While the GDX did not strike its upside resistance, it may have come close enough to consider it having topped. The question now is how do we view the coming “correction.”
As I noted in my mid-week update on the metals and miners, the toughest part of a new major trend, from an Elliott Wave perspective, is determining where waves i and ii reside, as the targets for waves iii, iv and v are all based upon waves i and ii. And the difficulty is compounded in the metals market since retracements are often so shallow.
Ultimately, if this were a “normal” chart, and I was not concerned about the parabolic nature in which metals react, I would easily classify the current count as topping, or having topped already in wave i in blue, and would be looking for wave ii to take us another month or two to complete. However, there are still so many market participants who missed the bottom (as they were clearly not following our “BUY BOX”), and many are still waiting for sub-$1000 gold. Maybe they are right, since we still do not have a confirmed bottom in place with a greater than 80% probability. But, in my humble opinion, I still believe there is a 65% probability that the bottom has been struck in the GDX, so, it seems more likely than not at this point in time that the bull market has returned. Yet, as I have noted before, the probability for a lower low is still not insignificant, so I still believe that aggressive long side trades should not be placed until we obtain our confirmation.
Now, if the market would be truly cruel to those who missed the bottom, it may only provide a shallow retracement and make them chase this much higher, once they realize they have missed the bottom. This will cause the next rally to be exceptionally strong once we move into the wave 3 of iii. So, I am trying to be more cautious about upside surprises than I normally would be (which is presented in the green count), even though I really like the blue count on the chart, and is supported by many of the individual miners we follow.
Since many of the individual miners we bought in our EWT Miners Portfolio back at the lows in 2015 seem to be approaching the top of, or have actually struck, their larger degree wave i off the market bottom, we have reduced our exposure to the complex to a 20% allocation this past week, with those stocks seeing returns of 70-165% from when we bought them back at the end of 2015.
The main reason we have banked the profits this past week is because we are a “long-only” model portfolio so we want to bank returns and add back those positions as the corrections take their shape. Price improvement is how one increases their overall return within a market, so this one of the ways we expect to outperform the GDX over the long term, along with picking the stronger stocks within the fund.
Moreover, since we opened our model portfolio and began buying positions in late 2015, we have avoided those stocks which we viewed as carrying potentially higher risk due to the bottom not having been confirmed in the market. We have also not taken the allocation of the portfolio to a 100% position, since we still do not have a confirmed long term bottom in place yet. Once we have a confirmed bottom in the market, we will be able to more comfortably allocate 100% of the cash available, as well as designate more of the portfolio to more of the junior miners which we feel may strongly outperform the complex. And, this is the same perspective I have been suggesting to members as we were buying in our “BUY BOX” at the end of 2015 and early 2016.
But, as you may notice, I have two counts on my GDX chart, and neither has been classified as a “primary” count. I have been struggling with this issue all week, as I outlined in my detailed mid-week metals update. My concern is the green count, but most of the charts we follow seem to support the blue count. Moreover, if my thesis that the equity market and the metals market may align for the next few years, the blue count seems to support such alignment. Therefore, while it is not noted on the chart, and after contemplating this more throughout the week, the blue count is probably my “preference,” whereas the green count is my “concern.”
Lastly, in order for me to believe the “correction” has begun in GDX, and the overhead resistance will not be struck, we will need to break down below 22.20 to make it less likely that this drop is a 4th wave in the last 5 wave structure higher. Moreover, any strong break out over 26 in GDX places me in the green count, and in the heart of wave 3 of iii, and on our way over 40.
As far as the GLD is concerned, it has turned into a very complex pattern, which may continue as an even more complex b-wave that can still take us higher. Of course, the b-wave may have completed already, but, unfortunately, I cannot be certain until we break the 115.50 region, which will point us to the 111-113.75 region for wave ii.
And, as complex as GLD has become in its micro pattern, silver has become even more so. While it invalidated an immediate bearish set up a bit over a week ago, we are still trying to “feel out” where the i-ii structure resides. My ultimate preference, which I noted back in 2015 even before we bottomed, has been for the wave i off the lows to target the 21/22 region. However, the immediate path to that region will be closed off if silver were to break down below 16.20. You see, in the “ideal” bullish count to the 21/22 region, silver struck its 1.236 extension for its wave (iii) of 3 of I this past week. Therefore, support resides between the .618 (16.22)-.764 (16.55) region, with my ultimate preference for silver to hold over 16.55, and then rally strongly in wave (v) of 3 to take us to the 18.55-19 region.
However, if silver breaks 16.20, we only have 3 waves up off the lows, and it opens the door, yet again, for silver to potentially make a lower low.
I know the action in the metals/miners have been quite exciting at times (with many of our members posting about overall returns well exceeding 70% this year), and frustrating during the corrective phases, especially in silver. But, once we have a confirmed i-ii in place, and wave iii confirms its break out, all that will remain will be the excitement of profits, as we will then have a high probability confirmation of the bull market in metals, with the next phase seeing GDX heading north of 40, silver heading north of 30 and GLD heading north of 150 within 12-18 months of such confirmation. But, until such confirmation is seen, I am trying to carefully take this one step at a time, as the probability for lower lows is still not insignificant, especially in silver.
See charts illustrating the wave counts on the GDX, GLD and YI at https://www.elliottwavetrader.net/scharts/Charts-on-GDX-GLD-YI-201604241249.html
(First published Sun Apr 24 for members)
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&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.