How Do Corrections Develop and Why May This One Be Different?

Those that have experience trading the market have figured out that there are usually 3 movements within a corrective decline phase.The first drops the market from the high, the second provides a counter-trend bounce, which fools most into believing that the primary trend has returned, and the 3^rd dashes those hopes, and brings back the fears of the prior bear market, as the market moves down to lower levels, but makes a higher low before continuing in its trend higher.

This same perspective applies whether you follow Elliott Waves, cycles, or most other technical analysis out there.This is a common understanding market technicians have about markets.

However, the metals often buck these trends, and need to be looked at a bit differently at times.And, this may be one of those times.

You see, the rally that struck the last high in this complex was not a primary trend rally, but was, itself, the potential counter-trend rally seen as the 2^nd leg within a 3-phase correction.In Elliott Wave parlance, we call that a b-wave (or x-wave, in more complex structures).And, in GLD, that wave actually made a higher high, which makes many believe that this is only the first phase of the correction, and that the next rally will be a counter-trend rally.However, it is quite likely that this drop from the highs can complete the correction before the trend higher takes hold again.This would leave almost everyone, even the bulls, in the “dust,” causing them to chase the market much higher, and making the next break out phase even stronger. 

This is why high level corrective structures portend strongly bullish markets, and often even take the bulls by surprise. So, not only are the bears looking lower, and expecting this correction to take longer, so are many of the bulls.

Of course, the market can take its normal course, and continue in this corrective action for another several weeks, as most seem to expect. But, I would rather you be on your toes, and looking for the potential break out, rather than assume this is a standard correction in the making.Should the next rally phase develop correctively, we will be able to prepare for another drop lower.