First published Sat Jul 25 for members of ElliottWaveTrader.net:
When the market made it clear three years ago that much lower levels were going to be seen, as the bottoming set up, we were tracking was invalidated in June of 2012, I put out the lower targets we have had on our metals charts for the last three years. And, during those last few years, many of you have questioned me about us being able to strike those targets, as they seemed too unbelievable to most. In fact, I have been warned by many market participants, as well as other analysts, that if I wait for my targets, I will likely miss the next bull market. Well, I don’t think we have missed much, and, in fact, have done quite well with our short side trades.
With the markets now dropping towards our long term buying zones, the most common question I am asked is “do we buy now?” And, much of the answer depends on your risk tolerance perspective. But, for those who are not trying to perfectly time the market, the answer is “yes,” if you already do not have initial positions in this market. But, if you do, please do keep in mind that the “potential” still exists that silver can see the as low as the $10 region (ideal target has been 12.75), whereas ARCA:GLD can still drop as low as the 75 region (ideal target has been 98) in an overemotional capitulation event, which I have warned about for quite some time.
With the break down this past week, the GLD has now moved into the buy zone, and is approaching my “ideal” target at 98. However, silver is still hovering a little over that buy zone, and many of the miners we have been watching on our list have moved much closer to their buying zones. So, while gold has moved into the target zone, silver still has not, and I would prefer to see them both in the zone together to consider we have a strong long term buying signal. That has not yet happened.
For those who are trying to time this market, I would have to say that it seems we still need a “rally” in a 4th wave to set up our final run to lower lows. So, just like shorting the markets from the highs, one has to determine how much risk they want to take down here, and, more importantly, how much “pain” they would feel comfortable in taking if they begin to buy their long term positions now. But, should you begin to buy now, we still have at least one more opportunity to hedge our positions, as we did back in May and June of this year.
How I Am Viewing The “Buying” Opportunities
I am going on record that I still do not believe the final lows have been struck YET. I know that some analysts in the market are again considering this last drop as the “final capitulation” that precedes the major market turn, but I am still not yet in that camp. While we have begun to see the masses turning strongly against the metals right now, some even considering them akin to “pet rocks,” as well as seeing some of the lowest sentiment readings for metal bulls on record, our downside pattern does not yet look completed.
If I were to be an absolute purist, I would say that we need another rally in a wave iv of 3, followed by a lower low in a wave v of 3, which would be followed by a second rally in a wave 4, which would then be followed by another lower low in a wave 5.
What this ultimately means is that after a wave 4 rally, which should last between 2-4 weeks, as I expect it to be much larger than wave 2 based upon the theory of alternation, I am going to be “calling” the lows are in at the next lower lows following that wave 4. But, I want to be clear. Should we see a lower low within the next week or two, I would only view that lower low as being the completion of wave 3, with us still needing a wave 4 and 5 before the lows are in. However, at whatever the next lower lows are, even if they are only wave v of 3 within the next week or so, I will personally be buying more metals and miners on those lower lows, and leaving capital available for more buying at the next lower lows I expect. My intention has always been to layer into my long term positions.
This means that my answer to the question of “is it time to buy?” is to be answered in the affirmative on whatever next lower lows we see. Should that lower low be seen within the next week or so, it is a good long term buying opportunity, but we still have a high probability of seeing one more lower low below that, even after a rally is seen. Yet, remember, just as we did our initial buying for the first time in 4 years at the November lows in 2014, and we successfully hedged those longs in May, we can always do the same on the next larger wave 4 rally.
But, the lower low I am still expecting in a month or two, would be a VERY STRONG buying opportunity, and those levels may not be seen again for many decades to come.
Wave Count
Silver is still not providing us with a standard impulsive pattern to the downside, and still strikes me as forming an ending diagonal to complete this final run to lower lows. Furthermore, we may yet see a little lower to complete this wave (3). What this likely means, if I am correct, is that the upside in silver’s 4th wave may be relatively limited as compared to that for gold and ARCA:GDX. But, it also means that when silver does complete its full 5 waves lower, the move off that 5th wave bottom will likely be one of the more powerful moves we will see in silver.
As far as GDX and GLD, those of you in our Trading Room at Elliottwavetrader.net know that, by the end of this past week, I have gotten out of the significant portions of my puts/hedges which were entered in May and June. Yet, I am struggling with whether the low we saw on Friday was the end of the 3rd wave in this 5th wave, or if it was only wave iii of 3. Should we see lower lows in the next week, that would suggest to me that the low on Friday was only wave iii of 3, and the next immediate lower lows are wave v of iii. However, should the market begin a multi-week corrective rally/consolidation, it would confirm that the bottom struck last week was the completion of wave 3.
I want to clearly note that I have reached a point at which my fears may drive my wave count, and I am concerned that this may affect my objectivity. But, when I look at the long term picture, it is not reasonable for me to be suggesting to those who have been waiting for me to issue the “buy” signal to continue to wait, at least for their initial entries into this market. But, if I were a complete purist, I would almost have to expect lower lows within the next week or so, which would then complete wave v of 3. And, as you can see from my GLD chart, this is how I must present the count, as it really makes the most sense, despite my fears. However, I cannot maintain the same perspective in the GDX at this time. And, oddly enough, silver also looks like it needs another lower low to complete wave (3).
So, for now, I am going to be looking for a lower low within the next week or so, which would complete wave v of 3, which will then kick off a multi-week corrective rally for wave 4.