For those that follow me regularly, you will know that I have been tracking a set up for the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX), which I analyze as a proxy for the metals market. I believe that the GDX can outperform the general equity market once we confirm a long term break out has begun, and I think we can see it in occur in early 2018. But, that will depend if the market holds this test of support we are seeing right now.
In the fall of 2011, the entire market was giddy regarding how the fundamentals were pointing to an imminent break out of gold through $2,000. At the end of 2015, all gold investors were quite sullen because the fundamentals were pointing to an imminent drop below $1,000.
During the decline off the 2011 market highs, the market was again certain that the fundamentals behind QE3 was going to cause the metals to skyrocket. The metals moved in the exact opposite direction of the markets expectation.
At the end of 2015, when the Fed made it clear they were going to begin to hike interest rates, the market was again certain this was going to cause the metals to tank. Yet, that time frame may be looked upon in the coming years as a very long-term bottom for gold, as the metals began one of the strongest rallies in their history.
What do all of these events have in common, other than evidencing how fundamentals in the metals market will have you looking the wrong way at the most crucial times? They all represent how the market was heavily weighted on one side of the boat, which always makes the boat capsize. This is sentiment at work, and evidences why it is the primary driver of the metals market all the time. And, our job should be to identify what market sentiment is telling us.
The market told us in mid-December to prepare for larger moves about to trigger. In fact, I wrote an article on December 12th, which was published on December 12th entitled “Strap Yourself In - We Are About To See Some Big Moves In Metals.” It was that day that the GDX began a month long 20% rally.
And, as I outlined in my last public update on Seeking Alpha, we were looking for GDX to pullback and build a base from which it can see a strong break out. As I wrote two weeks ago:
On Wednesday, just after 2PM, I published a mid-week update to my members entitled “Prepare For A Retracement.” Within minutes of my publishing that update, the market began the pullback we experienced during the remaining part of the week.
At this point in time, the market seems to be setting up in a break out fashion within the next few weeks. In fact, that rally can provide us with a stronger move than that seen in early 2016. However, it may take more consolidation/pullback before the market is ready for such a break out. But, as long as we hold support between 22.50-23.25 over the coming weeks, it would suggest we are going to begin a rally which could eclipse the strength of the one seen in early 2016. . .
Lastly, I want to remind you that my job is not to tell you what the market MUST do. That is an impossibility. Rather, my job is to provide you the guideposts for how the market can react as long as it respects those guideposts. For this reason, I will never be right 100% of the time in my primary expectations, but you will know up front where those primary expectations become invalidated.
Moreover, these expectations are based upon market standards which apply approximately 70% of the time. That means there will be a minority of the time that the market will move outside the norms and standards we follow. So, before you decide to work with the analysis methodology I utilize, you must not only understand the tremendous value it can bring to investors in identifying relatively accurate points at which the market can turn point, but, also its limitations.
And, since I have been getting many questions as to how I see the market right now, I thought I would provide a quick update. But, nothing has really changed in my expectations on the GDX. However, I can allow for a bit lower in support based upon the structure as developed this past week down to the 22 region.
So, if we are able to hold the 22 region in the coming week, and then we see another 5 wave structure take us back up towards the 25 region, we will have to prepare for a potential break out on this chart.
I want to reiterate that we have a break out set up developing in the metals complex. While we still need another i-ii structure to be seen in the GDX before the market sets up for a potential “blast-off” mode, the set up is certainly still building that launching pad. However, we have been here before. In fact, we have seen these set ups several times during 2017. And, each time, I warned about playing this market with leverage, whether that means using 3X ETFs or aggressive options strategies. I want to warn about that again. Until this market finally gives us a confirmed break out, we have no assurances that the market will capitalize on the current bullish potential set up.
While I am not a prophet and cannot tell you whether the market will follow through, all I can do is present the set-up potential to you, in the similar way I presented the topping potential to you in 2011, as well as the bottoming potential at the end of 2015. But, should we see the next i-ii structure develop in the GDX in the coming weeks, that will put you on warning that a break out may be imminent. Until that point in time, let’s view this market with some caution rather than reckless abandon, while recognizing the potentially strong break out pattern that is being built before us.