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Are We Setting Up for a Rally in Silver and Gold?

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Gold's chart has become much more complicated, so the manner in which we view it has to change.

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I am not sure how many chances we can give the metals to prove that they intend to complete their final fith wave in 2014. And, in truth, I am now coming to the end of my patience in expecting it this year.

But the problem I am having in being able to obtain a clear picture right now is based upon something I noted all of last week. If you look at the slow stochastics on the daily chart of the Mini Silver Futures Contract, you will see that we are clearly embedded, which is a strong indication of third wave action to the downside according to Elliott Wave analysis. However, the MACD on the 144-minute SPDR Gold Shares (NYSEARCA:GLD) chart that my firm follows is oscillating in a manner which is not ordinarily suggestive of third wave action to the downside. So, this leaves me wanting for clarity as to where we stand in the metals.

The question is simply presented as follows: Are we about to embark on the conclusion of the fifth wave in this larger degree c-wave in the metals to new lows, or, are we only in a b-wave down in a larger fourth wave of that c-wave? The latter scenario leaves us with the potential for another rally into the end of the year, which will set up the final decline in the early part of 2014.

And, with the current setup as it now stands, the manner in which we view the GLD chart has to change. It has become much more complicated, so allow me to explain.

Right now, we can see a break down below the 117 region, which may no longer suggest a waterfall decline. Rather, we may only be in a fith wave of a c-wave of the larger yellow b-wave and all we would see is another test of the prior support from June between the 115-118 region. So, unfortunately, it will now take a solid and strong breakdown below 115 to get me to target the 98 region. And, any move through the 123 region will have me targeting the 131.50 region at a minimum, with the potential to still head back to the 140 region.

It was for this reason that I strongly suggested last week to all those that were still in options with expirations of earlier than February of 2014 to consider taking their profits from my firm's initial short trade from 138. And, if you want to maintain a short position, my suggestion would still be to use options that go further out into 2014 in order to play it safe. And, I see no reason to exit any of the intermediate term short positions without a strong move through the 123 GLD region.

As for silver, it still can drop back into the 18.30-18.95 region without confirming that this is a fifth wave down, and it may see a rally back to the 26 region to complete a larger degree fourth wave, as seen on the daily chart. In fact, the 144-minute silver chart is very suggestive of this being a c-wave down in the bigger b-wave of a larger fourth wave.

But, please do not believe that I am of the position that we will be clearly making a final low in the metals if we see a bit lower in the metals. While it is certainly possible, I still maintain that we will see the 100 region in GLD and 16.50-17.75 region in silver before we can consider that a bottom has been made in the metals. However, if you are playing for the longer term trend, I am hoping that you are seriously considering buying very long term positions on the long side in the metals on any further drops, as we will likely be closing in on major lows in the metals within the next three to six months.

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.

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Positions in GLD, SLV LEAPS.
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