Can The Complex Break Out Sooner Than Most Believe?

First published Sat May 21 for members of Elliottwavetrader.net:

Back in April, the Fed made it clear that they want to hike interest rates several times this year.  And, when the metals complex began to rise after that announcement, many were certain that the Fed was the catalyst that made the complex rise.  This past week, the Fed released the minutes from its last meeting, which contained no surprises, and restated their plans.  Yet, instead of the market reacting in the same way as its last statement of raising rates this year, the metals went in the exact opposite direction.

I have written about this ad nauseam through the years, and many still do not believe me.  But, the Fed does not control the metals complex, nor does the direction of interest rates control the metals complex. It has been, and will always be, sentiment driven.  The truth is how can one explain the exact same news supposedly “causing” opposite reactions in the market?  Yet, in understanding how sentiment moves, we were able to identify the short set up this past week before the Fed even released its minutes. 

I always question why people hold fast to their desire to fit their fundamental perspectives into what the market is doing.  It’s no different than attempting to place a square peg into a round hole.  Yet, if you review the metals articles that have come out since the minutes were released, all analysts are aligned in their belief that the minutes we clearly the cause of the recent decline.  These same analysts were quick to point to the exact same Fed expectation being the “cause” of the last rally.  Again, we have a situation where brains have not been put into gear before engaging fingers to type.  Rather, it is much easier, not to mention intellectually dishonest, to identify the seeming correlation, and inappropriately presume causation.  Such is the sad nature of the analysis in the metals market.  And, one wonders why they have gotten it so wrong for years.

And, even though some have finally recognized its ultimate failure at identifying market moves, nonetheless, they continue to run through the same motions, believing they have the answer.  Einstein said that doing the same thing over and over again but expecting a different result is the true definition of insanity.  Well, our markets are clearly littered with the insane.

As far as the price patterns are concerned, we saw a nice decline over the last week, just as we had preferred.  And, the question is if that was all we get.

Before, I begin to answer that question, I want to put something into perspective, which I pointed out in our Trading Room at Elliottwavetrader.net this past week.  While many believe that this past weeks’ decline has “begun” the correction in the metals complex, I want to correct that thinking.  If you understand Elliott Wave, then you recognize that the high we struck on May 17^th was a b-wave high.  That means that the correction actually began on May 2^nd, which means the correction has lasted almost 3 weeks, rather than the 2 days that most believe.  This also matches the pattern in silver, and when I review the chart closely, I can even come up with the same count in the GLD.  Moreover, in the more accelerated i-ii, 1-2 count, wave 1 lasted a little more than a month, so a wave 2 that lasts almost 3 weeks provides us with very nice symmetry to consider the “correction” as complete.

Ultimately, what this means is that if the metals and miners are able to break out over last week’s high, it is our first signal that the “correction” has completed, and a major melt-up has begun in the complex.  In the current structure, it would place our 2016 targets for the GDX over 40, the GLD towards the 170 region, and silver to 27.  The trigger I will be watching for this potential is in the GDX, with the initial break out signal being a strong move through 25.86, with strong follow through over 28, taking us to our next major target in the 35 region for wave 3 of iii, as seen on the GDX daily chart.

I know this sounds quite aggressive, but I can tell you that the set-up is certainly in place for this to occur.  Clearly, I am unable to tell you if the market will take the opportunity to follow through in the immediate set-up, but if we see a break out over last week’s high, you must be on high alert for a major break out to be in progress.

On the micro scale, it still looks like we may have a bit more work to be done on the downside before this break out may occur.  Of course, the market can choose to begin the break out scenario as early as Monday or Tuesday of the coming week, but the GLD suggests that we may see two lower lows before the bottom may be seen.  So, as long as we remain below 120.40, I would “prefer” the market to complete this c-wave with a series of 4^th and 5^th waves lower in the coming week.  But, again, I want to note that the break out set up is already in place in the GDX, and should we see a strong move through the 25.86 region, it is our first signal that a melt-up may begin sooner than most believe.

Therefore, for as long as we remain below 25.86 in the GDX, I will maintain the hedges on my long term positions in the complex.  On the downside, there is still a set up in place for the GDX to drop as low as the 19 region, and for silver to even make a lower low.  It would take a drop below 15.45 to suggest silver can make a lower low.  But, as I have noted before, this likelihood is on the lower end of the scale at this time.  But, until we actually see the break out signal noted above, I am going to maintain caution.

See charts illustrating the wave counts on the GDX, GLD and YI at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-YI-201605221278.html.