Last month, Seeking Alpha published our article describing our Expectations of Future Upside in the precious metals and miners sector. In this article, I discussed two potential routes for both metals and miners to achieve markedly higher levels. Since then, the complex has resolved very little in showing its hand on which route is most likely. However, a number of the individual mining stocks that are part of our Strategic Miners Portfolio have provided entries in what can count as wave 4's, or possibly shallow wave 2's, and that has allowed us to enter long positions and now safely have our stops at the lows established several weeks ago. The question now is will they break to the upside from current levels, or will the larger correction against the move up from the low established last August take form, while continuing to frustrate those hyper bullish the sector.
In addition, on November 29, 2018, Seeking Alpha published the article Gold: History Is Repeating Itself - Time To Listen to the Buy Bell. In this article, I stated:
The next 30-90 days is setting up for a low in both metals and miners, similar to what occurred in 1976. Don't be part of the crowd that fails to participate in the next move up, which unfortunately will include most market participants.
While prices are now considerably higher than when this article was published, it is our contention that miners will see lower levels to those they are at today before taking out the recent highs, and that they are in a complex wave structure that will ultimately retrace against the move up from the low established in September 2018. However, in the spirit of recognizing that we could be wrong, we took long positions in the sector at their recent low and now have hard stops at those recent lows to ensure two things - 1. If miners take off to the upside, we participate; and 2. If the short-term bearish potential comes to fruition, we are protected from taking larger losses to investor capital.
If you have not read our comments in last month's article, I would encourage you to do so, such that you may share a realistic expectation of what is not only possible, but likely in respect to the downside possibility. In truth, we much prefer miners take off to the moon, given we are long the sector at the moment. However, investing and trading is about putting one's self in a position to participate in the upside without risking large amounts of capital to do so. The only way this can happen is to be fully aware of the most likely potentials in both directions, and then establish an investment plan to deal with both potentials as though either may become a reality. Taking a purely one-way perma bull approach to the sector with no consideration for downside possibilities is more akin to gambling than investing. This is frankly an approach we loath.
To reiterate, we are monitoring two potentials, one up and one down. The upside count is reflected on the HUI Gold BUGS Index chart, and the downside is reflected on the VanEck Vectors Gold Miners ETF (GDX). First, let's drill down a tad from that last update on the GDX Daily Chart below. For a larger time frame analysis of GDX, please refer to last month's article.
In this count, GDX is in a large WXY pattern. WXY patterns are simply two 3-wave moves connected together by an X wave. Note that the move up from the September 2018 low counts best as an ABC for the (W), and would now be in an ABC for an X-wave that would ultimately target $23-20, before heading up to much higher levels. This is the reason we carry hard stops now on our individual mining stock positions, as if the low is taken out, it would suggest an opportunity to repurchase these shares from lower levels.
However, notwithstanding that GDX best counts as a WXY, there are other ways to view the larger time frame charts for not only GDX, but the HUI Gold BUGS Index, as well as many of the individual mining shares. Primarily, this alternative would take the form of a larger i ii 1 2 move up off the late 2015 low. To better understand this potential, below is the HUI Gold BUGS Index Weekly Chart. In this count, HUI is still in the middle of a wave 3 of 1 in a i ii 1 2 setup and, once complete, will forge ahead to the 295 region before a more meaningful pullback would occur. It is worth nothing that many of the individual mining stock charts support this potential, which again is the reason we recently took long positions in various miners that are part of our Strategic Miners Portfolio.
In conclusion, the most appropriate approach to this sector is to buy on pullbacks and at fib levels that will most likely solicit a reaction to the upside, and then get stops to the lows established on those pullbacks quickly. By taking this approach, it will allow you to be positioned long in the event the sector takes off to the moon, but with very limited downside risk.
While we view the downside count as having the advantage overall in the sector, this is a business of probabilities, and no investment choice based on probabilities is ever 100%. For this reason, we position, or reposition additional exposure where and when it makes sense and allows us to have our cake and eat it too.
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This article was written by
Brian Fletcher is the Manager of Abaci Capital Advisors, which is a registered investment advisory firm that manages capital for qualified investors, and which focuses on achieving consistently out sized non-correlated annual returns in a host of investment sectors. Through the practical delivery of investment opportunities for managed investor accounts, Brian provides investors what he calls “super-performance”, enabling those who prefer to not trade their own capital the ability to allocate to a managed account structure that follows a highly risk managed approach to achieving annual performance.
Brian is also a the manage of The Active Investor service here on Seeking Alpha, and is a Senior Research Analyst for TimePriceAnalysis.com, where he manages the Strategic Miners Portfolio. Brian uses technical analysis to determine undervalued sectors, and then implements a combination of fundamental and technical analysis to pinpoint specific “value” opportunities within the identified sector.
Prior to forming Abaci Capital Advisors, LLC, Brian served as CEO for Cox Technologies, Inc. Through his investing career, For many years Brian has focused heavily in the analysis and purchase of undervalued bank stocks from within the candidate rich US Banking Industry. Because of his industry knowledge, he has served as a board of director for two North Carolina banks.
Brian received a BSBA in Finance and Economics from Rockhurst University, holds a Series 6 license, and is a licensed Commodity Trading Advisor through the National Futures Association.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.