Metals Fallacy Revisited, But Still Searching For A Bottom

“Gold is a safe haven.”  “Gold is a hedge against market volatility.”  We have all heard these sound bites countless times.  Analysts seem to dust them off every time the market declines and the metals rally concurrently.  In fact, many of them were making these claims during the recent market volatility.

But, of late, we have been seeing metals and miners rallying along with the equity markets.  So, do we now have to adopt the perspective that metals rally all the time?  I mean, if we have to view them as rallying as a safe haven or during market volatility, we have to also consider that they were rallying when there was no need for a safe haven or when there was no market volatility. So, it must mean that they rally all the time. Right? Well, not if we want to be intellectually honest about it.  I hope you can understand this extreme example of how one must not pay heed to much of what is said about this market, as most of it is baseless and unreliable in determining market direction, and will surely get you looking the wrong way. 

As I have said time and again, if anyone has followed these “theories” or any of the other theories that have been thrown out about China, India, Russia, QE, etc. causing metals to rally, then they have likely been terribly whipsawed and left scratching their heads for years.  Rather, please stay focused on the fact that metals are a pure sentiment trade, and the “news” is not going to drive their main trend.  Yes, we may have news coincide with and act as a catalyst for a small degree move in the metals, but they do not “cause” a trend move.  And, for those that want to disagree with that statement, then I suggest you begin by being honest with yourselves about the last 4 years of market action.

So, as far as sentiment is concerned, it seems the market is getting a bit frothy again.  On Friday, KITCO published an article which noted that “the majority of both analyst and investors are bullish on gold prices next week.”  That usually does not bode well for the market to move much higher, especially when we are in a bearish trend.  Again, that is assuming we are still in the bearish trend.  Did I just say that?

Well, I did.  But, all it means is that I have begun to be “open” to the idea that the complex has bottomed.  You see, 3 years ago, I provided downside targets for GLD (98-105), silver (12.75-14), HUI (100 region) and GDX (9.61-13.21) at which I would begin to be a buyer in this complex.  And, each of the charts has recently struck my long term target zones, albeit the top of those zones. 

Now, understand that these targets were not guaranteed lows, but, rather, were minimal targets the market would attain before a bottom may be confirmed. So, at this point in time, we have struck the minimal targets I set several years ago as to where we should look for the market having bottomed.   But, ideally, I still think that one more lower low can be seen and, at this point in time, I still have no confirmation that a final bottom has been struck.

Although I would still love to see that final wash out in the markets for which I have been waiting, I have begun to question whether it will truly occur.  Normally, that is how markets ultimately find solid long term bottoms.  But, as I have read more and more articles and comments to those articles, there seems to have been a large group of people that have joined the“below-1k-dip-buyer” community.  And, when a large group of people expect something in the market, it usually precludes the market from granting them their wishes.

Now, for the last several years, I have been quite adamant that each rally will only set us up for lower lows.  But, I am not going to be as adamant about this current rally, since the minimal long term targets we had for this correction have been struck – even though the larger degree patterns would look best with one more lower low.  Therefore, as I have said since even before we began the current rally, shorting the market aggressively at this point in time is not the prudent course of action, at least in my humble opinion.  So, I have said that I have joined the FOMO community myself at the last lows.  But, even though I have been net long for this current rise, I have begun to add hedges, specifically in the GDX.  I guess you would say I am in the “FOMO-but-hedged” community.

GDX

That brings me to a discussion of the GDX.  What we are looking for is a 5 wave structure off the last market lows to confirm that a long term bottom has been struck.  First, the initial move off the lows in both the HUI and the GDX really counts best as a 3 wave move.  That is the first reason I have a hard time moving into the “raging bull” camp, as opposed to the much more timid “FOMO-but-hedged” camp. This one factor alone has been a very reliable factor in maintaining our perspective for lower lows for the last several years.

Next, my expectation would be that a full 5 wave structure would take the GDX to at least the 2.00 Fibonacci extension for all 5 waves, but, more often, we would see only wave 3 of that initial 5 wave structure heading to the 2.00 extension.  Right now, I can count wave 3 completing into the 1.382 extension, which is quite uncommon for true bullish action when dealing with this complex.  So, in the true bullish case, it is likely only wave iii of 3.

