A Precious Metals Market That Clearly Defies Conventional Analysis

First published Sat Aug 27 for members of ElliottWaveTrader.net: 

After coming into this past week still expecting the GDX to test a bit lower towards our 28.50-29 region support level, we clearly tested that region.  However, the market did not pass that test.

With the market breaking down below our support region in the GDX this past week, it has clearly caused us to re-assess where we are in the big picture in the market.  To that end, I want to quote sections of the update I sent out to members at Elliottwavetrader.net the day we broke down:

First, while my expectation was for the 28.50 region to hold, I do apologize that my expectations were off this time.  I wish I could say that I was always right, but, clearly, that is simply not possible.  While we have done very well in the metals throughout the years, there are times like this when my primary expectation will be wrong, and I do apologize for those times.

But, in prior analysis over the last few weeks I explained that if we broke the 28.50 support, it suggested we could drop towards the 27 region.  

After reviewing the charts and running a number of different calculations and scenarios at this time, there is no question that the lack of real pullbacks in the GDX has not given us the highest confidence as to where to put 2nd waves in this rally.  And, since our Fib Pinball method is based upon an appropriate identification of 2nd waves, it has made it a bit difficult, and was likely why I was wrong in my expectation for 28.50 to hold.  I have discussed this issue many times in the past.

In fact, several weeks ago, when I was still expecting the market to hold support, I warned about becoming too aggressive in this market just yet purely because of the real lack of pullbacks:

Now, for those who will read my words and consider leveraging up to the hilt in an irresponsible manner, I want to interject reasons one should still maintain your standard risk management practices.  Set ups such as these are estimated to be about 70% probability.  That still means there is a 30% probability that it could fail.  One of the reasons this set up could fail is because all retracements in the GDX chart have been VERY shallow.  This forces an analyst such as myself to make certain educated assumptions about where 2nd waves in the structure are located (since they are otherwise deeper retracements), which can have an effect upon the overall wave count if even one of those assumptions is wrong.  

Now, normally, we see .500-.618 retracements for 2nd waves, whereas 4th waves usually retrace .236-.382 of the prior move.  And, the deeper 2nd waves provide us with clear guideposts for the larger count.  But, when we have had the decimation we experienced from 2011-2015 in the complex, it is not unusual to expect that even 2nd waves may only provide us with .236-.382 retracements, which I warned could be a strong possibility even before we began this rally in 2016.  And, this seems to have been the nature of the market since we rolled into 2016. But it does lead to a bit more uncertainty due to having to accept higher 2nd wave retracements, which make it hard to discern between 2nd and 4th waves.  

Over the last several weeks, I have also noted that I was having problems aligning where the GLD was relative to the other charts.  And, it may turn out that the GLD was the tell rather than the other two charts.  You see, I had the GLD in a i-ii, 1-2 structure for well over a month now, and it seems that the other charts have now moved to align with the chart that I was initially questioning. In fact, the GLD is the one chart that has held the support I have been citing for over a month, whereas silver and the GDX have both dropped deeper than I expected over a month ago. 

As you can see from the attached charts, due to the bigger pullback in the GDX, along with the deeper pullback in silver, it would make the most sense that all these charts now align with the same count I have maintained in the GLD.  While this was my alternative count in the GDX until we broke down this week, the break down has now made it my primary count.

While I can certainly turn bearish like the rest of the market has seemed to do once the GDX broke down, I am really swayed by the technical picture on the silver 144 minute chart.  Throughout all of 2016, every time we have had the positive divergences that we now see on that chart, it has portended a strong rally about to start in that market.  Moreover, the GDX is now as oversold as it has been all year, and the bearishness is almost palpable.  And, while GDX can certainly become even more oversold, I am relying on the positive divergences seen in silver to guide me yet again.

Furthermore, the night of the break down in the GDX, the management team of our EWT Miners Portfolio met for several hours to review all the charts we follow in the complex.  In fact, the four of us reviewed almost 100 charts that night (and Garrett posted updated charts on 82 of them in our Trading Room at Elliottwavetrader.net that night).  Those charts also led us to the conclusion that maintaining a larger degree bullish perspective is the appropriate course of action for now, even if we see the potential for a little more downside in the coming week. 

For this reason, I will be watching the 25.50-25.75 region in the GDX, along with the 17.80 region in silver (0.618 retracement of wave 1 of iii as now counted) as the modified support regions in those two charts.  As the GLD has held its support quite well thus far, I will maintain the 123.50-124 region as my support in that chart.

So, for now, I will remain cautiously optimistic.  I am awaiting our next bullish signal of a (i)(ii) set up or wave 3 of iii to give us a much stronger short term bullish indication.  Until such time that we have that set up in place, I will remain cautiously optimistic as long as we remain over support. And, as I noted in our Trading Room on Friday, the market provided us with an excellent opportunity to hedge our long term positions with the expected rally we had on Friday back to the break down point. I will hold my hedge as long as we remain below Friday’s high in the GDX.

In the immediate perspective, as long as we remain below Friday’s high, I am still expecting a test of the lower levels cited above.  A break out over Friday’s high is the first indication that a bottom to this correction may have been struck, and I will be looking for the next bullish (i)(ii) set up to provide me higher assurance of that assumption. 

However, if the market should break all the levels cited above, it would suggest that a much deeper and longer correction is taking hold in the market (as presented in the blue count on my GDX chart), and may even increase the probabilities that a lower low MAY be seen.  But, as it stands right now, I view the estimated probabilities that we are within a new bull market in the metals complex still at 70%.

See charts illustrating the wave counts on the GDX, GLD and Silver (YI) at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-Silver-YI-201608281351.html