Let’s Keep It Simple

January 4, 2020
widely followed Elliot Wave Technical Analyst & author @ Elliott Wave Trader

Originally published on Sat Dec 28 for members of ElliottWaveTrader.net:   When I peruse the comments on our Elliottwavetrader site alone, I am seeing a myriad of “beliefs” as to what the metals are doing and will be doing.  Most of such beliefs seem to be driven by feelings, and quite a number of them have been fighting this metals rally. Yet, some are even driven by various forms of analysis. 

Of late, we are seeing so many become fearful of the metals market due to the COT report being so “bearish.”  But, I have already dealt with this issue last week, yet I am going to repeat why that report is really of lesser consequence, especially when viewed relative to the structure of the market and support and resistance:

“If you look at the attached chart for the last 20 years, you will see that during the parabolic rally of 2010-2011 in gold, the commercial traders were heavily short gold.  In fact, you can see that during that entire period of time, commercial shorts remained at 200,000 or greater.  Yet, that was during a period of time where gold rallied $800.  For those counting in percentage terms, that means gold rallied 70%+ during a time where commercial traders were heavily short of gold. 

You see, just like technicals have to be read differently during bull markets versus bear markets, so does the COT.  During bear markets, when the technicals reach an overbought level, then it often suggests the market will likely begin a selling phase.  However, in a bull market, when the technicals reach an overbought level, rather than suggesting selling will result, the technicals often embed during the strong advance of a bull market.  The same will often happen with the COT.  So, applying a linear expectation to the COT data will not often result in the appropriate trading result.”

Yet, even Zac and Garrett have presented a slightly different wave structure than I have in some of the charts we track.  So, how should we address all these different views?

For those that were with us back in 2015, throughout the first half of the year, as many of the charts were seemingly completing an ending diagonal in their final throes of the correction, I continued to note that I cannot wait until we can finally begin to view the market from the long side.  I explained that it would be infinitely easier to approach this market from the long side once we turned.  I still feel that way today.

So, I am just going to simplify this for all those who are reading this analysis.  While we can approach this in a complex manner, I would rather move towards a much simpler perspective, and default to the more complex only if it should become necessary.  And, as long as we continue to remain over respective support levels noted in the charts and in the analysis, I will continue to approach this market with a simple bullish bias.

That means that I am approaching this market as setting up for the heart of a 3rd wave in 2020.  Will it actually follow through on this set up?  Will it morph into one of the more complex structures?  I cannot provide those answers to you with certainty.  Rather, I can simply outline the set-up and provide the parameters for the potential move. Moreover, I will also outline that set up in the simplest manner – in other words, as a standard Fibonacci Pinball impulsive structure set up. And, I will also provide the parameters for maintaining that structure over the coming months.

So, in viewing this structure from in its simplest form, let’s use the GDX chart as our example, and take note that I am viewing the current structure as multiple 1’s and 2’s off the 2015 lows, with us currently working on wave [i] of wave iii of [3] of 3. 

Now, whether you “believe” that this is the correct structure or not should not really be material.  In fact, I have lost a lot of opportunities in my younger days of trading when I did not “believe” the set up the market seemed to be placing before me.

Rather, many charts across the complex are presenting us with this type of set up, which, if triggered, would provide a parabolic type of rally in 2020.  Therefore, I think it is the prudent path to recognize this potential certainly exists across the complex, and align yourself with this potential because these are one of those types of set ups you do not see very often in your investing career – especially in the metals.

Let me also be clear about something:  This does not mean you throw caution to the wind and abandon all forms of risk management.  Rather, we have been outlining the support levels we view as important, and you should be utilizing those supports when outlining your own risk management strategies.

As I have highlighted many times before, I give the metals the bullish benefit of the doubt when they begin to set up for a bullish move.  The main reason I give the metals the bullish benefit of the doubt when they provide us a bullish set up is because when they leave the station, they often move faster and stronger than almost any other product out there.  And, when they leave the station without you during the heart of a 3rd wave, they do not often provide you another clean opportunity to get back on the train.

Of course, if the pattern breaks, you can always stop out and wait for the next set up to develop.  That is simply what we all should focus upon when we invest/trade.  But, to ignore the metals market when they provide you a set up for what may be one of the most powerful rallies you may see in years is not something I would suggest.  Remember, we have our parameters and are not throwing caution to the wind.

As the set up continues to develop, I will continue to outline the parameters.  Moreover, should the next 1-2 trigger over the coming months, I will even outline where the pitfalls reside so you can have early warning of a potential failure.  In fact, you have them outlined on the daily GDX charts I asked you to review as our example.  And, I have outlined these pitfalls in prior updates.  Should we trigger the next 1-2 upside structure in the coming weeks/months, I will reiterate those pitfalls, so that you can be prepared with your appropriate risk management strategies.

For now, we are still working on the 5-wave rally off the recent lows.  And, I think it will still take us at least another week before we are able to complete all 5-waves in this current rally.  I have outlined the micro structures throughout the week, and, overall, nothing has really changed.  You can see my general expectations for waves 3, 4 and 5 to complete over the coming week or two presented on the attached 8-minute GDX chart and the 144-minute silver chart.

Once we are able to complete this 5-wave rally, then I will be looking for a corrective 2nd wave pullback.  Should we be able to rally strongly over the top of the high struck on this current rally after a corrective 2nd wave pullback, we will be triggering the major break out scenario I have been outlining for months.  And, at that time, I will update all our members regarding the support levels and targets that will keep us in a 3rd wave rally, or if a support is broken, will have us switching gears. Moreover, I will update all charts with the appropriate pivots which must be maintained in order to keep pressure up in the market.

For now, my expectation is that we will likely set up that break out scenario in early 2020.  But, we still have a bit more work on the upside (with a few micro 4’s and 5’s) before we complete that initial 5 waves off the recent lows, as outlined by the attached charts.

See chart on GDX illustrating Avi's wave counts.

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Avi Gilburt is a widely followed Elliott Wave technical analyst and author of 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. You can contact Avi at: info@elliottwavetrader.net.

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce

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