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No Downside Set-Up Yet for Metals


 -- Published: Wednesday, 17 December 2014 | Print  | Disqus 

By Avi Gilburt

First published Sat Dec 13 for members of ElliottWaveTrader.net:  Last weekend, in a special edition article I did on Elliottwavetrader.net, I addressed the inflation/deflation arguments we hear so much about regarding metals.  Over the last several weeks of weakness in the equity markets, we are now seeing the resurrection of another old perspective that gold acts as a “safe haven” during times of equity market weakness.  And, it really plays well as a sound-byte. But, unfortunately, it is not bolstered by the facts.

Simply because gold is in an uptrend during a time that the equity markets are moving in the opposite direction does not make gold a “safe haven.”  Remember, we called the lows in metals in early November, right before the metals began this current rally. But, the equity market weakness did not begin until a month later.  Does that make gold omniscient as to the equity markets?  I think not.  I simply think that people look for nice stories to tell to bolster whatever perspective they want to proffer. And, believing that gold is a “safe haven” to equity market weakness has no consistent factual or historical support.  But, it sure does sound good and provides a short term sales pitch for brokers to sell gold.

As a perfect example, let’s take a look at the financial crisis of 2008/2009.  Until the end of 2007, both gold and the equity markets were in a long term uptrend together.  The equity markets topped at the end of 2007, and began the major portion of their decline in mid-2008. Meanwhile, gold continued in its uptrend until early 2008, and topped several months after the equity markets topped, but also several months before the equity markets began their severe decline phase.  And, during the strongest selling phase of the decline until the equity market bottomed, the market shaved off 50% of its value.  During that same period of time, gold lost 30% of its value. The only real “safe haven” during that period of time was the U.S. dollar, which gained in value.

But, if you look at the patterns of gold and the equity markets, there is hardly any similarity or noted reverse correlation between the two asset classes.  And, clearly, gold did not act as the “safe haven” during the strongest period of the equity market decline. Yet, most are simply unburdened by these facts, but regurgitate this fallacy every time they see gold rising when the equity markets are falling.

And, if we recognize that the metals did not even move during one of the strongest declines in the equity markets we witnessed in 2014, does that really make them a “safe haven?”  Or, are they just acting within their own patterns, rather than reacting to the equity markets?  I think you know how I answer this question. 

Since we called the last lows in early November, I have been net-long the miners and metals, and have not had a reason to turn net-short.  But, as I have noted in the Trading Room at Elliottwavetrader.net, I did add a first tranche of hedges at the 20.50 region on GDX a few weeks back, for which I have now set stops at resistance.  But, as of the close on Friday, taken as a whole, I still have no reason to be net-short the entire complex, but the miners make a strong argument for being net-short of that segment of this complex.

Along those lines, we have 3 charts, each telling us different things.  The GDX is in a very negative posture, as long as it maintains below the 19.62 and 20.23 levels. Silver seems to be consolidating in a micro 4th wave triangle, setting up for another push higher.  And gold has no solid upside or downside structure to which I am able to point this weekend.  But, clearly, without a clear downside structure, the current structure should be viewed as a “consolidation,” setting up for another push higher.  A break down below 116 in impulsive fashion would change that perspective.

This leaves me relatively bearish of the mining stocks – as long as GDX maintains below resistance – and quite neutral the metals themselves.  And, without a clear downside structure in the metals over the last week, I have no reason to be net-short the metals at this point in time.  I will await a 5 wave decline to begin shorting the metals aggressively for wave V down, but until that cue is seen, we do not have clear indications that any top has yet been struck. So, it leaves me with the same warning I provided to you last week:

“this is the first time in over 3+ years that I am truly comfortable with my positioning in the metals.  Within a correction, the market whipsaws up and down, as it makes it way lower and lower, until the correction has completed.  Until recently, I have not had enough of the correction completed to feel comfortable in taking a long-term long position in the metals and miners.  Well, that is, until early November 2014, just as most others were stopping out of their long positions in the metals and miners.”  

As I noted repeatedly in the Trading Room at Elliottwavetrader.net, I know many of you are just itching for a short-term shorting opportunity for the final decline in metals.  But, I think it is time I warn most about being too aggressive on the short side now.  Remember, we are looking for a long term correction to complete.  And, when that correction hits its final downside targets, it would not surprise me to see the exact replay of Sunday night, which, if you are not nimble, can turn very profitable short positions into losing positions very quickly.  

If you read the tone of my perspective over the last several years, I have been very bearish for quite some time, until we hit the bottom of the drop in early November.  Since that time, I have changed my overall perspective to one in which we should be looking towards the long-term upside, rather than the short-term downside.  And, while I, too, will attempt a short-term short trade if the set up appropriately presents itself in a low-risk manner, I will not cry if the market drops without providing that low-risk entry. Rather, I will look at it as an opportunity to cash in my intermediate term puts on GLD, which were purchased when GLD was around 128, and also an opportunity to buy more long-term long positions.  

As for downside targets, well, nothing has really changed for me in GLD.  I have had a target of 95-105 for quite some time (with an over-reaction target as low as 75), and have no reason to change that expectation at this time.  As far as silver, we may see as deep as the 12.75 level, with much depending on the size of the extensions we see on the way down.  And, yes, I still believe those targets could be the buying opportunity of a lifetime. 

See Avi’s charts illustrating the wave counts below:

 Elliott Wave Chart
 Elliott Wave Chart
 Elliott Wave Chart
 Elliott Wave Chart

 

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.


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 -- Published: Wednesday, 17 December 2014 | E-Mail  | Print  | Source: GoldSeek.com

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