Overview Of The Precious Metals Market

First published on Sat July 8 for members of ElliottWaveTrader.net:  As I see many metals investors and traders begin to throw in the towel, I wanted to take this opportunity to again explain why I will not count myself amongst them just yet.  However, I will explain below what it would take to have me begin to look for lower lows in the overall complex relative to 2015, since I have been asked so often.  (And, I usually get those questions as the market bottoms and begins a strong rally). 

While the market did not follow through on the immediate bullish set up I outlined over the last several weeks, it does not invalidate the larger degree perspective we still see in the market.  And as sentiment becomes more and more bearish, there are many more signs that a strong rally is setting up to take hold.  But, again, even though the smaller degree immediate bullish set up invalidated, and we will have to await the next one to set up, I think that anyone aggressively maintaining on the short side of the market will likely overstay their welcome.

Let’s start with the larger degree structures.   Back in 2015, the greater probabilities suggested that the metals complex completed its long term “pullback,” right into the zone we were targeting for a long-term bottom.  That is why I was suggesting our members enter their long-term positions at the end of 2015, and it was also why we began our EWT Miners Portfolio at that time. 

Now, I know many disagree with our longer-term perspective regarding gold, wherein many view the drop from 2011-2015 as only an a-wave of a much larger degree corrective a-b-c pullback. They believe the drop from 2011-2015 is relatively too small to be all of the corrective pullback.   However, when one views the complex as a whole, one realizes that the HUI clearly looks like the drop from 2011-2015 was a c-wave in a larger degree expanded flat structure – the chart of which is attached below. This means that the longer term first wave took 8 years to complete, and topped in 2008.  It was then followed by a 7-year corrective 2^nd wave pullback which bottomed at the .618 retracement of the first wave at the end of 2015.   This is about as textbook of a long term 1-2 set up one could find from a pattern, Fibonacci structure, and relative timing perspective.  This is also the main reason why I view the larger complex as embarking upon a very long-term bull market move which can exceed the expectation of even the most bullish of uber-bulls, even though we have experienced difficulties with upside follow through in 2017.

Since that bottom was struck in 2015 right where it should have, the market provided us with what really looks like a clean 5 waves up off those lows, especially in the mining complex.  Again, this is another strong factor in viewing the larger degree structure as extremely bullish.   And, since that 5-wave structure topped in August of 2016, we have pulled back in what seems to clearly be an overlapping and corrective structure.

Now, for those who doubt this pattern structure in the HUI as being much more immediately bullish in the long-term perspective purely based upon the gold high level pullback, remember that silver also pulled back almost 75% from its rally high struck in 2011.  So, again, while gold may only have a relatively shallow pullback, it still provided us with a requisite a-b-c corrective structure, while the rest of the complex has clearly pulled back sufficiently to view the 2015 lows as a very long-term low in the complex.  This is why I believe that anyone maintaining a view that the 2015 low in gold as only an a-wave of a larger correction is failing to take into account the rest of the complex in their analysis.  But, do remember this is based upon probabilities rather than absolutes. 

Many of you have asked me how and when I would consider adopting a more bearish bigger perspective.  The answer is going to depend on how the next larger rally develops.   Should the market abide by all the Fibonacci Pinball pullback supports on its way up off the next low we strike, then I will maintain a strong bullish bias.   However, should a pullback convincingly break a Fibonacci Pinball support level after the next rally phase back to the 26-28 region, then I will have to consider the more bearish possibilities in the complex, even one that views the potential for a lower low.  I would then have to view the rally off the 2015 lows as a 5-wave a-wave (yes, a-waves can be 5-wave structures in the minority of cases), and that we would still need a c-wave rally, potentially even over the high seen in 2016, which would then set up a drop to lower lows in a year or two from now. 

