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Precious Points: Bull Trap in Gold?

"If the triangle is going to prove correct, the question becomes whether the e wave low is in place or is another small low to come. Either scenario would be bullish for gold as it would make imminent the start of a 5th wave move to new highs, which a move back above the 5-week sma at $800 would tend to confirm. An alternate that keeps the recent selling corrective ... looks for a lower low in the $750-775 range. The question from a fundamental standpoint will be whether the forces causing this consolidation in metals will persist enough to take gold to it's lower target, or strengthen enough to take the bullish shine off silver and metals altogether." ~ Precious Points: More Tough Love from Bernanke and Co. December 15, 2007

Precious metals had a positive close to the week, but did not ultimately make any final determinations between the possibilities traced here over recent weeks. For some time we've been calling the consolidation in gold corrective and ultimately bullish, but the chart in silver is far less optimistic. Strength in the dollar threatens to erase the recent gains in the precious metals, but a breakout in platinum could portend a bullish resolution to the current consolidation in the others.

When gold peaked in late October, the original expectation was for a three wave move to the $750-$765. First discussed here in early November, this scenario remains valid and is shown in black in the chart below. In December, however, the relatively shallow correction opened the possibility of an even more bullish fourth wave triangle consolidation, which seems to have become the consensus view.

As the chart shows, the lows early last week hit at the 5-day simple moving average mentioned here as a crucial support line and a proxy for the lower trend line of the unfolding triangle. The rally from there stalled but finally moved above the 5-week sma, appearing to corroborate the e of a fourth wave triangle count as mentioned in the last update. However, the move from a triangle e should be a powerful thrust that breaks out of the triangle. Though Friday's action began strongly, it stalled in the afternoon leaving the wxy alternate still valid.

We'll know very soon which count is invalidated as time for the triangle is rapidly disappearing, but both scenarios in the chart above are ultimately bullish for gold, calling for a new high in early '08. Remember the bearish count for gold monitored in the fall had a c wave low well under $700 and, while this is currently just an outside chance, it will again be watched closely if gold loses the $750 level. It will take an impulsive thrust above $823 next week in the front month futures contract to rule out the triangle fake out. If gold cannot break out of the triangle next week, the triangle will likely be invalidated, suggesting a more complex correction and would require further examination.

Silver also had a strong week, moving back above $14, but failed to win back all of last week's losses. Friday's rally failed to take out the previous day's high and closed back below the 50-day sma. The white metal continues to paint an ugly picture and weighs on metals as it continues to look as though it will need to test support in the $13.50 area. If gold fails to break upward by the end of the year, this retest is almost a certainty, whereas well established resistance awaits any move higher.

As mentioned, the recent action in platinum contradicts the message in the silver chart, and may point to the most bullish scenarios for gold and silver. This is certainly not a foregone conclusion, however, as the impulse in platinum could now be finished and rollover. With a major cycle in the dollar set to turn bullish in January, the week ahead will be crucial for determining the near term outlook in precious metals.

 

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