Sentiment Speaks: Metal Market Extremes Test Your Mettle

Summary

• Metals are setting up a much bigger rally to come later this year.
• I still think we see a pullback before the bigger rally takes hold.
• We have one more potential pitfall in the coming months in the metals complex.
• This idea was discussed in more depth with members of my private investing community, The Market Pinball Wizard. Start your free trial today »

I am often asked by many to see the type of analysis I provide to our members of the Market Pinball Wizard. So, rather than write a separate public article on metals this week, I am going to re-publish my analysis posted to my members over the past weekend. However, I am leaving the charts out, as I have to leave something that is exclusive to my members.

So, this was posted this past weekend:

Extremes are the hallmark of the metals market. And those that handle the extremes best are usually the ones who do best in the metals market.

Consider the extremes we experienced in August and September of 2011. Gold had days where it would rally $50 in a single day during its final parabolic move. Moreover, everyone you spoke with would express their certainty that gold would soon eclipse the $2,000 mark, on its way to much higher levels.

Yet, I remained steadfast in my analysis which suggested the $1,915 region would provide us with a top. While the market continued $6 higher than my expectation, I think we all recognize what occurred at that time.

This was also no different when the multitudes were expecting sub-$1,000 gold back in 2015/2016, while we were pounding the table about a major bottoming in the complex, as we were buying miners in the last quarter of 2015. And, again, last year, as gold was dropping into the end of the summer, and many were again certain of sub-$1,000 gold, we were standing in the breach, with our analysis suggesting there was no set up to break below $1,000 gold at that time also, noting that we expected to be bottoming.

The main point is that metals move to extremes in sentiment, and you need to understand that if you intend on allocating your money into this volatile complex. And, our longer-term members have been battle-hardened, standing shoulder to shoulder with us in the past, as we have together conquered these sentiment extremes through the years.

While our members have trusted our analysis through the years because we have consistently provided highly accurate analysis, many have come to expect perfection. And, believe me, I wish we could always provide perfection. I also take it as a compliment that our members hold us in such high regard that they develop such high expectations of our work.

But, markets are not linear, and do not always fit the patterns we track in the exact fashion in which we lay them out. While I wish they would react exactly as we always outline, human beings are fallible and are not always going to be exactly right. Nor can one truly see the future with absolute clarity. And, the last time I looked, I am still human and the metals market was still a non-linear environment. The market proved that by moving through my ideal resistance region in GDX this past week.

However, silver has still followed through on all our expectations, from bottoming at the end of 2018 exactly where we called for it (noting the downside was likely complete since the pattern was “full”), and rallying 5 waves off that bottom into early 2019. But, it is clear that the GDX did not abide by my primary expectations. And, while I wish I could be 100% correct in each of my expectations, unfortunately, there will be times I will not. GDX proved that to be the case this past week.

So, I want to take a moment to again explain my perspective in analysis, and how I came about my expectations. And, oddly enough, GDX has still not proven that we are in wave 1 off the lows just yet, despite moving just beyond my ideal resistance region.

Over the last several months, I have outlined two specific reasons that have caused me to view this rally as a corrective rally. And, neither of those reasons have changed. The first is that the initial move off the lows in GDX was a clear 3-wave structure. The second reason was that we did not see a completed structure at the lows struck in September of 2018. While I have maintained an alternative that the bottom may be in place, as I have noted in yellow on my daily chart, those two reasons have maintained it as my alternative.

So, now that the GDX has pushed through my target zone by approximately 40 cents, and may still see another push higher, we are still sitting within the down trend channel which has contained this price action within the last two years.

Moreover, our Fibonacci Pinball method suggests that once we begin a 3^rd wave, the 1^st wave of that 3^rd wave will rally to AT LEAST the .382 extension of waves I and II. In our case, that would suggest the market should take us at least to the 25 region for that 1^st wave. It also suggests that a 2^nd wave retrace in that instance would point us back down to the 19/20 region.

So, not only do we have several reasons to view our primary count as still quite viable, the market has still not attained its minimal standard expectations for a 1^st wave off the lows suggesting that we have begun the next bull run. And, when the metals market does not attain at least minimal expectations in a trending move (as it often exceeds those expectations), I still have to present the chart as annotated on the daily GDX chart for these reasons.

However, as I have outlined in the past, a move through the 22.30 region suggests to me that the probabilities for that lower low for GDX in the 16-17 region have been reduced, and I “feel” they are maybe 50/50 at this point in time. I will allow the weaker charts I follow to lead me in the coming weeks about when downside expectations can be reduced below 30%.

