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Elliott Wave Analysis: What Will Be Most Painful to Metals Bulls?

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Pick your poison: A big rally, followed by a strong fifth wave decline to lower lows, or a death by 1,000 cuts.

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I often debate this issue myself late at night. Will a big rally, followed by strong fifth wave decline to lower lows, or a death by 1,000 cuts be most painful to the metals bulls? Truthfully, I am not certain, and neither is the market at this point in time. But, it will likely decide which will ultimately be more painful over the next week or so.

Last week, I noted that "[u]nder 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 our target region being between 111.50-113.50 in the SPDR Gold Shares (NYSEARCA:GLD). Therefore, for those who want to play this pattern aggressively, you may consider buying long positions on a drop into that region which exhibits the appropriate positive divergences."

Unfortunately for us, the market bottomed $0.50 above our target region. And experienced Elliott Wave traders know this does happen from time to time. Oftentimes, the market will hit the Fibonacci levels to the penny, but, sometimes, it does come up short.

Yet, after it bottomed at 114 and had that initial rally, the market provided the setup for another buying opportunity at 115.75, for which I sent out a "wave alert" in our Trading Room at Elliottwavetrader.net, with a suggested stop just below our blue box entry target around the 115 region, with an upside target of at least the 118 region. While this proved to be the low of this retracement within pennies of our cited target, I did suggest to traders to sell their long trades between the 118.50-119.50 region before the weekend and allow the market to prove itself before we take any further trades in this market. In fact, I noted that the easy money in this trade has been made, and it is time for the market to make its decision, for which we may wait before entering our next trade.

At this point in time, all we have is three waves off the 114 lows. And, again, I will remind you that I am using the GLD as my metals trading proxy, since it is providing the clearest pattern at this time. But, in order to view this market as changing its intermediate-term trend -- and as cited multiple times over the last half of the week -- the 117.75 and 117 levels represent very important support levels for the potential change of intermediate-term trend. As long as those levels hold as support, we can maintain an impulsive count that initially targets the 121-123 region in the GLD, which we would classify as purple wave i of a larger degree c-wave, ultimately targeting the 136-140 region. If we are able to make it to the 121-123 region, I would then be expecting a retracement/consolidation in wave ii before we target the 131.50 region in wave iii.

However, if we were to break the 117 level in impulsive fashion before reaching the 121-123 region, then the next target region I would have for the GLD would be the 111-112 region, with the potential to bottom in the 108-109 region for wave 3 of this larger degree downtrend. This would set up a wave 4 rally back towards the 118-120 region, which would set up another decline towards the 100 region to complete this two-plus-year corrective decline in the metals. And, if the market were able to exceed the 120 region from the 110 region, then we may still be heading to the 136-140 region in a larger c-wave before we target the 100 region to complete this correction.

So, ultimately, there is still a lot of trading to be had before a final bottom will likely be seen in the metals in 2014. And, again, the question will ultimately be if the market will provide a big helping of hope to the metal bugs/bulls before taking them to new lows and potential capitulation, or if they will simply die a death of 1,000 cuts as we see spikes, followed by new lows, followed by spikes and new lows, etc., in a series of fourth and fifth waves until we finally reach ultimate lows in the metals in the 90-100GLD region.

But, even though we are attempting to trade for a final low, I have continually harped on and on to those who are willing to listen that, if you are in this market for the long term, these lower regions below 120GLD and below 20 in the Mini Silver Futures Contract is where you should be thinking about accumulating for the longer term. Sure, we expect to see lower levels, but consider how much more potential downside there is, as compared to the potential upside, even if we were only to target the prior market highs again in a larger degree corrective rally wave.

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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