The short-term bearish path that we forecast on March 1 as the most likely scenario for gold appears to be playing out. However, that does not mean we think the decline will extend a great deal farther. In fact, the majority of the decline is probably already over. There might still be a trade to the down side, but that trade probably will be heading into a long-term low. Even so, the chance to begin an enduring bounce and rally is likely weeks or months away. Our analysis suggests that gold needs, at a minimum, another lower low before the downward correction can be considered to be over.
It is interesting to note what happened right before the big decline that has been so much in the news during the past two weeks. After completing a diagonal 'i' downward into the mid-February low, price made a surprisingly small correction upward before resuming its downward path in earnest. The forceful decline that began on March 21 and that accelerated into April 15 was probably a 3rd wave. In the chart below, we have labeled it as wave 'iii' of '(c)' of '[4]'.
We admit we were not expecting the wave 'ii' correction to be so brief and small, but some of the reasons for its early termination can be seen in the weekly candle chart below. For this article, we have reversed our standard approach by looking first at the smaller timeframe (weekly candles) and then stepping back to view the larger timeframe (monthly candles) for a sense of where price may eventually be headed.
The small upward wave 'ii' correction ended where it met the combined resistance of the Fibonacci .236 retrace and the top edge of the channel formed by the prevailing Andrews fork. This is an excellent example of an abbreviated 2nd wave. The formation is not very common. It occurs when price must satisfy the requirement for a correction in a market that is eager to reach a more profound resolution. In other words, an abbreviated corrective wave happens when the market does not want to waste time getting where it is going.
Fortunately, the strong move in recent weeks has painted a clearer picture of the wave structure. Price should be working toward completion of the third and possibly final segment of a corrective move from the 2011 high. From here, the net forecast should be a series of up and down moves which should produce a lower low fairly soon to complete wave 'v', and which should thus complete the larger wave '(c)' within the big corrective wave '(4)' that began in 2011. Some attractive areas for the wave 'iv' retrace to meet resistance include 1434 and 1506, based on standard Fibonacci ratios.
Other Fibonacci-related targets lower include 1305 and 1219. However, the middle line of the downward fork shown on the chart should also provide support and could cause the downward move to terminate somewhere in the range of 1250-1275, if that area is reached during the next several weeks. Additional square-of-nine levels to watch include 1330, 1294, 1258, 1223, and 1188. Gold price often responds to square-of-nine levels by using them as intermediate targets or stepping stones.
It is also possible, but unlikely, that wave 'v' could grow to exceed wave 'iii' in magnitude. If that type of severe decline were to happen this year, then a low could conceivably be reached in the mid-900s area. Again, we think that scenario has a low probability.
Turning to the larger timeframe, the monthly candle chart below shows a speculative channel and its harmonic extensions that have fit well with gold's advances and corrections since 2008. An attractive area for completion of large corrective wave '(4)' would be around the lower boundary of the main part of the channel. If a low materializes during the next several weeks (perhaps even as late as three months from now), then that would put it in area around 1216 to 1240, depending on when the correction finishes. This projection coincides nicely with the projection from the weekly chart.
Thus, for any trade lasting more than a few days, now does not appear to be the right time to look for a bounce. We probably need to see a lower low first. However, that opportunity is approaching. We may reach it before summer.
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