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Technical Analysis: Silver and Gold In 4th Wave Consolidation

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Unless we see more evidence that the bottom is in, I will expect one more low in the metals going into the fall before I prepare for a major breakout rally.

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Last week, I warned you that we were heading into a topping region. In fact, on Wednesday, just minutes before silver broke down, and in a reaction to extreme bullishness that I saw on ElliottWaveTrader.net -- with many talking of going directly to the 26 region -- I sent out the following Wave Alert as a warning to the short-term longs to take their profits:

I know everyone is very happy about silver holding the support cited yesterday and this follow up move higher. But this 5th wave has gotten extended and is showing weakening on the smaller time frame charts. If we are going to see the 26-27 region, we will likely still see a pullback for a larger degree wave iv and potentially see a 23 handle again. But up here, you may be playing with fire, short term.

Well, it was really only minutes later that silver broke down, and began the downward consolidation that took us into the end of the week.
As of the close on Friday, the Mini Silver Futures Contract appeared to have almost completed an a-b-c structure to the downside into the lower 23 region. In fact, an a=c ratio would take it down to the just below the 23 level.

The question then becomes is this just the a-wave of wave iv, or is it all of wave iv? In looking at the SPDR Gold Shares (NYSEARCA:GLD), I am leaning to this being just the a-wave of iv, since it would seem that GLD would need to come down lower than it already has. In fact, ideally, I really wanted to see GLD come down to the 131/132 region for this wave iv, so it still has a big lower to reach before I would think that the wave iv has completed. That would likely take silver to my ideal target region of 22.25-22.95.

For those that are wondering why I have picked those regions, they are the levels of the wave 4 of one lesser degree, up to as high as the bottom of the wave 2 of the prior 5th wave. Those are traditional targets for the metals to see in a 4th wave retracement.

So the main question that is really on everyone's mind is whether this impulse wave is really a 5 wave structure off the lows and whether the major rally to take us to $60 and beyond in silver is finally here. Well, I am still of the opinion that it is not likely at this time; I will explain why, and what would make me change my mind.

First, when I look at GLD, I see the negative divergence in this second move up relative to the first move up off the lows. This is not what I should be seeing in a bullish move, but it is rather something we see in a c-wave, which is the manner in which I currently have it counted. The more bullish alternative is that the wave off the lows is a wave 1, and this is only wave i of wave 3. That would explain the technical weakness, but we need more information, and it will take at least another month or so until we have that information. In fact, after we see a wave iv and v, we would need to see a high-level consolidation, and then a technically strong breakout over whatever high we make in wave v to get me into that camp.

But my next reason is why I am not expecting to see that.

I do not have a confident completed pattern into the lows, which is why I still think we have one more lower low to make into the fall. Third, it is unusual to see a major rally in silver begin with a leading diagonal, which is how the move off the lows in silver would have to be counted. If silver really were entering into the major type of rally that I would expect, it is hard to believe that it would be coming off its lows in a leading diagonal. And I even questioned whether it was an appropriate leading diagonal, so when I went into that pattern a little more closely, I concluded that it was appropriate, as the 3rd wave in that count is not the shortest, as you can see from the table below:



So while my mind is open to the idea that the metals may have bottomed, it is not my primary count for the reasons mentioned. And unless we see more evidence that the bottom is in, I will expect one more low in the metals going into the fall before I am preparing for a major breakout rally. However, that being said, I will still maintain my long position in my iShares Silver Trust ETF (NYSEARCA:SLV) LEAPS and simply add to my current intermediate-term hedge at the top of the wave v that I am expecting over the next few weeks.

As for my targets for the wave v, it still remains in the 26-27 region in silver, and in the 138.50-142 region in GLD. We should be able to develop a better target once we see wave v in progress. Furthermore, a break down below 130 in GLD and 22 in silver will tell me we have likely completed the upside as per our alternative count and are heading down to new lows.

There is one more note that I would like to add. I want to revisit my theory that the metals and the markets may bottom and rally together over the next half a year to nine months. So if we see a b-wave higher over the next week or two in the metals, it may argue that the market may have completed yellow wave (1) on Friday and is about to embark upon an a-wave rally next week. The b-wave pullback we would then see in the market would coincide with c-wave down for wave iv in the metals, and then, when the markets move higher in a c-wave of yellow wave (2), the metals would complete wave v of their c-wave. This would set up all assets to drop strongly into the fall for new lows, thereby setting up a massive rally for all assets into the spring of 2014.

Again, there are many ways this could play out, and in fact, they clearly do not even have to trade in lockstep. But this is simply something that I am watching because if they begin to trade together, then my thought is all assets will then top together, and be hit by a very strong deflationary bout together beginning sometime in the next year. Again, this is just something I am watching for as a possible longer-term signal.

See charts illustrating wave counts on silver and gold here.

Editor's note: Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD, and VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

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Position in SLV LEAPS.
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