As both metals seem to be meandering higher – a term I could only use for the metals for such a rally – it is starting to look more and more like they are simply setting up another drop. Thus far, the SPDR Gold Shares
(NYSEARCA:GLD) has moved up to a 1.00 extension off its recent bottom, and the Mini Silver Futures Contract has moved up to the .764 extension. While it is possible to consider that a top has been made in both these metals, I am still thinking we will see another push higher before they top.
This means that silver is likely in a larger ending diagonal, which according to Elliott Wave analysis, would then label this rally as a corrective wave 4 within wave v of wave 3. The resistance I see for this move higher is the 20.60 region, to as high as the 21.35 region. A move over the 21.80 region would place me in the larger degree wave 4 camp, with an initial target of 23, which can extend as high as 27.
In GLD, again, we have already reached the 1.00 extension, but we can still extend to the 1.382 extension in the 127 region. It would take a high-volume move through the 129 region – the 1.618 extension – to make me believe that we are in the larger degree wave 4, with targets over 132, and potentially as high as 145.
If the metals were to have topped already, the signals of a break down would be a drop below the 120 level in GLD, and the 18.95 level in silver.
My downside target for silver would be the low 17 region, and the 112 region in GLD, as a minimum target for GLD.
From a technical standpoint, as of Friday, it seems that silver is attempting to break out of an 8-month downtrend channel in the daily RSI. Furthermore, I have been pointing to the positive divergences in the daily MACD and RSI for quite some time. Both these developments must make you take notice, as any further drops could ignite one of the strongest snapback rallies we have yet seen from the metals, especially when you consider the significant amount of negative sentiment and short positions in the market today. So, attempting to short any further drops is fraught with extreme danger, and should only be attempted by the most nimble of traders utilizing very tight risk management strategies.
From a larger scale perspective, while my firm has discussed this many times in the past as we have dropped quite deeply in silver, if silver were to break down below 16.35, it would generally invalidate this drop as a fourth wave, and require us to label this drop as a second wave.
There are many ramifications to such an invalidation. First, it would mean that the next rally would be a third wave of large degree in silver and have implications over 100 . . . yes, you heard me right. Second, it would also open the door to the possibility that silver could see a drop to as low as the 11-14 region before this wave 2 were completed. Third, it opens the door to the possibility that this entire 2+ year drop from the highs is only an a-wave, which would make the next rally only a b-wave, followed by a c-wave decline. And, even though it would make the next rally a potential b-wave, such a b-wave should still likely take us into the mid 30’s at a minimum before a c-wave down. So, we do have the prepare for such an eventuality if we do break such support.
See charts illustrating wave counts on silver and gold here
Editor's note: Avi Gilburt is author of ElliottWaveTrader.net, a live trading room and member forum focusing on Elliott Wave market analysis. Avi emphasizes a comprehensive reading of charts and wave counts that is free of personal bias or predisposition. His Elliott Wave analysis appears frequently on several financial news sites.
Top of Wave iii Target Hit
Larger C-wave in Yellow B-wave
C-Wave Grinds Higher