First published on Sunday Oct 22 for members of ElliottWaveTrader.net: Yes, I still think we can push one more rally out of this market, but there is no question in my mind that risks have risen, as I have now been writing for over a month. When the GDX broke down from its upper support in its last break out set up, it clearly should alert us all to the potential trap door just below us.
Now, as I read through the blogs and public articles, it seems most are looking for the metals to just drop from right here for a myriad of reasons. (Well, that is, other than those who only see the word “UP” when you mention the word “gold” to them). For those who usually place their expectation upon the immediate direction of the complex, it would seem that the recent drop in price has them expecting it will immediately continue to drop. Isn’t linear analysis wonderful? So, it would make sense, at least from a sentiment standpoint, that we need to get a number of them believing that the market is about to rally strongly, which will then trigger our trap door.
As far as individual miners, I am strongly suggesting that you have stops on all your positions (as we do on ALL our positions in our EWT Miners Portfolio), or at least have hedges on your positions, especially if we are able to get that rally I still want to see. But, as an example, if the ABX is unable to exceed 18.35 on the next rally, and then breaks back down below the low we make before we begin the next rally, it opens the trap door for it to target the 11 region. That is the potential for a 30% drop in that stock, which is a major component of the GDX. And, it certainly supports the potential for the GDX to drop back down to the 17 region.
Now, I really do not want to scare you regarding the complex as a whole, as I am still quite bullish from the longer-term perspective. Rather, I want to point out the potential risks we are now confronted with due to the fact that the complex failed to break out in its last bullish set up. So, rather than view the markets while wearing rose colored glasses, I would rather view, and present to you, the market as it is. I want you to clearly understand the potential risks I am seeing over the coming months, even if we get a rally to invigorate your bullish juices, as I am quite certain it will do for the rest of the market.
For those who are truly opportunistic, should we see a 5-wave decline take hold over the next few months (in other words, a c-wave drop), this may present to you a last major buying opportunity in this complex for decades to come. So, it would be wise to maintain some cash on hand to take advantage of the opportunities presented by the market.
Additionally, I want to repeat something I posted on Friday. For those of you who read my analysis regularly, you will know that I am not a believer in investing in metals based upon correlations. I have presented much historical evidence as to why one should not be treating the metals as a contrarian trade to the stock market. That is, unless I see some evidence to think they may be trading in opposite directions.
As I noted this past week, it certainly seems as though the equity market and metals market may be set up for contrarian trades in the coming months. You see, we are looking for a wave iv pullback to begin soon in the equity market, while, at the same time, we are expecting a rally to begin in the metals complex. After that completes, we are looking for the equity markets to rally one more time into year-end to complete its 5th wave off the August lows, and, at the same time, it would seem the metals are going to drop into year end.
Now, if we see the follow through on this pattern, it would suggest that the equity markets are going to top out in wave (3) off the February 2016 lows and enter a multi-month pullback in wave (4). Again, it would seem that the metals would then be set up to finally begin their 3rd wave rally, and we know how far they can run over a 3-6 month period of time. In fact, it should even potentially exceed the strength of that seen in early 2016.
So, while I am still quite bullish of the metals complex in the long term, I am very cautious of the potential of a sizeable pullback in the coming months. And, how the next rally takes shape should give us more clues as to whether GDX can see the 17 region again.
At the end of the day, nothing has really changed in my overall expectations in the main charts:
As I explained in greater detail last weekend, if the GDX is able to make a higher high in the 26 region in the coming weeks, then it leaves the door open that green wave (2) may not break below the July lows. However, if the market is unable to develop a higher high over that struck in September, and then breaks below the low made before the current rally began, it opens the door to the GDX dropping down towards the 17 region before year end to complete a much more protracted wave ii, as presented in yellow on the daily GDX chart.
Ultimately, this leads me to the conclusion that the 2016 market highs will not likely be broken until 2018, and this will remain as my primary expectation whether the GDX sees a larger break down or not. But, until we see how the next rally takes shape, we will not be able to ascertain with more certainty whether a bigger decline is in the cards into the end of the year, or if we will simply remain in the same consolidation region until then.
With that being said, there is a potential micro-set up for a double bottom to be seen in GLD and GDX relative to the lows struck in early October. Along with that potential micro set up, silver may still see one more decline as well. But, as long as silver remains over the 16.50 level, I can still maintain my expectation for another rally to be seen in the coming weeks.
Overall, should we get that rally that I still want to see, I would suggest you use it to protect your metals portfolios, as it is still looking likely that we may not see a real break out until 2018.