By Avi Gilburt

First published Sat Jul 18 for members:  This weekend, I write my update with mixed feelings due to the long suffering being withstood by the last remaining bulls from 2011, as juxtaposed against the euphoria currently being enjoyed by the profitable bears.  

Also, I will warn you that I am covering a lot of items in this update, including:

           1 -   Understanding the overall market

          2  -   Taking risk off the table on your shorts

          3 -    Preparing for the long side of the market

          4 -    Current analysis of GLD and silver

The Overall Market Perspective 

This past week, we saw gold and the GDX break their 2014 lows, as we have been expecting.  So, while the bears are rejoicing, many of the bulls are feeling quite heartbroken for the umpteenth time since this correction began in 2011. 

But, the bears should not rejoice too much or else they will soon find themselves in the same position as the bulls in 2011.  I am quite confident that the roles will reverse in the not too distant future, as we are moving much closer to the end of this multi-year correction.  And, when they do reverse, the bears will begin to feel that heartbreak, yet, there may not be any of the 2011 bulls left to rejoice at the commencement of the next bull market.  And, if one truly understands how markets work, this is typically what we see when a correction nears its end and the next bull market phase begins.

After each lower low made by the metals over the last 2 years, which was then followed by a seemingly strong rally, I have been quite steadfast and unwavering in my opinion that the correction is not over.  I have provided you with long term buying targets posted several years ago which have still not yet been struck, and have reiterated that the pattern to the downside had not yet completed.  I have repeated this week after week, despite the masses believing to the contrary.

Week after week one analyst after another has posted “reasons" as to why gold is about to rally.  One week it is Russia.  Another week it is Syria.  Another week it is China. Another week it is Greece.  And on and on.  They have been endless and relentless, but, lacking correctness.

Now, look.  I am not saying that I am the smartest person in the world, nor am I always right.  But, with the bearish set up I have been noting of late to take us to lower lows, I have been pleading with those that read me not to attempt any counter-trend trades during this decline until at least SOME minimal level of resistance is broken to the upside.  And, as I have been noting for the last several weeks, this feels exactly like last summer, where every little spike up in the downtrend motivated many to trade the long side without a break of resistance, only to be taken to the woodshed time and again.

Taking Risk Off The Table

For those that shorted the market at my last set up noted in mid-June (as represented by the blue box on the GLD daily chart), I noted on Friday that I took profits on approximately 20% of my own short positions (which were initiated in May, as noted on the site), but still expect us to head lower.  There comes a point in time where it is prudent to be taking risk off the table when a market is getting stretched too tightly on one side of the market, as I believe we are now seeing in the metals market.  As Xenia Taoubina, the lead analyst of our options service, appropriately noted in the past:  "In this area, the beach ball has been pushed pretty deep under water, so surprises to the upside are more likely than surprises to the downside."  It is exactly for this reason that I warned last weekend that if you are not already short from my last resistance region, now is not the time to begin to the short the market.

Therefore, the lower we head over the next few months, the more one needs to be focusing on the long side of the market, while taking their risk off their short side.  So, even though I see the “potential" for GLD to drop as low as 75 in a very "over-emotional" selling climax, that does not mean I want to be leveraged short all the way down to that level.  Rather, I would simply view it as the buying opportunity of a lifetime.

On Wednesday, I sent out a Market Update to all subscribers to stay the course on the short side, as the market tipped its hand and provided more bearish cues.  In fact, on Friday, the GDX even broke below the lower target I provided on Wednesday by 20 cents, and still does not look to be done with this wave iii of 3 extension, but I still wanted to personally take some profits on my shorts.  As I also noted on Wednesday, the GDX is providing us with the cleanest and clearest of the wave structures.  And, based upon that wave structure, once we complete wave iii of 3, we will then see a wave iv of 3, followed by the completions of wave 3, 4 and 5. 

Furthermore, since the 2^nd wave of this current down trend was quite short, it is likely that wave 4 will take up a relatively large amount of time, and potentially last for as long as a full month.  It is for this reason, along with the extension in wave iii of 3, that I am not going to expect a low in the GDX until at least September.   But, once wave iii of 3 completes, it means that we are only “squiggles" away from the 4 year correction completing.

How We Are Preparing For The Resurrection Of The Bull Market

As I also reminded members this past week, as per the request of many members over the last year, Larry, Zac, Garrett and I have been diligently working on our managed miners portfolio and allocation percentages to prepare for the final bottom in the miners.  For those that may not know, we are creating our own miners portfolio within our StockWaves service, with the goal of outperforming the GDX.  We are analyzing all the stocks within the GDX, and taking out the ones that we feel will underperform, and replacing them with stocks we expect to outperform, once the bottom has been struck.  Furthermore, our “committee" will be regularly reviewing all the stocks within the portfolio every two weeks to assure that we maintain an outperforming portfolio.   

And, since my expectation is for bottoming to occur no earlier than September, we should have our list and allocation percentages completed by our roll out date of September 1.  And, we thank you, our membership, for constantly pushing us for this over the last year.  Ultimately, we expect this will place us in the enviable position of having recommended  exiting the market at the exact top in 2011, and attempting to time the publication of our managed miners portfolio right at the expected bottom.

Current Analysis of GLD and Silver

As far as GLD and silver are concerned, there is still nothing on the chart to suggest that the bottom has been struck, nor is there anything that makes me want to trade this chart in a counter-trend fashion. As you can see from my attached daily silver chart, there is nothing to even speak of regarding a counter-trend rally until the downtrend line in red is breached.  Until that happens, I am looking for wave (3) to head lower. 

In the GLD, we are also caught in a downtrend channel, and it too suggests that no counter-trend trade should be taken as long as we remain within the channel. 

The one note I want to add about GLD and silver is that the downtrend is not terribly impulsive looking from the recent highs, which makes it more likely that we are in an ending diagonal for this last segment of the decline.  It makes it much more difficult to set downside targets on the micro-scale, since we have no impulsive pattern to follow. It also means we can see some whipsaw as we continue lower.  But, once completed, we often see a very strong reaction in the opposite direction, taking us back to the region from which these diagonals began, which would be a minimum initial target back towards the May high once all 5 waves down have completed.   

Ultimately, the market is setting up for our final approach towards the runway of the long term wave 2 correction.  But, since we do not have a clear impulse pattern in this last stage down towards our lower targets, I am not going to be shocked if the market has a few surprises in store before this downtrend is completed.  Should anything of consequence occur during the week, you can be certain that all members will receive a mid-week Market Update from me.

See Avi’s charts illustrating the wave counts on the metals below:  

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: Tuesday, 21 July 2015 | E-Mail  | Print  | Source: GoldSeek.com

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