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Gold: A Prolonged Correction Favors Traders over Position Investors

Special announcement:

Before we present our updated analysis for gold, we want to announce that Trading On The Mark will open its intraday trading room to the public on the day of the Nonfarm Payrolls announcement, Friday, October 5. Markets should be interesting after the news. If you trade intraday, or if you're just curious, come join the conversation for free. The trading room can be accessed by following us at http://twitter.com/TradingOnMark, and the room will start getting active around 8:30 a.m. eastern U.S. time. We will try to address any comments or questions you put into the Twitter stream too.


Gold outlook:

The QE announcement and the climb in the price of gold during recent weeks have produced a rush of enthusiasm, with some market watchers seeing it as a breakout move and many others predicting a generally upward path beyond the 2011 high. We acknowledge that an immediately bullish scenario is possible, as the low earlier this year could represent a completed 4th wave from an Elliott perspective. However, some evidence is accumulating that suggests gold has more corrective maneuvers to go through before it can make a clear path higher. If a longer correction is needed, then true position traders who are already long from earlier in 2012 probably would benefit from holding those positions, while maintaining stops. However, traders and near-term investors looking to the long side might watch for better entry points in coming weeks or months.

The chart of gold prices since 2008, below, shows two prominent scenarios. Some things we have taken note of include:

  • Price has obeyed the boundaries and the internal divisions of the channel nicely.

  • The commodity channel index (CCI) has moved sharply up into positive territory.

  • The powerful and steady move up from late 2008 is consistent with 3rd wave action in terms of Elliott Wave analysis, and it counts well from that perspective. Even so, there is more than one way to count the 3rd wave, and two scenarios are shown on the chart. The scenario labeled in blue shows the 3rd wave as being finished, with some correction needed. The scenario labeled in green shows the 3rd wave as needing another high.

  • The more aggressively bullish count, with '(iv)' having ended May of this year (labels shown in green), implies that gold price would move upward in a 5th wave of some degree, perhaps after a small pullback. Among traders who use Elliott wave, this is probably what most of them are seeing.

  • The more aggressively bullish count had some penetration under a steeper channel that is not shown on the chart, which uses points '(1)' and '(3)' as anchors. A poke below channel support is not unheard of for a fourth wave, but the amount of time it stayed under the channel line creates doubts about the validity of the aggressive count.

Gold 2008-2012: Was the last low the foundation for the next move?
Gold 2008-2012

With either of the scenarios shown in the long-term chart above, gold would be likely eventually to challenge the upper reaches of the price channel again, perhaps even more than once.

If the majority of traders is seeing the 2012 low as a launching pad, then the majority is probably wrong. If so, what other scenario comes to the fore? It's quite possible that a more time-consuming correction is forming - one that will throw many investors and traders off the path.

Consider the blue-labeled count in the close-up chart below, which shows gold prices from 2011 to the present. Note that there was a well-formed 'a-b-c' move -- together labeled as '(a)' -- down from last year's high, followed by a fairly sharp move 'a' up into early this year. That move was then followed by a clear three waves lower to the low of 2012, making it a good candidate for a 'b' wave low.

Gold weekly 2011-2012: A closer look
Gold weekly 2011-2012

If the blue near-term bearish wave count is working, then the sharp rise out of this year's low should meet resistance near $1,794 and/or slightly higher at $1,826. If price breaks through those levels, then it could seek new highs around $1,950 as the next Fibonacci extension measurement of wave 'c' of '(b)'. That would certainly fuel optimism about gold prices, possibly offering an opportunity for the contrarian trader as disappointment sets in.

A downturn in equities markets around now could prompt gold to sell off in a risk off and raise cash reaction in spite of the recent additional quantitative easing. For reasons described in other posts at Safehaven and presented even more extensively in our newsletter, we believe such a downturn in stocks is nearby.

If evidence continues to favor the scenario of a longer-lasting corrective move, then we will be able to project targets after it appears that a downward wave '(c)' has begun.

In conjunction with the possible moves in gold prices shown here, this week's newsletter from Trading On The Mark presents likely paths and levels to watch as entry opportunities and targets in equities, bonds and currencies over the same time periods. First-time readers of the newsletter are welcome to request a free copy of the newsletter through our website.

Beyond the newsletter, our full subscription service provides our members with analysis and running commentary on daily and intraday timeframes. Anyone who trades on relatively short timeframes of less than a month can benefit from a trial subscription to the site - just $30 for an entire month of full access to our charts, forums and live trading room.

Trading futures and options involves the risk of loss and is not suitable for all investors. Nothing in this article should be construed as a recommendation to buy or sell financial instruments.

 

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