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Elliott Wave Theory: Identifying the Bottom in Precious Metals

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I am still of the opinion that any bottom that comes up shy of the 100 region in GLD will likely be only a temporary one.

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Many seem to be calling a bottom in the precious metals of late; many believe a bottom is imminent, and I have seen other respectable analysts also calling for one soon.

However, I am still of the opinion that any bottom that comes up shy of the 100 region in the SPDR Gold Shares (NYSEARCA:GLD) will likely be only a temporary one. That is, per Elliott Wave analysis,any bottom we see over the next week or two that ignites a strong rally though 118 GLD will only be a b-wave bottom in a 4th wave in the final decline off the 2011 highs, which means we will not likely see the final 5th wave bottom until much later in 2014.

So, now the question is how do we view the next decline in the metals and how do we react? Well, first, my expectation last week left me looking for the completion of wave (iii), as we seemed to have been consolidating in a minor 4th wave within wave (iii) within the nice impulsive pattern which was thought to have been playing out.

But, the problem now is that this consolidation took the entire week. This has now really become too large to be a 4th wave within that degree wave (iii). It is making me lean towards viewing this last segment of the decline, which began within the 122 region, as an ending diagonal. Ideally, it would make it much clearer if the GLD can overlap the bottom of what would be wave 1 down at the 117.70 level before dropping to make the final low. This would take most of the doubt out of my mind about this being an ending diagonal. So I will be watching the GLD for that cue early on this coming week.

Under all circumstances, it really does seem reasonable to still expect one more decline to complete this segment of the wave structure under all counts, with my target region being between 111.50-113.50 GLD. Therefore, for those who want to play this pattern aggressively, you may consider buying long positions on a drop into that region that exhibits the appropriate positive divergences. The suggested stop should be the 111 region, for if we are going to break down below the 111 region, it becomes much more likely we are heading towards our 100 region within the next month or two to complete the corrective decline from the 2011 highs much sooner than later. But, if the rally off those lows becomes clearly corrective, then you can likely exit your long positions with a profit, and then attempt a short trade for the next leg down.

As for upside targets for a c-wave, my minimum expectations will be the 136 GLD region, and the 26 region in the Mini Silver Futures Contract, both of which represent the region wherein a=c in this pattern. However, GLD can see extensions that take it as high as the 138-142 region. So, we will likely wait until we have waves 1 and 2 of the c-wave higher in place before we can begin to find multiple levels of Fibonacci confluence to use as a target. Until such time, I am going to assume we will target the 136 region in GLD and the 26 region in silver.

But, as I have said so often, the market is going to have to take out the 118 level in GLD to invalidate the downside pattern, with confirmation coming in a move over 122.50. So, for those who want to wait for confirmation of a potential rally towards the 136 region, you may wait until the market makes it much clearer with a bottom in our target region, followed by a 5 wave structure off those lows, which should also take out the 118 resistance region.

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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