The Good, The Bad, And The Ugly

December 14, 2016

First published Sat Dec 10 for members of ElliottWaveTrader.net:  Almost daily, I am asked if I think the complex will see lower lows below those seen in the previous January and December.  My answer has been and remains the same and I will explain to you what I am seeing that still keeps me in that perspective.  And, I will also explain what does sway me into thinking I may be wrong.  You will then have all the information I am seeing and you can make your own assessments.

Now, I want to start out by saying that, as a long term investor in this complex, with a horizon of 2-3 decades in front of me, I secretly wish for lower lows to buy at even better prices.  But, I can wish all I want, yet the weight of evidence is still suggestive to me that the bottom has been seen.

Support For Bottom

1.   As you know, I am an Elliottician.  And, as an Elliottician, I look for a completed number of waves in one direction, followed by a 5 wave move in the opposite direction to suggest that the market has changed trend.  While this is not a certainty, it does strongly suggest a change in direction.  And, that is what we have seen in the metals market over the last 5 years.  We have what can be a completed a-b-c structure to the downside followed by a 5 wave rally in 2016 off those lows.

2.   The correction we have seen off the highs in 2011 have struck appropriate Fibonacci retracements.  While the HUI struck a standard .618 retracement, gold had a shallow Fibonacci retracement, whereas silver had a rather deep one.  But, overall, the complex as a whole seems to have struck appropriate Fibonacci retracement percentages to complete this degree of correction.

3.  Next, the move off the lows is more likely a 5 wave move than a corrective move due to the size of what we are counting as a 5th wave.  I believe counting the 2016 rally as a corrective a-b-c structure is not correct BASED UPON STANDARD STRUCTURES.  (Of course, it can be a non-standard structure, but they are in the lower probability range of market moves).  The significant majority of a-b-c structures see the c-wave presenting as the same size of the a-wave, or, it will exceed the size of the a-wave to as much as 1.382 or even 1.618 the size of the a-wave, especially in the metals complex.  In our case, the 5th wave struck where it normally does in the metals complex between the .618 and .764 extensions.  That is the standard size I would expect in this structure for a 5th wave and not a c-wave.   To me, this is strongly suggestive that the 2016 rally was an impulsive structure which is starting the next bull phase, and presenting a much lower likelihood that this move was a corrective a-b-c corrective structure, since, based upon standards, the c-wave would generally be too small, especially in the metals complex.

 4.  When a 2nd wave occurs off a major bottom, the sentiment has to develop so bearishly that the great majority of the market is going to believe that the bear market has returned.  We need that type of sentiment to support a 3rd wave rally, which will be larger than the initial move off the lows. In fact, it can easily be double the size of the move off the lows.  And, based upon much of the anecdotal sentiment I am seeing in the market, as well as the sentiment indicators which track the market, we seem to have enough “disbelief” in a 3rdwave rally as the great majority is now quite certain of lower lows. 

5.  In the last drop in gold, which has been the weakest of the complex to date, the volume seems to have dried up.  That is ordinarily suggestive of selling pressure waning, which often precedes a market turn.

6. I am seeing positive divergences in ALMOST ALL the technical indicators within the complex.  While they can all still support another drop yet to be seen, the indicators are such as we normally see as the market is bottoming, rather than accelerating lower.  And, this is most true in the mining complex.

Support For Lower Lows

1.  Well, we have to start with the fact that the market has not yet turned up with a 5 wave move off any lows we have struck yet.  Even though silver has been the strongest within the complex, I cannot confidently say that even it has developed a CLEAR 5 wave structure off the lows.  Now, while this does mean that we have no clear evidence that the low has yet been struck in the complex, I would classify this as a weak signal that we “can” see lower lows in the complex relative to January and December.

2.  The technicals on the daily chart of GLD are not typical of what I would like to see for an a-b-c retracement.  I have no clear positive divergence on the daily chart, even though the MACD has begun to turn up this past week.  But, at the same time, it does not “look” like the set up which is strongly suggestive of lows to be struck below those seen in December.  While it is certainly possible we can see a series of 4’s and 5’s to drop us below the December low, I am not convinced the MACD is in such a posture.  But, again, the lack of positive divergences on the daily chart is concerning to me, and I have pointed this out several times in the past.

3.  The only way I can count a 5 wave move off the lows in the complex for silver is as a leading diagonal.  For those of you that have read my analysis in the past, you will know that I have a hard time relying on leading diagonals as a strong trading cue.  So, clearly, this does weaken my overall conviction a bit.  But, with the structure seen in gold, the GDX, and the individual miners that we track, this is much less of an issue to me at this time.

4.  While the depth of the pullback in the GDX “THUS FAR” has still not broken below its .618 retracement of the rally off the lows, the GLD and silver has both broken below that support.  In my experience, when this market is very bullish, it often sees very shallow retracements, whereas a drop below the .618 retracement is often suggestive of lower lows, especially since we still have no clear structure suggesting that the bottom is in place.

5.  The complex has still not been able to take out any of its resistance we have been citing for the last two weeks.

Conclusion

While not a complete list of those things that I consider in my assessment of the complex, this is a general review of the factors I have been weighing in my larger degree perspective of the complex.  And, it still sways me to remain bullishly inclined even though some of the bearish issues have weakened my conviction a bit. But, I still see the weight of evidence as overall still bullish in the larger degree.

While the action we have seen this past week is still suggestive that we can still see another drop, I think the weight of evidence still suggests that it is not likely that the market will drop to levels below those seen in December and January.  Yet, due to the potential for another drop, and until we have developed more of an immediate bullish structure, I will remain hedged in my own account, as I have been stressing since we bounced back to the 28.50 region in the GDX. But, as a long-term investor in the complex, I still do secretly yearn for lower lows below December and January levels for even better bargain prices.   Yet, based upon the weight of evidence, I think this yearning will likely see the same end as an unrequited love.

See charts illustrating the wave counts on the GLD, GDX and Silver (YI) at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-Silver-201612111443.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. Visit his website:https://www.elliottwavetrader.net. You can contact Avi at: info@elliottwavetrader.net.

Gold is found in nature in quartz veins