Testing A Wave Count With GDX




I created this chart on Monday and have now posted it for the first time. I’m going to gear my commentary to someone who is more of a trader than an investor. Also, someone with EWP knowledge would be very helpful as you have a basic understanding what many of the “ABCs” stand for.   

I have made many of these types of tests, but I have not done one on paper for years. This is all based on any good understanding on how well we can visualize up or down the different idealized wave form.  Many will view this gold market as a very bullish sign, but what they don’t tell us is how much you can lose trading even in a bull market.

Basically, I will be breaking many conventional and even contrarian rules as we test this potential trade setup.  We will start off with a $5000 cash account. On this Monday, I purchased just a bit above market price, 100 shares, spending $2500 of the cash on an uncertain wave position. This single order instantly forces you to put up 50% of your virtual money, which breaks many guidelines, but the main one would be that we are betting too much of the net cash.  Of course, if GDX crashed another move lower, then instantly you will have doubts that you did the right thing. 

If that happened your account could be in the “red” by 30 or even 40%, and this is when most will bail out, as they can’t stand the pain of seeing “red” in their accounts.  

That’s when you look at the 2016 bottom, and think that this could be a very major bottom and this bullish phase has still lots of room to move north.  

In the long run you want to constantly shrink the net cash ratio as that is the key source of all our trading fears.   

If I tried to play this out with a minimum amount of trades, then this would take about 4 trades, with two buy orders and two sell orders. Let’s say that we really don’t have a firm price for the next major top, but that $41 may be a good price target. This is when the majority finally sees that the gold bull market is real, as they jump in and keep buying higher and higher, chasing the bull market. At that time I would do the unconventional thing and try and sell into a high, preferably, with a spike. Of course, when we sell we are breaking another rule and that is not letting your profits run. 

Letting them run to what? At $41 GDX would be showing you about a 160% profit and your account would be lit up in green. How far will we let that profit fall because we want to hang on for more? This is when we get greedy as the wealth effect controls our thinking.  

At this time somebody is going to be the “Greater Fool” and buy right at the peak. We have to ask who is still left to come in, that is going to load up on gold stocks at a peak? Contrarians don’t buy at peaks, so we can forget them, to save a gold stock bull market.