As far as the GDX is concerned, I want you to keep things in perspective. My next larger upside target is minimally within the 36/37 region in the GDX (assuming we maintain support in the 16/17 region), and I don’t think we will be heading to that target until we see at least a 2^nd wave retracement.

As for me, as I have outlined in my live videos and in answers to your questions about how I am hedging for a potential decline in the miner’s complex, I am using the weaker charts for my hedging vehicles. I am including one such chart this weekend – NEM. We have reviewed this chart many times over the last year. Thus far, it has retained its expectation for another drop.

However, due to how high it has now rallied, if it is going to see a lower low, it may take a much more complex path down to the ideal target region on our chart. As you can see, should we drop again, that drop may only be the [c] wave to complete an a-wave in that last decline. That could mean we would see another b-wave rally before NEM completes its downside structure, and could push out bottoming for many months. While I would certainly prefer a more direct completion to this pattern, I will be reducing the hedges I maintain as we approach the 29 region, assuming we drop in 5 waves projecting to that level.

And, alternatively, should NEM see a sustained break out over the high struck in January (and, yes, I expect you to look at the chart to understand what I am saying here), then it would suggest that the low in NEM may have already been struck, and I would be reducing my hedges significantly, and will be positioned overwhelmingly net long in the complex. I will then be searching for the point at which I would want to be building leveraged long positions in the complex. Moreover, should this break out occur, I think the NEM can outperform in the near term as it catches up to the rest of the complex in trying to complete its 1-2 structure off the low, as presented in green. Therefore, I think this chart may be a good barometer of the market in the coming weeks, and I will likely include it in my reports until this region has been resolved.

As far as silver and GLD are concerned, they too suggest a 2^nd wave retracement should be seen. Both seem to completing 5 waves off their 2018 lows, and may even see one more (4)(5), as highlighted as an alternative in silver. Yet, silver has now completed what can be considered a minimal 5 wave structure off the lows we identified in real time last year. But, I think the next bout of weakness in the complex can be bought, with the expectation for a major rally later this year, depending on how long the next pullback takes. In fact, should GLD break 120, I may even add a small “buy” box on the chart. And, the range of that box will depend on exactly where GLD tops out in this wave (I).

While we have noted for some time that this complex has been quite bifurcated, with some charts still retaining potential for lower lows relative to 2018 lows, and others having already bottomed, I am still of the belief that the next bout of weakness in the complex will likely be the last opportunity to buy into the complex before the next major rally begins. And, as noted, the next major rally should rival that seen in the first half of 2016, and may even potentially exceed it.

Lastly, I have added my long trading plan to the daily gold chart. As you can see, after we complete this current rally, I expect a corrective wave (II) pullback, which will be confirmed once we break below 120GLD. After that wave (II) completes, we will likely be off to the races in what we will either be in wave (III) of 3, or a c-wave rally. And, the strength of that rally may take many by surprise, especially if it is the heart of the 3^rd wave for which we have been preparing for quite some time.

I expect we will strike at least the 138 region, but the projections seem to be pointing to the 145-150 region for that next rally for the GLD. After the rally to 145-150 completes, it will be the ensuing pullback back down to the 130 region which will tell us about whether the long-term bull market has begun in earnest, or if there is indeed a lower low in gold sitting out there, pointing us back down to the 700-900 region.

Consider what sentiment will be like when we do rally back up to the 145-150 region in GLD. And, while many will clearly abandon all consideration about any potential to break below 1000 at that time, I view this point in time as the most important we will face since we bottomed back in late 2015 and early 2016.

While most of the market expected the pullbacks into the end of 2016 and then again into the end of 2018 to take gold below $1,000, those that followed us at the time know that I did not see either of those drops suggesting the potential of taking the gold market below $1,000. Yet, I want to stress again and at least prepare you now that the pullback off the upper box will be the biggest test we will face in this market in many years, and will determine if the long-term bull market I foresee has begun in earnest, or if we have yet one more bout of selling to take gold below $1,000 before that bull market finally begins. For now, my expectation is that a multi-decade bull market has begun, but I also need to have an appropriate risk management plan in place should that expectation prove to be wrong. This chart provides you with my personal plan in the coming year.

But, since this is not likely a determination we will have to make until 2020, I think we all need to focus on the buying opportunity which will likely be setting up over the next few months, which will then point us up towards that larger degree target overhead. We are finally approaching a very critical time in the metals market. So, let’s keep our emotions in check, and stay focused on what the market is telling us. There is a lot of money to be made in the coming years in this complex. But, we need to keep everything in appropriate perspective.

Enjoy the rest of your weekend.

Housekeeping Matter

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Analyst’s 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. I have no business relationship with any company whose stock is mentioned in this article.

I own hedges as outlined in the article above.