When the metals are in a bear market, metals enthusiasts are frustrated. And, even when the metals are in a bull market, metals enthusiast become frustrated. This is what I have been seeing of late, as the metals are consolidating for their next bullish run.
But, if you trade metals, you know that they actually spend much of their time consolidating. The reason is that their moves are so strong and powerful, they complete quite quickly, while spending the great majority of their time within a consolidation. And that is what I think we are seeing now.
Yet, I don’t think we will see the bigger fireworks until 2020, and it may not even be until the 2nd quarter.
5-Wave Rally
Before we are able to confirm a major break out and the potential of a major third wave taking hold, we still need to see another 5-wave rally complete. And, neither of the metals have broken out to suggest even that the initial 5-wave rally is taking shape. While many of the mining stocks we track have clearly begun that rally, such as Newmont Goldcorp (NYSE:NEM) and SPDR Gold Shares (NYSE:GLD), they have not convinced market participants that their rallies have begun. But I think that is simply a matter of time.
Therefore, we still need to see this smaller degree 5-wave rally completed before we are able to set up the major 1st and 2nd wave for the rally I expect to see in 2020.
So, while the metals take their time before breaking out, I want to take a moment to address a question I get all the time, and that is the “bearish” perspective many derive from the “Commitment of Traders” report. The common argument suggests that as long as the commercial traders are shorting gold heavily, then gold cannot rally. Yet, history suggests otherwise.
If you look at the attached chart for the last 20 years, you will see that during the parabolic rally of 2010-2011 in gold, the commercial traders were heavily short gold. In fact, you can see that during that entire period of time, commercial shorts remained at 200,000 or greater. Yet, that was during a period of time where gold rallied $800. For those counting in percentage terms, that means gold rallied 70%+ during a time when commercial traders were heavily short gold.
Just as technicals have to be read differently during bull versus bear markets, so does the COT. During bear markets, when the technicals reach an overbought level, it often suggests the market will begin a selling phase. However, in a bull market, when the technicals are overbought, rather than suggesting selling will result, the technicals often embed during the strong advance of a bull market. The same will often happen with the COT. So, applying a linear expectation to the COT data will not often result in the appropriate trading result.
In the near term, GLD (NYSE:GLD) must break out strongly through the 139.70 resistance region and silver must break out through the 17.60 region. A break out in GLD should be pointing it up toward the 143-45 region for wave 1 of v of [3], whereas a break out in silver will likely point us to a minimum target of 18.50 for wave [1] of wave [iii]. But, as you can see, we will then need one more consolidation in a 2nd wave before the fireworks really begin in 2020. This suggests that the middle of 2020 will likely present us with a potentially powerful rally in the metals market should this set up trigger.
In GDX (NYSE:GDX), we still need to take out the micro pivot noted on the 8-minute chart to suggest we have begun the rally for wave [i] of iii of [3] of 3, which is targeting the 30 region before it sees its wave [ii] pullback.
Lastly, and most interestingly, the GDXJ may still be within its wave [iv] of wave i, as shown in the attached chart. I don’t think the alternative count has a high probability at this time since this pullback seems to be corrective in nature. But, a break down below 37.25 would suggest otherwise. In fact, at this point in time, if the market has begun its next major rally phase based upon the primary count, I would not expect to break below 37.25 at any point in time, even in the wave ii. But, admittedly, this is not the cleanest or most reliable count, as I don’t trust diagonals.
For now, it seems we still will need to have a bit more patience, even if the markets do break out to complete their respective 5-wave structures off the recent lows. We will still likely need another multi-week (and maybe as long as multi-month) 2nd wave pullback before the fireworks are seen. That is the set up for which I am being patient when it comes to trading this market with leverage. Until then, I have no reason to turn overly aggressive. And, most importantly, until then, I suggest we all maintain a modicum of patience.
Originally published on Sat Dec 21 for members of ElliottWaveTrader.net.