But, if there is something that develops as what may be counted as a full 5 waves off the lows, I am going to have to maintain a perspective that the market has bottomed as my alternative count – which is the first time we have had such a perspective in years.  That alternative count would become my primary count should we see a corrective decline from that 5 wave structure, followed by a strong rally which exceeds the high of the initial 5 wave structure high.  Should that occur, then my alternative count becomes the expectation of a lower low until the next larger degree 5 wave structure completes.

But, for now, I remain vigilant in identifying the first 5 wave downside structure to consider that a top to this corrective rally has been made, which will have me on alert to setting up further hedges, and an opportunity to even move into a net short position in anticipation of the final lows.  

GLD

After GLD slightly broke out of its prior pattern, it caused me to do a lot more work on GLD on Friday during the day, and even more work after the market closed, and I have a few things I would like to point out.

First, I want to remind everyone that we have had a downside target of 98-105 target in the GLD for several years, at which point I said I would become a long term buyer in this complex again, after selling at $1,900 in gold back in 2011. Now, that target region represent the first point at which I believed that GLD could bottom, after we broke the first long term support several years ago. Ideally, I still do not have a true completed downside structure, but because this last segment seems to be an ending diagonal, it has truly made it very difficult to definitively determine where that ending diagonal completes, until we have a larger degree 5 wave structure off the lows take us to 121+.

Next, we have another immediate set up for a downside follow-through, as long as the GLD remains below the 112 level.  However, should the market be able to strongly exceed that 112 level, it does open the door for it to potentially rally as high as the 118 region, as we had discussed so many times before.  That will likely be the final test for this 4+ year correction, as that would be a potential wave (4) in the ending diagonal in GLD.

But, please take note that a rally which takes GLD through 121 does open the door to the potential that gold has bottomed at the minimal target we provided several years ago, as it would imply a 5 wave structure having been completed off the lows.

Yet, I have the same issue with the initial rally off the low in GLD as I do with GDX, and that is that it counts best as 3 waves than 5.  Specifically, what would count as the 5^th wave is the same size as waves 1-3.  That is usually suggestive of an a-b-c structure, rather than a standard 5 wave structure.  And, since we know that 5^th waves in commodities are usually the largest, I do have to leave the door open on this issue.

Ultimately, I am still in search of that lower low, but will not cling to such expectations if the market makes it clear that the long term bottom is in place.

SILVER

Silver, too, has a potential for having bottomed in its long term downside structure, and it also struck the minimal target we have wanted to see over the last several years.  Furthermore, in the most bullish interpretation off the lows in silver, one can even consider it to be in a 1-2, i-ii, (i)(ii) structure, which means that it should be soon blasting through the 17 resistance region to complete a solid 5 wave structure off the lows.  And, again, as with the others, I want to see a corrective decline and then a rally through the top of the initial 5 wave structure off the lows to confirm that it has a long term bottom in place.

For now, I will maintain my primary perspective that a lower low is still going to be seen, as long as we remain below 16.75.  But, please do not discount the bullish potential should the market PROVE that to be the case.  To date, it has not yet done so.

SUMMARY

After a 4+ year correction, I think investors have to realize that the time for aggressively shorting the metals has since passed, as I have been saying for months.  One needs to be focused on the longer term bullish prospects before us.  While I certainly still see the strong potential for lower lows to be made in the market, there is no set up on any of the charts I follow which suggest that we are going to see an imminent drop to those lower lows just yet.  For this reason, I still remain net long in this complex.  So, yes, not only am I a member of the “FOMO-but-hedged” club, I am also the president (smile).

What will see me becoming fully hedged will be a 5 wave drop in the upcoming week, followed by a corrective 3 wave move back up.  And, what will make me consider a net-short position would be another 5 wave move down thereafter, which would set us up in a 1-2, i-ii structure to the downside.  Until I see that set up, I intend to remain net long, as it has been quite a profitable run up off the lows we called to the day on 9/11 of this year.  And, should we see a full 5 wave structure up in GLD and silver, then I will likely be going “all-in” on the wave (ii) pullback rather than waiting for any further lower lows.  But, for now, that is not what I am expecting.

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For those that are interested in trading this complex before the final lows have been confirmed, Larry White, who runs our Short-Term Trading service for miners, has earned total returns of almost 150% for this year.  So, feel free to come trade with Larry, who will provide you with entries and exits for the 3X miner ETF’s.

See charts illustrating the wave counts on the GLD, GDX and YI at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-and-YI-20151011856.html .

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&P500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.