Why Is This Correction Different From All Other Corrections?

First published Sun May 29 for members of ElliottWaveTrader.net:   After reading the title, you may expect me to say something like “let my metals go.” And, you are likely quite right.  So rather than afflicting you with the plague of darkness, allow me to illuminate how I view the market as it currently resides.

How Do Corrections Develop and Why May This One Be Different?

Those that have experience trading the market have figured out that there are usually 3 movements within a corrective decline phase.  The first drops the market from the high, the second provides a counter-trend bounce, which fools most into believing that the primary trend has returned, and the 3^rd dashes those hopes, and brings back the fears of the prior bear market, as the market moves down to lower levels, but makes a higher low before continuing in its trend higher.

This same perspective applies whether you follow Elliott Waves, cycles, or most other technical analysis out there.  This is a common understanding market technicians have about markets.

However, the metals often buck these trends, and need to be looked at a bit differently at times.  And, this may be one of those times.

You see, the rally that struck the last high in this complex was not a primary trend rally, but was, itself, the potential counter-trend rally seen as the 2^nd leg within a 3-phase correction.  In Elliott Wave parlance, we call that a b-wave (or x-wave, in more complex structures).  And, in GLD, that wave actually made a higher high, which makes many believe that this is only the first phase of the correction, and that the next rally will be a counter-trend rally.  However, it is quite likely that this drop from the highs can complete the correction before the trend higher takes hold again.  This would leave almost everyone, even the bulls, in the “dust,” causing them to chase the market much higher, and making the next break out phase even stronger. 

This is why high level corrective structures portend strongly bullish markets, and often even take the bulls by surprise. So, not only are the bears looking lower, and expecting this correction to take longer, so are many of the bulls.

Of course, the market can take its normal course, and continue in this corrective action for another several weeks, as most seem to expect. But, I would rather you be on your toes, and looking for the potential break out, rather than assume this is a standard correction in the making.  Should the next rally phase develop correctively, we will be able to prepare for another drop lower.    

Keep An Open Mind

Please consider these two quotes every time you approach the market, rather than foolishly thinking, in a linear fashion, that something MUST occur or that anything is “guaranteed” to happen in a non-linear market:

By failing to prepare, you are preparing to fail.  Benjamin Franklin

A word to the wise is enough. The old proverb is, forewarned, forearmed.  Capt. Francis Hooke

Maintaining an open mind, and reading what the market is telling you, rather than assuming the market MUST do something is what differentiates between the poor or average analyst/trader, and the really good ones.   Think about it.  How many were so certain that QE MUST make metals go up?  Probably the same ones that then dishonestly complained that it was because of “manipulation” that they did not.  (And, while we are on the topic of manipulation, feel free to read my perspective on manipulation here: https://www.gold-eagle.com/article/market-manipulation-and-dark-secret-finally-revealed)

It is for this reason I am trying to have you consider a pattern which many in the market are not expecting, rather than assuming the market is heading to lower lows, or that this correction can take another month or two, which seems to be what most of the market expects.

The US Dollar

While we are also on the topic of maintaining an open mind, I want to address my dollar chart, since it is outlining a potential move higher in the coming months if we see a corrective pullback over the next few weeks.  Yes, I know the whole market assumes that if the dollar goes higher, the metals MUST go lower.  But, have we all forgotten what we saw at the end of 2015, when gold and the DXY moved up TOGETHER, each by over 10%?  Again, I am trying to stress the point that one should maintain an open mind about what the market may do, and not assume that the market MUST act in a certain manner.

Ultimately, my point is not that you should be certain that the metals are about to skyrocket or about to crash. Rather, you should avoid all the assumptions about metals and miners which are made by almost everyone you read or with whom you speak.  I am suggesting you maintain an open mind so if the metals do break out earlier than most expect, you will not be surprised and be able to appropriately act upon it, no matter what the US Dollar does at the time.  Any strong move through the 25.86 region in the GDX should be strongly suggestive of the market heading to 40 no matter what else is occurring in any other market.

Have We Bottomed?

I would like to make one final overall point about the market before I move into the specific charts.  For those that have been following us over the last year, you would know that we caught this last bottom region at the end of 2015 and early 2016 in the metals/miners complex. In fact, I have received personal notes from dozens of our members at Elliottwavetrader.net thanking us and telling me that they have now become millionaires for the first time in their lives.  And, to be honest, nothing makes me happier and more fulfilled than to hear this from our members.

But, I have to still point out that the market has not yet confirmed the long term bottom is in place.  Rather, it’s the next break out phase that would provide this confirmation, and take the probabilities that the long term low is behind us to over 70%.  For this reason, I am still retaining my hedges, as noted last weekend and during my mid-week analysis, until the break out signal is seen.

GDX

As I noted last weekend, the technical top to the GDX occurred on May 2^nd.  That makes this correction running for 4 weeks now.  That is more than enough time for this type of correction in the metals to complete before a break out may be seen. 

But, in order to actually see a break out, the market has to begin to rally impulsively off the c-wave low.  At this point in time, I have no solid impulsive structure upon which I can rely yet which would suggest the break out is setting up.  Should we see an impulsive structure through the 24.25 level, then we may have something to work with.  Until such time, I am expecting a test to the 21-21.20 region, which, if it holds, can trigger the rally to set up the break out.  However, a sustained break down below 21 opens the door to an extended c-wave down to the 18-19 region.

Lastly, I have added back the alternative larger degree a-b-c wave ii structure in blue, which would extend this correction out to the end of June, or even into July.  But, this is my alternative count, as I will be on high alert for the breakout set up for the reasons I noted above.

GLD

While the correction in the GDX has taken a month, the one in the GLD has been continuing now for 3 months.  The technical top to the market was seen in early March, and, as noted earlier, the higher high seen in May was actually the top of the counter-trend corrective leg.  This chart supports our perspective that the next impulsive rally may very well be setting us up for a major break out, which can take the GLD to the 157-170 region before its next multi-month consolidation.  For now, our lower support is in the 113-113.50 region, which should hold for this wave ii.  A break down below that region would make me concerned.

I have also attached an 8 minute chart, which shows my expectation for one more iv-v before this y-wave in wave ii completes.  Moreover, an impulsive break out through the resistance region opens the door to this correction having completed.

Silver

Silver has a bullish i-ii, 1-2 set up which is more in line with the GDX.   For those of you that were watching silver this past week as the GLD and GDX made their way lower, silver exhibited some very interesting strength.  During a sizeable portion of the decline in the complex, silver held its minor 1.618 extension down quite strongly.  This action, and the wave structure, may suggest that silver could have already completed its wave 2 structure, and is setting up its break out.  What we will need to see is for silver to break out through its resistance region noted on its 144 minute chart in impulsive fashion.  Once that is seen, then I will be targeting the 27-28 region for all of wave (1) off the lows.  Alternatively, a break down below 15.45 would warn me about the potential for lower lows in this chart.

See charts illustrating the wave counts on the GDX, GLD and YI at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-YI-201605291281.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&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.