But, again, I am not yet convinced that a lower low is sitting out there in the complex at this time due to the “textbook” larger degree bullish action noted above in the HUI/GDX.  However, if the market is unable to prove that bullish potential during the next rally phase, then I will have no choice but to consider the possibility of this action setting up the potential for a lower low in the complex before the bull market returns to the metals complex.  Yet, for now, I am going to maintain a bullish bias.

With all that said, I have to note the issues I am having in the silver chart.  Any immediate bullish multiple 1-2 structures have invalidated with this week’s drop below support, as all we are left with is the larger degree i-ii off the 2015 lows.  Moreover, the market has made it neigh impossible to adopt a simple corrective count to the downside since the highs seen last year.  The action in 2017 alone does not lend itself to any simple perspective, and is exceptionally complex.  As many of you know, I always adopt the Occam’s Razor theory in all my wave counts.  But, for now, that chart has left me without anything simple to point towards.  Moreover, I also do not have an impulsive structure to the downside to suggest we are heading directly to lower lows, as the technicals do not support an impulsive downside structure.

Since I have no clear structure to which I can point to support speculation of a lower low below the one struck in 2015, I cannot maintain an overall bearish thesis, especially when I view the GDX and GLD charts in conjunction.   So, the only reasonable perspective I can take at this time is that we have a complex WXY pattern playing out wherein the Y-wave can be .618 times the size of the W wave, which has a target in the 15.25 region. Moreover, the W and Y waves are nearly equal in time as well.  However, we would need to see an impulsive rally through 15.80 to give some teeth to this potential.

The GLD still provides a strong bullish picture in the bigger perspective too.  While it has retained its potential i-ii, 1-2, (1)(2) potential, I can even view as one lesser degree wave 2 pullback potential as well.  And, the main issue I have to any larger degree bearish potential is that there is no simple perspective to adopt that is pointing to lower lows in this chart.  Rather, it still points to this being part of a corrective pullback which “should” still bottom soon, and provide us with a 3^rd wave higher.   But, as I noted this past week in the GDX, since we broke the prior immediate, smaller degree bullish set up in the GDX, we will have to be a bit more patient to allow another one to set up to give us stronger indications of an imminent break out.  Until that is seen, I am not going to view the complex in a very aggressive fashion in the near term.

Ultimately, the broken bullish set up this past week proves that no one is able to be right all the time about the market.  While I can say I am sorry for being wrong this past week, it has to be understood that it is simply inevitable that I will be wrong from time to time.   In fact, the last time I missed a move  in excess of 3% in the GDX was last year around this time, but was able to catch the remaining part of the larger move thereafter.  Yet, as I have noted, when I see a set up like the one presented these past two weeks, we would see follow through approximately 7 or 8 times out of 10.   Unfortunately, this was one of the 2-3 times it did not follow through.  Unfortunately, this does happen since markets do not always follow through on what we view as the higher probability potential, and sometimes do take the lower probability path.  Yet, I would still take that set up 10 out of 10 times, and would overall do quite well.  In fact, this was no different than the bullish set ups we have been pointing to since February 2016 in the SPX, as we were looking for a rally to 2500+ from the 1800 region, which clearly did follow through on its higher probability perspective.

While the micro structures still leave room for another drop early in the upcoming week, much of what I am following is suggestive of a bottoming in the near term due to the deep bearish sentiment as represented by a number of indicators I follow (including several of the EWT proprietary indicators created by Dr. Cari, Victor and Luke), along with positive divergent technicals.   However, since we broke the immediate bullish set up by breaking below 21.75 GDX and 16.30 silver, I am going to be patient while looking for the next immediate bullish micro 1-2 structure off the next low. 

But, my bigger perspective still remains bullish until the market proves otherwise.  So, please do understand that my counts reflect the bullish glasses I have been wearing since trading in my bearish glasses at the end of 2015.  If you do not agree with my primary analysis outlined above, then feel free to act accordingly.  But, in this update, I have presented to you my thoughts of how I view the market from both sides of the market, and why. 

See charts illustrating the wave counts on the GDX, GLD, Silver Futures (YI) and HUI.