Sentiment Speaks: There Is A Disturbance In The Force... I Mean In The Metals Complex

Summary

  • Price action over the prior week.
  • Anecdotal and other sentiment indications.
  • Price pattern sentiment indications and upcoming expectations.

Price Action Over the Prior Week

The past week has seen very unusual action in the metals complex. While gold and silver continued in their bullish set-ups, the GDX has chosen to do otherwise. And, this has made many scratch their heads.

Anecdotal and Other Sentiment Indications

This week, I want to address why reliance upon "correlations" can hurt more people than they help. You see, many investors use correlations as a primary method to invest or trade. They believe that if one market moves in a specific direction, then another market must move in the opposite direction, or in some instances, in the same direction, in commensurate fashion.

However, the reliance upon these correlations is based upon a fallacy that correlation equates to causation. And, so many who have relied upon this fallacy to determine market direction are often left in the dust during "unexpected" market moves which occur on a breakdown of the supposed correlation. In fact, I have yet to see an inter-market analyst that has even kept up with the market over the last 3 years, much less beaten it.

Before I try to strike this point home, allow me to present some "correlations" for you in the following charts for you to consider:

(charts are from tylervigen.com)

Are you beginning to see my point?

You see, one can always find something they view as correlative. But, just because something seems to correlate for a period of time does not mean that one should rely upon it for trading or investing purposes. And, just because two markets are trading in tandem or opposite each other for a period of time does not mean that they maintain the same underlying causative impetus. Without the same causative impetus, why would one rely upon such seeming "correlations" when placing their hard earned money at work.

In fact, using correlative inter-market analysis is an extremely indirect and unreliable way to analyze markets. You first need to be able to accurately prognosticate the underlying "correlative" asset, and then you need to "hope" that the correlation does not break. So, if you are going to take the trouble to attempt to prognosticate an asset, why not simply analyze the subject asset? If your methodology is reliable enough to accurately prognosticate the correlative asset, would it not be more accurate to apply it to the subject asset?

So, when I read analysts pointing to the discrepancy between FX volatility and equity market volatility to suggest the market is wrong for rallying as high as it has, or that some market is tracking the Yen, or bonds, or any other metric you chose, well, it brings back the old saying "what does this have to do with the price of tea in China?"

Therefore, I do not rely upon supposed "correlations" when I trade or analyze the market.

Amazingly, we even witnessed how the metals themselves have diverged a bit from the mining complex. And, this is why I so often suggest that one analyzes each chart on its own. So, let's look at silver, GLD and GDX, each on their own.

Price Pattern Sentiment Indications and Upcoming Expectations

For those following my recent analysis, I noted the last time I wrote about metals on Seeking Alpha that there was a bullish set-up in place for the complex:

Our next important resistance in silver is the 18.20 region, with GDX at 26.90. As long as silver holds over 17.50 and GDX over 23.75, I am looking for another leg of this rally to take hold, pointing GDX towards 28, silver towards 19, and GLD to 121.50.

Thus far, GLD and silver have both moved higher towards their next targets. And, while the GDX held its micro support noted by 7 cents (the lowest it struck last week was 23.82), it is still stuck in the mud. Yet, it has not broken its upper micro support, but it is certainly posturing towards that potential.

Due to the current pattern I am seeing in the GDX, I would prefer to see it hold 23.82, and break out over the high it made the other week. However, if we do break 23.82, we have 23.30 support below that, which can still provide support for an immediate break out. However, should we break the 23.30 level on the GDX, it certainly opens the trap door down to the 21.50-22 region. So, we are certainly testing critical short term support in the coming week.

We really should not see silver breaking down below 17.60, and preferably not even below 17.80, should we see any weakness in the complex in the coming week. But, the most immediate path for silver has it pointing directly to the 19.15-19.40 region should the market continue along its current immediately bullish path, without breaking any support.

The GLD has support between 118.65-119.35. As long as all pullbacks do not break below that micro upper support, I can remain immediately bullish, with the 121 region as my next micro target. However, if that support should break, with follow through below 118, that would cause me concern about the immediate bullish potential in the GLD.

Lastly, I want to remind you that there are no guarantees in life, and there are certainly no guarantees in financial markets. Financial markets are non-linear environments, so, as I have noted so often, we have to approach them from a perspective of probabilities. So, allow me to reiterate how I approach the metals market from an analytical perspective, which I posted on Elliottwavetrader.net this past week:

". . . based upon the larger degree perspective, with seeing 5 waves up from the 2015 lows, and then another 5 waves up from the December 2016 lows, I am on the hunt for the heart of a 3rd wave in this complex. When we are looking for a heart of a 3rd wave to take hold, they OFTEN do not provide much in the way of pullbacks. For that reason, I have always defaulted to a more immediate break-out scenario potential, since, otherwise, you can be left in the "dust" (pun intended), wondering where your pullback went.

