Price Action Over the Prior Week
This past week saw a very nice move higher in the GDX and gold, but silver has seriously lagged, which does dampen any outright bullishness at this time. But, let's review where we stand overall.
Anecdotal and Other Sentiment Indications
Back in October and early November, there was much certainty that the metals were going to rally hard if Trump won the election. But, the metals did the exact opposite of the common market expectation and fell strongly instead.
At the time, I noted that the downside structure was not completed no matter who won the election, as my analysis was still pointing lower. But, I also explained why those who viewed a Trump win were really not wrong. You see, I hypothesized that even though Trump "seemingly" won on election night, the public did not really believe that he won, which was why the metals did not rally as most expected.
So, I then continued to hypothesize that when the election results were finalized with the Electoral College vote, the public would have to come to terms with the reality of a Trump presidency. It will only be at that point that the metals would rally, based upon the ultimate recognition of the election of Donald Trump.
The Electoral College voted on December 20th, and that day marked the low in GDX, with gold and silver beginning their current rally thereafter. So, clearly, the entire market was correct in their initial assumptions about what the metals would do if Trump was elected.
Now, does this not make the most sense as to why the metals are rallying? I mean, how can you deny the timing of the recent bottom of the market? It must have been because of the Electoral College vote that day. Right?
For those of you that have been following my analysis for some time, you probably saw through my "analysis" in the first paragraph. For those that are not used to my writings, the entire analysis presented above had a purpose beyond trying to relate a correlation to market action. You see, correlation does not equate to causation, and believing otherwise is simply believing in a fallacy.
To be honest, I am amazed at how well aligned my "hypothesis" has presented. But, in no way do I actually believe this to be the cause of the rally in the metals complex. But, it is being highlighted for those who believe that any news event is a cause for a rally or decline in the metals. The entire Trump episode should now make this fallacy quite clear to anyone who is honestly viewing the market.
You see, most analysis is presented by first identifying the recent or upcoming news events, and then relating that to the expected action in the market based upon those events. This is the ultimate in the belief in the fallacy that correlation equates to causation. It has always amazed me when analysts claim that a bad jobs number was the "cause" of the metals to rally, and only two weeks later these same analysts claim that a bad jobs number was the reason the metals fell, or vice versa.
But, as reasonable as my hypothesis presented above may seem, or how well it has aligned to the actual price action, it is clearly not the reason why metals rallied. The main reason the metals rallied was because the sentiment had dropped to the point that there was no one left to sell, which only left one direction for the metals to move. And, while a news event may be viewed as a "catalyst" to a directional move, for those who honestly study markets, you will know that the substance of the catalyst is not material to the direction of the move. Otherwise, we would not see the metals move in the exact opposite direction on the exact same news, which we have seen countless times whether that news was jobs, the Fed, the Middle East, or anything else you may conjure up.
Price Pattern Sentiment Indications and Upcoming Expectations
Several weeks ago, as the GDX broke down below its .618 retracement, many were throwing in the bullish towel, and everyone seemed to adopt the "clear" heads and shoulders pattern presenting on the daily chart, while pointing to target levels below the January 2016 low. But, it just seemed too obvious to me, and it seemed like the market was setting everyone up.
In November, well before we broke the .618 retracement and well before we broke the neckline of the seeming heads and shoulders pattern, I wrote the following to my members at Elliottwavetrader.net:
In our Trading Room at Elliottwavetrader.net and in my live video sessions with our members, I have noted several times over the past weeks that the perfect bottoming set up would begin as the market recognizes a heads and shoulders pattern setting up in the GDX. And, many this past week were pointing to this "perfect" pattern, which they view as setting us up for new lows in the complex. In fact, it could be "too perfect" since the entire market seems to now be hyper-focused on how it is going to take us to lower lows.
But, my view was that this pattern could very well present the market with a head fake. I was viewing a break of the neckline as providing more confidence to the shorts in the market, as they would likely then press their shorts. However, I think there is a very strong potential for them to be seeing those shorts squeezed . . . [and] can certainly provide us with the fuel to begin our 3rd wave higher. While there is clearly no certainty in this potential, I have seen this happen so many times, especially when the heads and shoulders patterns looks "too good," as this one does.
Back in mid-December, I wrote the following:
Some of you have asked me why I still retain a bullish bias if we have broken below the .618 retracement, which was my ideal target for this correction. When the market as a whole maintains a certain expectation, price will usually push you beyond the overall market expectation or simply does not meet the expectation to begin with. You see, markets do not give the majority what they seek. And, for some reason, there have been many in the market that expected the .618 retracement to hold, at least from what I have been reading in the analysis on the net. So, just like the market was certain in 2011 that we were heading over $2,000 in gold, or in 2015 that we were heading below $1,000, I think too many believed that the .618 retracement would hold, and we needed to undercut that level to develop even more bearishness to support a 3rd wave higher. (And, now, the majority seems to be certain of going below last year's lows . . . so consider what that may mean yet again).
With the GDX now breaking out over resistance, it does suggest a low may be in place. But, in order to view that break out as the start of a new bull trend, I will need to see a corrective pullback in the GDX which maintains over 20.40, with upside follow-through over 23.35. Once we move through 24.50, we should be on our way to 28-30 before the next bigger consolidation.
As far as silver goes, it is the last chart that is still presenting a strong potential for a lower low. I want to see a higher high made in silver before breaking below 15.85 to signal that we can have a new bull trend setting up. Otherwise, silver is in jeopardy of making a lower low below the one struck in December.
GLD has truly been a bit sloppy in its rally off the lows, but it presented the same way off the 2015 bottom. So, for now, I will be taking my cues from GDX and silver.
Disclosure: I am/we are long PHYSICAL METALS AND VARIOUS MINING STOCKS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I maintain a reduced hedge until the bull trend makes it clear it has re-asserted.