One of the important tools in the technical analyst's kit consists of a simple question: "How can the market get the greatest number of traders pointed in the wrong direction?" In the gold market, we believe the recent decline to new lows has led many traders to conclude that the next big downward leg has begun. They are probably wrong.
Working forward from the November 2014 lows in precious metals, the rally during December and January and the subsequent decline still appear to be part of a larger corrective structure. In particular, the decline from early 2015 has the appearance of a [b] wave low.
A.J. Frost and Robert Prechter described this phenomenon in their 1978 text, the Elliott Wave Principle.
"B waves are phonies. They are sucker-plays, bull traps, speculators' paradise... [They] are rarely technically strong, and are virtually always doomed to complete retracement by wave C."
In watching for a potential bullish trade opportunity this summer, we will be watching for signs of exhaustion of the downward move. When price breaks into the upper half of the guiding channel on a monthly chart, that will suggest that the expected wave [c] has begun.
The approximate upward target of $1,259 in February 2016 is informed by both the upper trend line of the monthly channel as well as by a cycle with a period of 64 weeks that may have inverted and that may have a high around that time.
If the decline from early 2015 maintains its three-wave structure, then the main support areas to watch for a bounce are near $1,067 and $1,022, as shown on the weekly chart.
Note also that GC is heavily oversold, with the adaptive CCI momentum indicator appearing similar to the way it did in September 2014. It is possible that price could bounce hard from near its present area. However, we believe it is more likely that price will produce a modest bounce, followed by a marginally lower low accompanied by positive momentum divergence in the CCI.
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