Along those lines, the market has been consolidating near the highs for quite some time now. And, as I noted last week, when the market has made a number of attempts to break out, and is unable, it often falls back into more of a correction, in order to take another running start at the heart of the 3rd wave. So, with the inability to break out when it had a break out set up last week, I noted towards the end of the week that I would be hedging my account in consideration of that potential, and while we were still right at the highs.

While some of you may want me to tell you EXACTLY what the market is going to do at any point in time, I am sorry to disappoint you by telling you that I, or any other human being for that matter, am unable to do so. Rather, I can show you where we have set ups to break out or break down, but I cannot provide you any certainty. For that reason, I will inevitably be wrong at times."

So, until I am able to find a crystal ball that works 100% of the time, I will provide to you what I am seeing in the markets based upon my most current probabilistic analysis. Those that have followed us know that a rather high percentage of set-ups we present follow through, while the minority do not. But, to see silver and GLD follow through in their bullish set-ups (for now), while GDX is still holding back is truly unusual. For now, the GDX would still need to break 23.30 to suggest a deeper pullback is in the cards.

Housekeeping Matter

It seems that Seeking Alpha has changed the way they tag articles. So, while my articles used to be sent out as an email to those that follow the metals complex, they are now only being sent out to those that have chosen to "follow" me. So, if you would like notification as to when my articles are published, please hit the button at the top to "follow" me, or join me in my Trading Room at Elliottwavetrader.net. Thank you.

This article was written by

Avi Gilburt profile picture
69.87K Followers
The #1 Service For Market and Metals Direction!
Avi Gilburt is founder of ElliottWaveTrader.net, a live trading room and member forum focusing on Elliott Wave market analysis with over 6000 members and almost 1000 money manager clients. Avi emphasizes a comprehensive reading of charts and wave counts that is free of personal bias or predisposition.

Avi is an accountant and a lawyer by training. His education background includes his graduating college with dual accounting and economics majors, and he then passed all four parts of the CPA exam at once right after he graduated college. He then earned his Juris Doctorate in an advanced two and a half year program at the St. John’s School of Law in New York, where he graduated cumlaude, and in the top 5% of his class. He then went onto the NYU School of Law for his masters of law in taxation (LL.M.).

Before retiring from his legal career, Avi was a partner and National Director at a major national firm. During his legal career, he spearheaded a number of acquisition transactions worth hundreds of millions to billions of dollars in value. So, clearly, Mr. Gilburt has a detailed understanding how businesses work and are valued.

Yet, when it came to learning how to accurately analyze the financial markets, Avi had to unlearn everything he learned in economics in order to maintain on the correct side of the market the great majority of the time. In fact, once he came to the realization that economics and geopolitics fail to assist in understanding how the market works, it allowed him to view financial markets from a more accurate perspective.

For those interested in how Avi went from a successful lawyer and accountant to become the founder of Elliottwavetrader.net, his detailed story is linked here.
Since Avi began providing his analysis to the public, he has made some spectacular market calls which has earned him the reputation of being one of the best technical analysts in the world.

As an example of some of his most notable astounding market calls, in July of 2011, he called for the USD to begin a multi-year rally from the 74 region to an ideal target of 103.53. In January of 2017, the DXY struck 103.82 and began a pullback expected by Avi.

As another example of one of his astounding calls, Avi called the top in the gold market during its parabolic phase in 2011, with an ideal target of $1,915. As we all know, gold hit a high of $1,921, and pulled back for over 4 years since that time. The night that gold hit its lows in December of 2015, Avi was telling his subscribers that he was on the phone with his broker buying a large order of physical gold, while he had been accumulating individual miner stocks that month, and had just opened the EWT Miners Portfolio to begin buying individual miners stocks due to his expectation of an impending low in the complex.

One of his most shocking calls in the stock market was his call in 2015 for the S&P500 to rally from the 1800SPX region to the 2600SPX region, whereas it would coincide with a “global melt-up” in many other assets. Moreover, he was banging on the table in November of 2016 that we were about to enter the most powerful phase of the rally to 2600SPX, and he strongly noted that it did not matter who won the 2016 election in the US, despite many believing that the market would “crash” if Trump would win the election. This was indeed a testament to the accuracy of the Fibonacci Pinball method that Avi developed.


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 executed a hedge on my mining stocks at the open of February 17th, and have stops on those hedges just above my entry points.

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