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Silver and Gold: On Verge of Breakout or Breakdown?

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A powerful setup is definitely in place. The question is whether or not the market will capitalize on this opportunity.

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I am not sure how many of you are old enough to remember the song "Stuck in the Middle With You" by the band Stealers Wheel. Well, this song sure describes the sentiment of the metals of late.

Last week, using Elliott Wave analysis, I noted the following, which is still quite applicable even after a full week behind us:

"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 the SPDR Gold Shares (NYSEARCA:GLD), along with a break out over 21.50 or a breakdown below 19.32 in the Mini Silver Futures Contract. But, it means that over the cited support levels we should be looking up, and a breakdown below those levels, 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 silver. 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, and the direction is not wholly clear just yet."

So, for weeks I have been noting my "Main Resistance" region on my charts to you, and continually explaining that I need to see a strong breakout through the 121 region, with follow-through over the 123 region on strong buying volume to then target the 125/126 region, on our way to 131.50 and then to 136-140. And, take note at what level from which we have been continually backing away – 121 GLD. In fact, I can count multiple attempts by the market at breaking through this important resistance region I have been citing for weeks.

There is one modification I have made to the Elliott Wave chart this week, of which I want you to take note. This move off the recent lows is really too big to be a 4th wave of the degree which we were counting it until this point. Therefore, if the market does top in this region and turns down hard, I will be viewing this as a wave iv high within wave 3, which still would take us down to the 108/111 region, with the ideal target being the 108 region, as it is the 1.618 extension down and the traditional target for a wave 3 in this pattern, with the potential to even extend down to the 1.764 extension in the 105.85 region, and the bottom of the trend channel.

But, for now, we have a potentially powerful i-ii, 1-2, (i)-(ii) set up, which would mean we would see an immediate breakout if this pattern were to ignite. But, the problem now is if the market breaks down below last week's low before strongly taking out the 121 region, we could be setting up a decline back towards the old 108-111 target below. Clearly, it would take a strong break down below the 117/118 support region to get there. However, the setup for a strong breakout is now in place. And, when the market has a setup to break out, and fails to do so, one must stand up and take note. But, make no mistake about it – a powerful breakout setup is in place as we move into next week. Will the market capitalize on this opportunity? That, I am unable to guarantee. All I can tell you is that it is there for the taking if the "animal spirits" so chose.

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.

Read more:

Tale of Multiple Markets

More Extensions

Important Inflection Point
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Positions in long SLV LEAPS and GLD.
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