metals to drop.  However, for those that have followed me for some time know, such thinking does not sway me.  In fact, it was back at the end of 2015 when I was expecting a rally in the dollar along with gold, many took the same perspective that it simply would not happen.  Well, the dollar and gold both rallied over 10% together.  So, simply because I see the potential for a dollar rally does not suggest that the metals and miners cannot break out.  In fact, they have been quite strong during the recent rally in the USD.  So, I will simply continue to follow the price patterns, rather than make assumptions.

Second, I would like to address the Commitment of Traders report.  Many have suggested that simply because one segment of the market is shorting the market it means that the market MUST decline.  As for me, simply because a segment of the market is shorting the market does not mean that segment cannot be wrong.  We have seen many times in the past where this segment of the market has been caught on the wrong side of the market.  So, consider what the short covering will do if this segment gets caught on the wrong side of the market this time.  Remember, this perspective is truly a double edged sword, and can have just as significant an impact on the long side of the market if they do get caught on the wrong side of price.  Therefore, I suggest you follow the price action more so than your fears or general assumptions.

See charts illustrating the wave counts on the GDX, GLD and YI at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-YI-201605151273.html .