Is It A Bull Market Or Bear Market In Metals?

First published on Saturday May 13 for members of ElliottWaveTrader.net: Without fail, each and every time the metals have dropped since bottoming over a year ago, many panic and proclaim the bear market to have returned.  Moreover, many have looked to the USD as their guide to what the metals will do, and are completely befuddled when the dollar trades in tandem with the metals, as we have seen for almost two months.

As for me, well, since I was taught at a young age not to “ASSUME,” I only listen to price and try to ignore emotion as much as humanly possible.  For this reason, I rely on my analysis to make decisions, as relying upon emotion often puts you on the wrong side of the market at the exact worst time.

Now, clearly, relying on analysis means that I am expecting the market to play out based upon probabilities, rather than certainties.  So, I have to expect that I will be wrong in my analysis at times.   However, the reason I utilize the analysis I do is because, over time, it has kept me on the right side of the market the great majority of the time, even though it “feels” as though the rest of the market disagrees with my perspective.

Over the last few weeks, the bearish voices have become quite vociferous in their proclamation that the bear market has returned.  Yet, as we were dropping into the target I placed on the GDX several weeks ago, I kept reminding those who would listen that one should ignore their emotions of fear, and focus upon the risk/reward being presented before you on the GDX chart, at least as long as we maintain over support.

Now, while I still do not have a high probability confirmation that the bottom has been struck because we still have not completed a larger degree 5 wave structure off that bottom, any further drops to a lower low will likely be met by a strong reversal. The reason I say that is based upon the positive divergences setting up at the bottoming region of late.

You see, a textbook a-b-c corrective structure actually sees the a-wave decline presenting a technically strong price drop, whereas the c-wave presents as a weaker price drop relative to the a-wave, which provides us with a positively divergent bottoming in our technical indicators. 

The clear example I can point towards is our daily GDX chart.  As you can see, the a-wave of the pullback provided us with a sizeable drop off the highs in February.  (Yet, as strong as that drop was, it still held the uptrend channel on our MACD developed since the bottoming late last year).  However, what is even more important is that the MACD for the c-wave started at a much lower high, yet seems to be bottoming at a higher low than the bottom struck for the a-wave, despite the price drop being relatively close to equal.  I consider this a textbook a-b-c bottoming structure from an Elliott Wave perspective, which is clearly supported by the technicals.

Of course, if we do not complete all 5 waves up, as noted on the attached 8-minute GDX chart, then we can still see a slightly lower low in price, but it will most likely retain its positive divergence, and support a very strong reversal in the opposite direction.

Now, while the GDX and silver have not completed a 5 wave structure off their lows either, and the only way the GLD can present us with a 5 wave structure off the low is as a leading diagonal due to all the overlap, it does not provide me with any strong confidence that the low has actually been seen yet.

So, since the GDX has the cleanest pattern in place to work with from a micro-charting perspective, I am going to focus on that chart this weekend, since the others are not offering any clear impulsive structures to provide us strong insight or guidance.  As you can see from the attached 8-minute chart, we have 3 waves up off the lows, and we have even exceeded the 1.618 extension of waves (i) and (ii).  This means that as long as the next pullback is corrective, and maintains over the 1.00 extension at 22.20, I want to see a 5^th wave develop to complete 5 waves off an a-b-c bottoming, which would strongly suggest the resumption of the next larger bullish trend.

However, if the market drops below 22.20 in an impulsive fashion, we have an early warning signal that the next bullish trend has not yet begun in the complex, and we may very well still see that 20.31 target on the GDX.

So, while you may read emotionally-based or correlative-based perspectives suggesting that the metals are about to crash, I suggest you focus on the chart before you, and analyze it based upon a methodology that will keep you on the correct side of the market the great majority of the time, and using stops for the minority of times you find yourself on the wrong side of price. 

See charts illustrating the wave counts on the GDX, GLD & YI.