Quick Lesson - Market Analysis for Oct 31st, 2016

Teaching moment:

We deal in probabilities, not certainties.  So, we try to get the probabilities on our side on a trade.

Right now, we have what seems to count well as a 5 wave decline on GDX, followed by an a-b-c rally, which I am counting as a 1-2 downside set up.

We also look to the technicals for guidance.  As you can see on both the RSI and MACD, we see the a-wave rally had the strongest technicals, with the c-wave rally striking a higher high in price, yet the techs have seriously lagged in strength, providing us a lower high on the techs.  This often supports the count as presented.

So, while, in my estimation, patterns like these follow through in the set up approximately 70-80% of the time, it means they invalidate 20-30% of the time.  But, since we have such a high retrace, the region in which we can be wrong is only up to the point of the wave 1 start - which, in this case, is 24.94. 

Again, this is what I USUALLY consider a high probability set up under normal circumstances, especially since we have the technicals supporting the count.

However, the reason I am not shorting right now is twofold.  First, I already have enough hedges in place for how I would want to be positioned for a 5th wave.  Second, since silver does not share the same IMMEDIATE downside set up, I am a bit more cautious than normal, so I will wait for the next i-ii of wave 3 down set up to attempt a short.

Just a quick lesson as to how I look at the market.