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Gold and Silver at a Crossroads


Go long or go short? It's just about impossible to say as the patterns are not clearly indicative of either play's potential right now.

With the market unable to breach the 121-123 important breakout region in the SPDR Gold Shares (NYSEARCA:GLD) and having been stuck in the main resistance region I have been pointing towards for weeks, the metals are truly at a crossroads.

Initially, Elliott Wave theory indicated to me that we would see a 5 wave structure into our 121-123 region, which would then set up a 3 wave corrective pullback before we broke out towards the 131.50 region on our way to 136. However, based upon the wave structure we have seen over the last week, the only bullish way I can really view this is as a i-ii, 1-2 setup, which means that if we see the 121-123 region, it will likely only be brief, as I would expect the market to blow through the 123 level in this setup on its way to at least the 125 region before even catching its breath.

But, I will tell you that when I look at silver on a 13-minute chart, I cannot get past the fact that it really looks like a 3 wave rally off the lows. While I can also apply the same i-ii, 1-2 count that I have in GLD, when you simply just look at the chart, it is a clear 3 waves off the low, with the c-wave just falling shy of being exactly equal to the a-wave. So, sometimes, a cigar is just a cigar. And, when I add to that the fact that the rally, which started on January 8, was begun without a solid impulsive structure, silver tells me to be cautious of any possible breakouts, but is potentially pointing to a breakdown about to occur. But, if you remember, I have a very hard time relying on shorter time frame charts in the metals, as they do not always provide us with the clear picture.

Now, ordinarily, I do not pay much heed to the Commitments of Traders reports. But, this past week's report shows that commercial traders added a rather large slug of short positions. If you believe that they are the ones who are always right in this market, it adds to the negative picture that silver seems to present. However, they got mowed down during the last large decline, which was seen in the metals as they were predominantly long at that time, so take this one with a grain of salt.

While I would absolutely love to tell you definitively to go long or short right here and now, I simply cannot, as the patterns are not clearly indicative of either potential at this time. Rather, I am going to have to wait for the market to either provide the breakout signal over the 123 level or a breakdown below 117 in GLD, along with a breakout over 21.50 or a breakdown below 19.32 in Mini Silver Futures Contract. But, it means that over the cited support levels, we should be looking up, and a breakdown below those levels means we begin to look down. If you want to remain long, you now have clearly defined stops, especially when you consider the upside potential this run may provide, which is the 136-140 region in GLD and the 26/27 region in the Mini Silver Futures Contract. Personally, I have purchased an intermediate-term options strangle in this region because I am expecting a big move in the metals over the next two months from the point we closed on Friday (Jan. 10), and the direction is not wholly clear just yet.

See charts illustrating wave counts on silver and gold here.

Editor's note: Avi Gilburt is author of, 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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