Based upon most of the patterns I am tracking on the metals charts, it is not highly likely that the long-term lows have yet been seen in the metals and most mining stocks. That being said, I am still searching for a high probability pattern that is going to imminently take us there.
I continue to be asked about how I view the larger degree perspective in metals and miners. And, as I have said since the first week of November, the time for aggressive shorting has passed. I have also noted in early November that I have entered the market on the long side and will simply trade around that long-side position until we reach those lower lows, at which time, I will add to my long term positions. Lastly, I noted several weeks ago that this is the first time in years where I have gone net-long metals and miners, and, based upon where we are within the long-term wave structure, I am much more comfortable trading from that position, rather than from the short side.
Last week, I noted that the SPDR Gold Trust (ARCA:GLD) had an unreliable set-up for downside follow-through to the lower lows we are still expecting, yet there was nothing immediately bullish about those patterns. Early this past week, the market began to follow through on this potential downside set-up. However, last Friday, it gapped over resistance, and invalidated that immediate downside set-up we were tracking. Still, the main issue that I continued to note was that the set-up was built upon a highly unreliable base, which caused me to say last week that “[t]his is what is causing my hesitancy in suggesting an aggressive short position on the metals.”
So, of course, the question on everyone’s mind is “how are we going to get to those lower lows?” Unfortunately, each chart is offering a different perspective on how that may occur, which, again, makes the short side less appealing to me at this time – at least from a longer term perspective.
First, silver has now developed into what counts best as a 1-2 set up in wave V down. And, as we have seen so often in 2014, silver has usually provided us with the best indications for the direction of the metals in the short term. Should this pattern follow through to the downside, I will send out a Market Update during the week, with the relevant Fibonacci extensions to trade around, once this pattern begins to confirm.
Second, Market Vectors Gold Miners (ARCA:GDX) may be setting up in an ending diagonal for its 5th wave down. The issue with diagonals is the same we have with triangles, and that is we usually assume we are further along in the pattern than we actually are. But due to the larger degree pattern, I do not want to be looking down for a lower low when the minimum waves for a 5th wave down has completed. For this reason, I am going to assume we are in a c-wave in purple (3), which would match the silver pattern quite well, as both would be expecting a 5 wave decline from this point.
Third, the smaller degree pattern in GLD is truly a big question mark in my mind. The most likely way to count it immediately bearish would be similar to silver, but as having started with a leading diagonal down as a wave 1 of V. Again, GLD presents the least reliable pattern at this time.
But please, allow me to reiterate that none of these patterns are high probability trade set ups upon which one should be aggressively shorting in the near term. The one thing that these patterns do project - should they follow through - is that the market will target the regions we have noted as bottoming targets for these instruments for quite some time; below 13 in silver and below 105 in GLD. That is one factor that does align well with our larger degree perspective that the lows have yet to be struck in this market.
However, I am still not confident enough in such a set-up to be able to provide the low-risk, aggressive short-side trade opportunities we normally seek. Rather, I am going to wait until more of the downside structure is in place before placing trades based upon this structure. The main clue I am now awaiting is a break-down of a .618 extension once this larger 1-2 set up to the downside completes. And, if that set-up should trigger, I will immediately send out a mid-week Market Update with targets and resistance levels.
Until such time, I am still net-long metals and miners, with some downside protection in place. The reason I maintain this positioning is that, even in the most aggressive downside scenario, I would rather be buying for the long-term then selling for the short-term as we head down in a 5th wave. And, should we see a further rally in the larger degree 4th wave alternative count, then I will have a better opportunity to trade the short side, while riding my long positions until that opportunity ripens. But, as Xenia Taoubina, the lead analyst of our options service at Elliottwavetrader.net, appropriately noted this past week: “In this area, the beach ball has been pushed pretty deep under water, so surprises to the upside are more likely than surprises to the downside.”
Disclosure: First published Sat Dec 27 for members of ElliottWaveTrader.net: