Setting Up The Next Rally In Metals And A Risk Management Outline

November 1, 2019

While we have the minimum waves now in place to consider that the pullback/correction we have been tracking for the last two months has completed, and the market has clearly held the support we have outlined which we expected to hold during this pullback, questions still remain as to whether we can still see any further downside before the next rally phase begins.

I have reiterated many times that not only do I need to see the market complete a pullback in a corrective structure which would hold the support region identified on our charts, I also need to see a 5-wave structure develop off those lows to begin our more aggressive preparations for the next rally phase.

While the market provided us with an initiation rally off the lows struck this past week, I cannot say that I can confidently count the 5-wave structure I want to see off those lows just yet.  And, until I do, I will retain a bit of a skeptical eye towards the potential that we have begun the next rally phase.

Much of what we have seen off the recent lows seems to present as an overlapping structure on many of the charts I am tracking.  And, we have yet to attain the ideal targets for an appropriate 1st wave for the next rally phase.  So, again, it leaves me quite skeptical of this rally for right now.

Therefore, at this point in time, I still think we need to maintain some caution regarding the potential for the market to begin its next rally phase.  And, I think the market will provide us with stronger clues early in the coming week.  Once we have more information to work with early in the coming week, I will not wait for Wednesday to provide a mid-week update if I have enough structure to clear up the smaller degree expectations.  Yet, please recognize that the larger degree perspectives remain the same, as we are still in search of a smaller degree “bottoming” in the market before the next major rally phase begins.

There is another issue I want to address in this weekend’s update.  Zac and Garrett have been tracking a slightly different bullish count than I have of late.  They are viewing a number of mining stocks as being in a 4th wave of a larger wave (1) of 3 off the market bottoming we correctly called for in 2018.  However, my count views it as a much more aggressive (1)(2), i-ii structure off those 2018 lows.  And, I have explained in many prior updates why I always side with such aggressive potentials in the metals complex as my primary expectation until the market proves otherwise.  So, how will we know which is the operative count as we go forward?

Well, this is where Fibonacci Pinball can be our guide.  You see, if the market is able to project us to break out well beyond the .764 extensions off the 2018 lows, then it makes it highly likely that the more aggressive (1)(2), i-ii bullish count is taking hold.  However, if the next rally only projects us to the .764 extension (or lower), then we will have to prepare for another wave (2) pullback/consolidation that can take months before the major rally begins in 2020. 

For now, I am simply going to outline this analytical perspective to you, since I am still not yet confident that we have begun that next rally phase.  And, once I have confidence that we have begun that next rally, I will provide those resistance levels in the charts I track.  But, for illustrative purposes, I have noted what I am considering the alternative (1)(2) in yellow on the attached GOLD and GDX charts so you can at least understand what I am talking about. 

Along those lines, this is also an appropriate time to speak about risk management. 

In using those GOLD and GDX charts again, you can see that I have market pivots noted on them, which I placed there months ago.  Should we see the more aggressive structure I am primarily tracking take us beyond the .764 extensions and strongly through the market pivot, you should then move your long term stops up to just below the market pivot.  You see, if we head directly to the 1.00 extensions overhead on those charts, and then break back below the market pivot, it tells us that the bull market has not likely begun, and lower lows will likely be seen in the coming years in the metals complex. 

While this potential is clearly not my primary expectation, I think it to be foolish to blindly be looking to the long side when we have such a wonderful tool as Fibonacci Pinball to provide us early warning of this potential risk.  In fact, I can assure that a direct move through that .764 extension will turn the market exceptionally bullish, yet, I would never want to be blindsided by a larger degree correction.  I would rather have my risk management parameters in place for protection. 

For that reason, I am providing you with a FIRST update on my risk management perspective.  And, I will certainly reiterate this MANY times should we see the market blow through that .764 extension and the market pivot. 

That is why I highlight this Fibonacci extension region between the .618 and .764 extension as a market pivot.  Once the market moves strongly through the pivot and attains the 1.0 extension overhead, a failure to then hold the .618 extension as support (the bottom of the pivot) is an early warning that the rally is corrective in nature, and that lower lows will yet be seen in the coming years.  But, in truth, should we blow through the .764 extension and the top of the pivot, I would not expect to see us break back into the pivot, as my expectation would be to hold over the pivot (.764 extension) at all times until we complete all 5 waves off the 2018 lows.

To recap, my short-term perspective as to whether we have truly bottomed in the complex and have begun the next rally phase is still in question.  While we have enough waves in place to consider the pullback/correction as completed, I still do not have a confident 5-wave structure in place as the structure seems to have become a bit overlapping off this past week’s lows.  Moreover, we have not yet attained our minimal targets yet for what I would expect to see for the first wave of the next rally.  So, I am going to maintain come caution early in the coming week.  I will alert you as soon as the market makes it more clear to me in the coming week.  For now, I remain a bit skeptical.

And, lastly, you will never see any “perma-analysis” from me regarding any market.  My job is to approach markets in an objective fashion based upon what the structure of the market is telling me about the larger market sentiment which is ultimately what drives the market.  This includes an appropriate risk management perspective. 

In fact, this is what one of my followers on Seeking Alpha outlined about my approach to markets:

“many authors are constantly about buying, others are constantly forecasting the next recession (they will be right... eventually) here we have an author in the gray area..he's neither perma bull or perma bear, he's perma profit”

To this end, we have developed the Fibonacci Pinball methodology to provide an objective framework to the general Elliott Wave structure.  We use this methodology to set forth not only our targeting for market moves, but just as importantly, it guides our risk management parameters.  Therefore, I strongly urge all of our members to focus on risk management once the next rally phase in the metals market begins. Everyone should be focused on protecting the profits from the buying we urged our members to do in the complex at the end of 2015 and then again at the end of 2018.

See charts illustrating Avi's wave counts.

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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.

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