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Avi Gilburt

Avi Gilburt

ElliottWaveTrader.net

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including…

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Expect A Pullback Before Gold's Next Major Rally

Gold

I can no longer count how many times I have been told that “squiggly lines cannot predict the market.” Yet, anyone who has tracked us over the long term knows how successful we have been at predicting many major market turns and targets with these “squiggly lines.” In fact, we have done so in many markets including metals, equities, Forex, bonds, etc.

The issue that many have with our work is a matter of naivety. You see, if someone does not understand what we do, then they assume that it must be luck or voodoo. Many people have a hard time believing something if they do not understand how it works. But, that stems from a weakness in their own understanding or ability to open their minds to something beyond their current knowledge base, rather than a weakness in our methodology.

To this end, allow me to quote two quite astute men from our recent history:

“Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are incapable of forming such opinions."

- Albert Einstein

“Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won't come in.”

- Isaac Asimov

Unfortunately, we are not all-knowing. That is why life should be viewed as a long-term learning process. Yet, we all encounter those types of people throughout our lives who are so happy to provide us with their negative opinions about that which they know very little. Now, what does it say about someone who presents us with an opinion based upon a lack of understanding? As Ben Franklin once noted about such people, “[a]ny fool can criticize, condemn and complain and most fools do.”

So, in order to be transparent regarding my methodology, and enlighten as many investors as possible who are willing to learn, I penned a 6-part series of articles explaining the theory behind our analysis methodology as well as how we apply it. My goal was to demystify what we do every day for our almost 5000 subscribers and 500 money manager clients. The 6-part series is available here for those interested.

So, this past week, I was challenged by a poster regarding the reason for the gold rally on Wednesday. And, many of those who read my articles take the same perspective as this poster:

“Powell indicates rate hike coming and gold off to the races again. The connection is once again axiomatic and irrefutable.”

When I explained to this poster that gold actually bottomed the day before Powell spoke (for which we had prepared our subscribers) and began that rally which continued through his speech, he retorted with the following:

“You didnt identify jack, you're just swinging in the breeze. The point is gold responded immediately to Powell indicating a rate cut, and yes it matter not your voodoo charts.”

Well, let me take a step back and first re-address the common perspective that news causes directionally expected movements in markets.

In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years’ worth of “surprise” news events and the stock market’s corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news. Based upon Walker's study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.

I know many of you have a very hard time accepting this based upon the fallacies and incorrect suppositions you have been taught throughout the years. But, as Ben Franklin also said, “Geese are but Geese tho’ we may think ‘em Swans; and Truth will be Truth tho’ it sometimes proves mortifying and distasteful.”

Or, as Yoda wisely noted:

“You must unlearn what you have learned”

(Click to enlarge)

So, rather than inappropriately rely upon news events, allow me to show you how we viewed the gold market on Monday, July 8th, two days before Powell spoke and supposedly “caused” gold’s rally.

(Click to enlarge)

As you can see from this chart, we were looking for a little lower in the gold market before the next rally we expected to begin. As I noted with this chart update: “A lower low in GLD can complete an a-b-c consolidation, setting us up for another rally.”

The reason I am presenting this is simply to explain our methodology and to open people’s minds to what has worked for us so successfully for many years. There is no “voodoo,” and, yes, squiggly lines can predict market directional turns quite often.

In fact, these squiggly lines have provided quite accurate directional calls in this market over the last 8 years, especially as compared to Fed-following or trading the news. But, you have to understand how to appropriately apply the methodology. Yet, that also means you need to maintain an open mind about how markets work. And, based upon what Einstein noted above, it would seem that very few investors would be able to do so.

So, let’s look at how we can view the market over the coming week. Again, I want to remind those following our work that we do not believe there is such a thing as certainty when dealing with financial markets. Rather, we deal in probabilities. And, when dealing in probabilities, we view markets from an if/then perspective. It also keeps us safer, since that is how we generate our risk management parameters.

 

Therefore, as long as GLD holds over last week’s low, our next target is in the 137-138 region. For those following our work recently, you would know that we called for a move towards this region back in early June when we warned “Strap Yourselves In - Gold May Take Off Like A Rocketship.” In fact, as we noted, the set up was pointing us to that 138 region, and the next rally should take us there.

I know that everyone and their mother, grandmother, aunt, uncle, cousin, brother, sister and dog are now bullish this complex. But, many of those you may read regarding the gold market have also been equally bullish for the last 8 years, as all we have been hearing from them is how gold is going to break out over $2,000 and that it may even happen overnight. In fact, over the last few weeks, I am starting to see those silly expectations return, with some calling for $3,000 gold already, and even well beyond.

But, let’s be realistic folks. While I think the probabilities suggest that the gold bull market has returned, I don’t think we will be at all-time highs overnight. In fact, I am still feeling the market out as to whether we see one more pullback later this summer before a parabolic-type phase begins in the complex or if we are ready to enter that parabolic phase now. Such a phase would be akin to what we experienced in the first half of 2016.

So, as we approach the market over the next few weeks, we may see an inflection point which will determine when the next parabolic phase in the complex takes hold. Overall, you should likely maintain a bullish larger degree bias based upon what I am seeing at this time.

By Avi Gilburt

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